As in the European Union the activities of public sector bodies are not subject to full taxation, the Value Added Tax (VAT) regime may cause distortions in their decision-making, in particular with respect to the choice between self-supply and contracting out of services to the private sector. Several European countries have addressed this distortion via a budgetary solution. In the Netherlands, such a refund scheme was introduced in 2003. This article provides an integral analysis of this scheme based on a broad range of evaluations.
As this study shows, VAT only plays a minor role in considering whether to outsource and the introduction did not cause a significant increase in contracting out. Motives other than the budgetary effects might be more relevant. Besides, contracting out was already a trend, regardless of the costs of VAT. The introduction had a number of negative side effects, such as the administrative burden and the budgetary effects, leading to a rather negative opinion of the participating public sector bodies.
Therefore, an introduction of compensation schemes in other Member States or a change in EU-VAT law as discussed in a recent Green Paper of the European Commission should be assessed thoroughly, to decide whether the remedy is worse than the disease.EC Tax Review