Monday, March 20, 2017

Modern Day Robin Hood? Taxpayers as Facilitators of State Level Tax Games

In an interesting twist on contemporary debates about tax planning by multinational companies, Prof. Leandra Lederman recently posted a very interesting column about how one government seems to have benefited from some clever tax planning at the expense of its own national government, with the help of a multinational company that appears to have received nothing for its trouble.

This is the strange case of Volkswagen's tax structuring involving the Spanish provinces of Navarre and Catalonia. What is strange is that, in this particular instance, Volkswagen's structure appears to have created no tax benefit for itself, but resulted in the province of Navarre effectively transferring itself a large pot of revenue from the national coffers.

Prof. Lederman's post explains that Navarre is an "autonomous community", which, unlike Catalonia, independently administers the VAT, and therefore only issues VAT refunds when products are exported from Navarre to a buyer located outside of Spain. (Most of Spain's other provinces have a harmonized VAT system administered at the national level). If products are sold to a buyer outside of Navarre but still in Spain, such as Catalonia, Navarre does not issue a refund because there has been no export. But if the purchasing company in that other province then sells to a subsequent buyer outside of Spain, the Spanish Treasury issues a refund to the company and voilà, Navarre has transferred itself a windfall in the amount of tax it collected and Spain paid back.

Over a period of several years, Navarre reportedly collected approximately 1.5 billion Euros from the Spanish government using Volkswagen in this manner. By routing its export sales through an intermediary in Catalonia rather than directly from Navarre, Volkswagen acted as a conduit to route revenues from the state to the province. Given its own indifference to who, as between Navarre and Spain, refunds the VAT on its exports, using an intermediary in Catalonia appears like an act of pure generosity to the province of Navarre. Prof. Lederman goes through the case that brought this issue to attention and queries: what's in it for Volkswagen? She notes that nothing in the public record suggests that VW received anything in return—"it simply did Navarre a favor." That seems unlikely; certainly, as Lederman points out, Navarre would be capable of having made some other concessions. These would not necessarily be made public.

Absent concessions, is this a modern day Robin Hood story, with VW effectively taking from the state to give to the province? Navarre is not quite at the bottom of Spain's provinces economically (at least according to wikipedia) but neither is it near the top spot in terms of gross regional product (it is, however, near the top in terms of purchasing power parity, as well as in other factors such as employment rates). Should we cheer or disparage the tax trickery that resulted in an ongoing transfer of wealth from Spain to Navarre?

Also curious is why Spain wouldn't have anticipated this problem far in advance of this situation arising. It seems that the government proposes to resolve the issue by renegotiating the Convenio Econ√≥mico Navarra-Estado (Navarra-State Economic Agreement), which governs the VAT administration among other matters. I am no VAT expert but it seems to me that having designed a destination based VAT system and having agreed to independent administration of that system by one or more of its provinces, the state might have immediately recognized that revenue transfers from itself to the non-harmonized province(s) would be likely unless there was some mechanism requiring the VAT-collecting province to be the VAT-refunding province in the case of ultimate exports.

Like Prof. Lederman, I would be curious to know whether this sort of situation has arisen in other contexts--do sub-national governments routinely look for ways to transfer state revenues to themselves using taxpayers as conduits? Should we liken the province's passively benefiting from a system not solely of its own making as acceptable tax planning or harmful tax competition? Likewise, should we view the taxpayer's willingness to facilitate the transfer (for apparently no reason but its good nature and general willingness to cooperate) as a victory or a failing in the taxpayer-state relationship?


  1. We see this happening in Brazil as well, where each of the 27 states has an autonomous VAT.

    In Brazil this happens for two main reasons. Either (1) there are non publicized concessions or benefits for the company or (2) it is easier to get a refund from some states than from others.

    This last reason is more common. The administrative procedure for refund in some states is too long or too complex. Or some times the refund is not done de facto. Moreover, if you own taxes to a particular state (because you have many transactions occurring there) you can "deduct", rather than get a "refund". The procedure is much more simple and immediate. So companies have a huge incentive to export from such a state.

    States try to avoid this, but corporations still do it all the time.

  2. Thank you Ivan, I wondered if maybe this was a "known" phenomenon, particularly by Brazil with its deep experience with VAT.

  3. Thank you from me, as well! (I had tried to comment yesterday from my phone, while traveling, but apparently it didn't work.) It's very interesting to hear that Brazil has had similar issues.

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  4. Thank you Prof. Lederman for raising the interesting topic and for the didactic column! I really enjoyed reading it.

  5. In Canada, Quebec "administers" both the Federal GST(under Federal legislation) and maintains it's own provincial VAT/GST like tax "QST"(Which is largely identical to the Federal GST anyways). However, I have never heard of any "issues" with this arrangement. One issue I guess the Federal GST has the same legislative effect in Quebec as well as the Rest of Canada.

    To give non Canadians an even bigger headache Quebec through is administration of the "Federal" GST is also responsible for collecting from Quebec based remote sellers the provincial tax for other Canadian provinces like Ontario that have harmonized their sales tax collection through full federal collection and administration. So a Quebec based remote seller into Ontario pays both 5% Federal GST and 8% Ontario HST to the Quebec Revenue department. Where the current arrangement is "bad" for Quebec is in the reverse. An Ontario based remote seller with NO Quebec nexus is only obligated to collected the 5% Canadian Federal GST on Quebec sales remitted on Ontario directly to the Canada Revenue Agency.

    **One reason the Quebec Sales Tax is now so closely aligned to the Federal GST Base is once on Ontario harmonized it's sales taxes to the CDN Federal GST circa 2010 there was no longer as many tax arbitrage losses for Quebec sticking closely to the GST Base.

  6. Richard M. Bird of U of Toronto wrote a paper a while back that while acknowledge the complexity of VAT administration in Canada makes the claim that as a "Federal" state Canada is "best in class" for VAT administration compared to other Federal states such as Mexico, Brazil, India etc.