Towards A Circular Economy: VAT And The 'Resell Model'

In our last article, we talked about the role tax can play in a circular economy: specifically, how we can shift away from an economy that taxes humans and towards an economy that taxes (material) resources. A next important step is to understand if and how circular business models actually affect the taxes paid by businesses and consumers, and the taxes received by the State: impacts that, à priori, can manifest themselves through changes in the amounts as well as the timing of taxes paid.

"In the future it is of critical importance to look in detail at the role of tax and how current rules incentivize companies to favor the linear model over a more circular business approach," says Dr Jeannot Schroeder, circular economy expert, managing director of +ImpaKT, and co-president of the Circular Economy working group formed for the TIR study.1

In order to explore the impacts of changes in taxation approaches, we decided, together with Dr Schroeder, to dedicate parts 2 and 3 of this blog series to the modelling of the fiscal impacts of real-life circular business models.

The present article focuses specifically on the VAT impacts of the resell model, and also discusses what VAT incentives can be used to encourage circular business models.

Taxation in a linear vs. a circular supply chain

For historic reasons, approaches to taxation today are perfectly adapted to a linear economy. In a linear system the value captured by products is lost when their usage period has ended (waste generation), whereas a circular economy is designed to preserve the value embodied in products and components, and to capitalise on the full potential of resources.

In a linear economy, a supply chain has a finite number of stages and the added value is taxed at each stage of the supply chain.2 In this scenario, there is no accumulation of taxes because of deduction rights - the final customer pays the tax. In a circular economy, the supply chain becomes a supply loop and is, in theory, never ending. Therefore taxing the added value will, again in theory, result in an accumulation of taxes on the same asset.

VAT implications for the resell model

One possible business model in a circular economy is the resell model - reselling used goods again and again. In this example, a business that sells books to consumers agrees to buy the books back from the consumers and then sells them again. The following graph illustrates the VAT implications of such a resell model on the...