Tax Incidence of VAT Enforcement Reform for Foreign Services and Small Businesses in Two-sided Markets

Nishimura, Yukihiro

Tax Incidence of VAT Enforcement Reform for Foreign Services and Small Businesses in Two-sided Markets

Nishimura, Yukihiro

Discussion Papers In Economics And Business, 2025, 25-06

Number of Access:67（2025-10-10 20:21 Counts）

Identifier to cite or link to this item: https://hdl.handle.net/11094/102344

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Title	Tax Incidence of VAT Enforcement Reform for Foreign Services and Small Businesses in Two-sided Markets
Creator	NRID 1000090345471 1000090345471 researchmap permalink read0156474 read0156474 Scopus Author ID 7403347968 7403347968 CreatorName Nishimura, Yukihiro
Subject	Digital economy
	Platform
	Network externality
JEL	F23
JEL	H26
Abstract	Value-added tax (VAT) has two major problems in its enforcement: taxing foreign vendors which do not have a business entity in the destination country, and taxing small and medium-sized enterprises (SMEs) with small tax bases. As a solution of these problems, some countries attempt to utilize online platform, to let the platformer pay the foreign firms’ and SMEs’ VAT according to the sales each firm made (platform tax for the destination principle and formalization of informal sector). In the monopolistic market where the platformer determines the fees for the network entry and the commission fee of the platform services, standard-good’s price, we show that taxing foreign developers increases the tax burden laid on the standard good, and we show that the increased tax burden is born 100% by the domestic standard-good’s consumers. We also investigate whether or not the prevention of tax leaks by platform taxes improves the vendors’ entry and tax revenue of the destination country. The effect of the tax reform on home developers crucially depends on the responsiveness of the developers’ entry to the number of network users, which is decreasing in the VAT rate. The derived formula of marginal value of public funds suggests that, due to the simultaneity of price and quantity, more fully fledged structural analysis may be necessary. Additionally, we show that the VAT serves as a Pigouvian tax to ease congestion externalities, and our results are robust with platform competition. In the context of formalization of SMEs, the strength of network externalities matters to see if the existing formal sector receives windfall gains or losses.
Publisher	Graduate School of Economics, The University of Osaka
Source Title	Discussion Papers In Economics And Business
Volume (Issue)	25-06
Date of Issued	2025-07
Language	English
Handle URL	https://hdl.handle.net/11094/102344
Relation.references	URI https://www2.econ.osaka-u.ac.jp/econ_society/dp/2506.pdf
Access Rights	metadata only access
Category	ディスカッション／ワーキング・ペーパー DP/WP
Category	Discussion Papers In Economics And Business

Resource Type	technical report
Local Type	DP/WP
DCMI Type	Text
DCTERMS.bibliographicCitation	Discussion Papers In Economics And Business. 2025, 25-06
DC.title	Tax Incidence of VAT Enforcement Reform for Foreign Services and Small Businesses in Two-sided Markets
DC.creator	Nishimura, Yukihiro
DC.publisher	Graduate School of Economics, The University of Osaka
DC.language' scheme='DCTERMS.RFC1766	English
DC.type' scheme='DCTERMS.DCMIType	Text
DCTERMS.issued' scheme='DCTERMS.W3CDTF	2025-07
DC.relation' scheme='DCTERMS.URI	https://www2.econ.osaka-u.ac.jp/econ_society/dp/2506.pdf
DC.subject	Digital economy
	Platform
	Network externality
DCTERMS.abstract	Value-added tax (VAT) has two major problems in its enforcement: taxing foreign vendors which do not have a business entity in the destination country, and taxing small and medium-sized enterprises (SMEs) with small tax bases. As a solution of these problems, some countries attempt to utilize online platform, to let the platformer pay the foreign firms’ and SMEs’ VAT according to the sales each firm made (platform tax for the destination principle and formalization of informal sector). In the monopolistic market where the platformer determines the fees for the network entry and the commission fee of the platform services, standard-good’s price, we show that taxing foreign developers increases the tax burden laid on the standard good, and we show that the increased tax burden is born 100% by the domestic standard-good’s consumers. We also investigate whether or not the prevention of tax leaks by platform taxes improves the vendors’ entry and tax revenue of the destination country. The effect of the tax reform on home developers crucially depends on the responsiveness of the developers’ entry to the number of network users, which is decreasing in the VAT rate. The derived formula of marginal value of public funds suggests that, due to the simultaneity of price and quantity, more fully fledged structural analysis may be necessary. Additionally, we show that the VAT serves as a Pigouvian tax to ease congestion externalities, and our results are robust with platform competition. In the context of formalization of SMEs, the strength of network externalities matters to see if the existing formal sector receives windfall gains or losses.
DC.format	102344
citation_title	Tax Incidence of VAT Enforcement Reform for Foreign Services and Small Businesses in Two-sided Markets
citation_author	Nishimura, Yukihiro
citation_publisher	Graduate School of Economics, The University of Osaka
citation_language	English
citation_date	2025-07
citation_journal_title	Discussion Papers In Economics And Business
citation_volume	25-06
citation_public_url	https://hdl.handle.net/11094/102344
citation_abstract_html_url	https://www2.econ.osaka-u.ac.jp/econ_society/dp/2506.pdf

Tax Incidence of VAT Enforcement Reform for Foreign Services and Small Businesses in Two-sided Markets

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