Global Comparison of Consumption Tax (VAT) Rates

On October 1, 2013, Prime Minister Abe Shinzō announced his final decision to raise Japan’s consumption tax from its current rate of 5% to 8% by April of the following year. After consulting a number of economic indices and confirming an upward trend in the economy, the prime minister went ahead with the decision to implement the tax hike as planned. But Prime Minister Abe also made it clear that he will implement a ¥5 trillion economic stimulus package to counterbalance whatever ill effects might arise from hiking the  tax.

A Low Rate, with No Exemptions

According to data from the Ministry of Finance, Japan’s current consumption tax rate of 5% is at the low end—along with Canada and Taiwan—compared to the standard value-added tax rate in other leading countries and regions. It should be noted, though, that in addition to the federal VAT in Canada, each province also levies its own consumption tax (such as the 8% sales tax in the province of Ontario), much like the state, county, and city sales taxes in the United States.

No Tax on Daily Necessities in Britain, Australia, and Canada

Because the consumption tax in Japan is relatively low, at 5%, it is applied to all products, including food items, with no reductions made for daily necessities. In contrast, even though the bulk of the EU countries have consumption tax rates at around 20%, many of them keep the tax rate lower for certain products like food items. Also, the tax rate is at a higher level in the northern European countries, given their extensive welfare states.

Given these differences, Japan is roughly at the same level as EU countries with regard to the proportion of consumption tax revenue to overall revenue, which stands at roughly 22%. Considerable confusion can arise when making simple comparisons between a country with a unified tax rate like Japan and countries with multiple tax rates, as is the case in Europe and North America. In order to compare the tax burdens among countries, it is necessary to look not only at the consumption tax rate but at the entire tax system, including the rates for income and corporate taxes, as well as the level of social security.

There are also countries where no consumption tax is in place, including the oil-producing countries of Saudi Arabia and the United Arab Emirates, as well as British overseas territories like Bermuda.