Contrating out: the importance of a solution for the VAT distortion

In member states of the European Union, the current VAT treatment of activities of public authorities creates significant distortions in their decisionmaking between public provision and contracting out of public services. In several EU-member states, a refund of VAT to local governments eliminates this effect. Therefore, these VAT refund schemes facilitate contracting out. In member states with a refund scheme for the VAT costs of local governments or another solution to this distortion, in general refuse collection is contracted out to a relatively greater extent compared to member states without. Despite these solutions, the VAT distortion is still relevant for private suppliers of tax-exempt activities and public suppliers in other member-states. This distortion could be addressed by a change in the European VAT legislation.