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IP/06/602

Brussels, 11 May 2006

VAT: The European Commission intends to modernise the current legislation on financial services and insurances

The European Commission intends to submit a legislative proposal by the end of 2006 for modernising the current legislation on financial services and insurances. It has launched a public online consultation (MEX/06/0314) and works closely with the European Banking Federation in this process. Within this framework the Commission together with the EBF organise at 11 May in Brussels a one day conference. The main objectives of a modernisation would mainly be to reduce the administrative costs for administrations and traders, to remove potential or actual competitive distortions between supplies across different Member States and to create more clarity and security for Member States and traders VAT should be applied in a manner consistent with a level playing field and accordingly eliminate all VAT attributable competitive distortions.

“I am very happy to organise today, jointly with the European Banking Federation, a conference on how to modernise VAT legislation on financial services and insurances. I encourage all stakeholders to provide feedback during the public consultation to enlighten the debate and to help the European Commission to come up with the best proposal." said László Kovács, Commissioner for taxation and customs. I hope we will be able to submit a legislative proposal, before the end of 2006”.

“The European Banking Federation and its members are delighted that the Commission has taken the initiative of this joint conference” declared Hein Blocks, Chairman of the FBE Executive Committee. “This and the on-going consultation answer a long-standing plea of the banking sector to modernise the current VAT regime. As it stands, it is a major obstacle to cross-border consolidation in the banking sector and puts banks at a competitive disadvantage compared to non EU competitors. The issue of VAT and the need for modernisation are for us one of the corner stones of the policy for financial services in the coming years, as acknowledged by the Commission itself in its White Paper (see IP/05/1529).”

Why revisiting the current legislation?

VAT current legislation (adopted in 1977) exempts financial services and insurances. This creates "hidden VAT" charges in supplies from financial and insurance services providers to other businesses. Indeed, they cannot deduct input VAT on services or goods (e.g. computers) supplied to them because the services they supply themselves, are exempt. Their charges to customers will therefore reflect this VAT cost and, as it cannot be recovered by business customers, cascades through the system increasing the cost of the goods and services they themselves supply.

VAT should not generate unnecessary obstacles to the achievement[1] of an integrated, open, efficient and competitive market for financial services. Efficient markets for financial services and insurances will benefit European business and consumers. VAT should be applied in a manner consistent with a level playing field and accordingly eliminate all VAT attributable competitive distortions.

Furthermore, the long list of cases handled by the European Court of Justice in the recent years demonstrates that there is an imperative need to modernise the VAT legislation in line with the current development in the markets.

What would be the main objectives of a new legislation?

A modernisation of the VAT legislation on financial services should address the following issues:

  • allowing that insurance and financial services customers are not left with "hidden VAT" whilst,
  • maintaining at the same time budgetary security for Member States,
  • reducing the administrative charges for the economic operators concerned and
  • improving the definition of exempt services, creating more legal security for Member States and economic operators and be sufficiently robust to keep pace with the development of new insurance and financial services;
  • removing potential or actual competitive distortions between supplies of insurance and financial services across different Member States or between places outside the EU and supplies of those services in the EU.

Against this background, the European Commission has pointed in the consultation document a list of 5 main options for structural reform, describing the main advantages and disadvantages of each option. It is possible that other options may emerge for consideration in the ongoing consultation process.

It has to be stressed that suggesting these options for consideration carries no implication that they reflect any preferences or priorities of the Commission.
Further information on current consultation on financial services is available on the following website:

http://ec.europa.eu/taxation_customs/common/consultations/tax/index_en.htm


[1] As set out in the new Financial Services Policy (2005-2010); see IP/05/1529


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