The Harmonization of Indirect Taxes in the Andean Community

After a long process that began in October 1998, on July 12, 2004 the Andean Community (CAN) approved Decisions 599 and 600 on, respectively, the harmonization of value added tax (VAT) and excise type taxes (ET). The only precedent for the agreement on tax harmonization in the CAN is the European Union (EU) experience. In the case of the Andean countries, designing the harmonized VAT also entails adopting international best practices. The main technical characteristics of the long-term convergence of national laws on VAT are: (i) reducing distortions so as to ensure competitiveness (economic efficiency); (ii) horizontal equity among taxpayers by limiting exemptions so as to foster sectoral neutrality; (iii) favoring coordination among the various tax jurisdictions on the basis of the principle of ¿non-discrimination¿ between national and foreign production; and (iv) the adoption of specific regulations to protect taxpayers rights without constraining the powers of the tax authorities. This study describes the background to the agreement; the importance of harmonizing indirect taxes (VAT and ET) for economic integration; the current significance of tax revenues in the Andean countries; multilateral negotiations on this matter and the lessons learned; and the economic bases and technical-taxation elements of the harmonized VAT.