INTRODUCTION

Almost all national-level (central-government) VATs rely on the destination principle to tax international transactions, with tax imposed on imports and removed from exports. For example, under the destination-principle Japanese Consumption Tax (a form of credit-subtraction VAT), domestic sales and imports for consumption within Japan are taxable, but exports of goods to be consumed elsewhere are zero rated.

The adoption at the subnational level of some form of value adding technique (see Table 2.7 for a review of the forms) is being debated or enacted in many countries. There has been renewed interest in the problems of cross-border trade in the European Union (EU) and within federal systems, especially in Canada, India, Brazil, and the United States. In addition to the long-standing problems faced by the EU and federal countries with cross-border trade, some of the recent attention to these issues by the EU, academics, the International Monetary Fund, and others has been propelled by the explosion of trade over the Internet (electronic or e-commerce). Indeed, the United States Congress enacted a moratorium on state taxes on Internet access and on multiple or discriminatory taxes on e-commerce.

Subnational units of government should control the revenue necessary to provide the services that they render. In any federal system, the fiscal authority and responsibility of subnational (referred to in this chapter also as regional) units of government must be established – what revenue sources are available to the region, who defines the bases and the rates, and who administers the tax.