VAT Reform via Monopolistic Platformer in Borderless Economy: Price Pass-Though and Efficiency Consequences

Shigeo Morita () and Yukihiro Nishimura ()
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Shigeo Morita: Fukuoka University
Yukihiro Nishimura: Osaka University and CESifo

No 25-02-Rev2., Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: The development of online markets has raised ongoing concerns that foreign app service developers are avoiding value-added tax (VAT) in destination countries. To address this issue, some countries have introduced tax reforms that require platforms to pay VAT on behalf of foreign firms based on the sales generated by each firm. This study investigates whether preventing tax leakage through platform taxation improves welfare in the destination country. We first show that taxing foreign firms leads to a reduction in the commission fees charged by the platform to the sellers (developers) which replaces exited foreign developers with domestic ones. However, the increased tax burden also decreases the size of the network user base. Given this trade-off, we demonstrate that whether the domestic welfare increases after the tax reform depends critically on how responsive the sellers’ market entry is to network size. When the tax reform brings welfare gain, it increases with the tax rate and reduces with the initial share of foreign developers. Finally, we show that digitalization mitigates both welfare loss and the platform’s tax avoidance.

Keywords: Value-added tax; Tax reform; Digital economy; Platform; Network externality (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 L13 L86 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2025-02, Revised 2025-07
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:2502r2

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