The value added tax is a phenomenal invention thanks to its main support: neutrality. VAT should be classified as a consumption tax, meaning that we seek to tax it on the consumer of goods and services. To achieve this, the tax structure is built on the pillar of neutrality. The OECD itself indicates:
“The basic principles underpinning neutrality are set out in Chapter 1 . In domestic trade, tax neutrality is achieved in principle through the multi-stage payment system: each company pays VAT to its suppliers on its inputs and receives VAT from its customers on its products. To ensure that the “correct” amount of tax is remitted to the tax authorities, each company’s input VAT is offset against its output VAT, creating an obligation to pay the net amount or the balance of those two. This means that VAT normally flows through the company to be taxed on end consumers. Therefore, it is important that at each stage the supplier has the full right to deduct the input tax, so that the tax burden ultimately falls on the final consumer and not on the intermediaries in the supply chain. This principle is set out in Guideline 2.1 .” ( OECD Neutrality ).
