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16 Eur. J.L. & Econ. 5 (2003)

handle is hein.journals/eurjlwec16 and id is 1 raw text is: European Journal of Law and Economics, 16: 5-22, 2003 @ 2003 Kluwer Academic Publishers. Manufactured in The Netherlands. Destination Based Indirect Taxation: The Case of Bosnia and Herzegovina WILLIAM F FOX Professor of Economics, The University of Tennessee, USA Abstract Development of a strategy to foster strong economic growth was seen by the international community as a key aspect to nation building and sustaining the end of the armed conflict in Bosnia and Herzegovina. Tax policy was a key aspect of the strategy, but the very decentralized institutional arrangements and limited cooperation between the governments complicated the design. This paper reviews and assesses the indirect tax structure that has been the focus of the first five years. Among the findings are the importance associated with creating destination-based revenue attribution, the strong tendencies for tax competition, the unwillingness to accept formula-based revenue distribution, and the high administrative and compliance costs that result from structuring a system to achieve all of the necessary goals in a decentralized government context. Keywords: harmonization, destination-based, tax competition, decentralization JEL Classification: H24, H71, H73 Introduction The international community had a very strong commitment to establishing Bosnia and Herzegovina (BH) as a single country in the years immediately following the war that tran- spired during the first half of the 1990s. Evidence can be seen in the firm commitment of $4.2 billion in donor support that was in pace by 1998 (The World Bank, 1999). Development of an integrated economy was an important aspect of the overall international agenda for revitalizing Bosnia. For example, the World Bank noted, A vision for Bosnia and Herze- govina in the medium term is of an open and unified economy. Free trade across BH and a single, open economic space were expected to provide the formerly warring parties with an economic incentive to sustain a united country and to cooperate in provision of certain basic government services and in other areas. Design of indirect tax policy was a key element of the reform package,2 though it took more than 5 years for the policy to be developed and accepted. This paper examines the history of the indirect tax structure reform, the reasons for the selected reforms, and the political issues influencing the decisions. The reforms are placed in the context both of the academic literature and practices used around the world. Reforms in Bosnia and Herzegovina offer important lessons because it is one of the few cases where it has been politically possible to examine and develop an entire indirect tax structure within a short time period. The paper is divided into five sections. The first outlines the complicated BH government structure and the second describes the basic goals for reform. The next two sections detail

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