VALUE-ADDED TAXATION IN THE EC AFTER 1992 - SOME APPLIED GENERAL EQUILIBRIUM CALCULATIONS

This paper examines the quantitative effects of the transitional system of value-added taxation for intra-EC trade between 1993 and 1997, as recently adopted by the ECOFIN-Council. First, the administration of the current destination principle and the interim solution are described. A short representation of the empirical general equilibrium model featuring seven EC regions and 14 production sectors follows. Finally, the effects of a switch to the transitional system are evaluated by using numerical simulations. The adopted provisions with regard to cross-frontier sales to final consumers open tax arbitrage possibilities which favour low tax countries at the cost of their EC partners. When decomposing welfare effects, international tax revenue shifts prove to dominate, while substitution effects have relatively little influence on economic welfare.