Decentralizing Value Added Taxes: Appearance or Reality?

In most countries, subnational expenditures have increased considerably in recent times. This is a consequence of both the devolution of a growing number of public tasks from the national level to the regional (local) authorities, as well as a result of rapid urbanization, and adverse demographic changes. These circumstances affect the need to seek innovative sources of financing local units, which will allow them to meet the challenges described above, while maintaining fiscal sustainability. One of them proposed in this article-could be some form of sub-central value added taxes (VAT). However, applying VAT together by two different tiers of governments within the same country was until very recently considered to be infeasible by most of academics. They pointed out many issues, such as high administrative and compliance costs and the need for border adjustment in case of cross-border trade. The purpose of the article was to present different approaches to VAT decentralization found in some countries and on the basis of their experiences to indicate the right circumstances in which ‘regional VATs’ could work well. The study includes examples of eight selected countries which have introduced various kinds of subnational VATs in the last years. The main conclusion of the analysis is that sub-central VAT in the right circumstances can work well. The effective implementation of this tax at subnational levels usually requires not so much overbearing structural barriers, which rather only changes of an administrative framework. What’s more, the problems arising with sub-central VATs are very closely related to those with national VATs in European Union, so most of proposed solutions could be useful.