Reimbursement of VAT on written-off Receivables

Bjarne Florentsen, Michael Møller and Niels Christian Nielsen
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Bjarne Florentsen: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Michael Møller: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Niels Christian Nielsen: Department of Finance, Copenhagen Business School, Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark

No 2003-1, Working Papers from Copenhagen Business School, Department of Finance

Abstract: In many OECD countries, a seller has a right to reimbursement of VAT (RVAT) she has paid on goods sold, but for which she has not yet received payment. Such reimbursement of VAT on receivables is economically inefficient. It leads to:

• Distortion of credit markets, by subsidizing direct credit at the cost of financial intermediaries.

• Price discrimination, by subsidizing buyers with low creditworthiness.

• A less efficient collection of bad debts, as trade with bad debts is made extremely expensive.

The finance literature presents several “good” arguments in favor of trade credits, e.g. transaction costs and asymmetric information. In contrast RVAT is an economically “bad” argument for trade credit. It is a subsidy that leads to inefficiently high use of trade credit.

Keywords: bad debt; receivables taxes; trade credits; VAT (search for similar items in EconPapers)
JEL-codes: H20 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2003-07-10
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