VAT in the Public Sector and Exemptions in the Public Interest

The European Commission has asked Copenhagen Economics and KPMG AG in collaboration to study the VAT rules applied to the public sector in EU member states, and make a comparison with the VAT/GST rules applied in key OECD countries outside the EU.The study collects and analyses relevant studies already carried out at international, EU or national level. The study describes the problems that arise from current VAT rules applied in the public sector. We analyse what the drivers and underlying causes of such problems are. We investigate the impact from differential VAT treatment between public and private entities on the input side in public entities and on the output side where competition between private sector entities and public sector entities are distorted. We have not looked at the postal sector in this study, however, because of the existing Commission proposal. Having identified problems and causes, we present main policy options, which has been defined in co-operation with the Commission services. These options are analysed and quantified using among others, a computable general equilibrium (CGE) model of the EU-economy. Discussions of costs of compliance are included in the analysis. In our economic model, we specifically model the so-called ‘core’ services waste disposal, cultural services, education, hospital services and broadcasting in agreement with the EU Commission. Hence, the modelling scenarios produce changes in output in these public activities which make up the results regarding the changes in public sector output. In order to model the quantitative effects from the policy options we needed to asses the baseline scenario as precisely as possible. To do this, we constructed a legal and an economic questionnaire and submitted them to our network in the majority of Member States.