IP/07/1782

Brussels, 28 November 2007

VAT: The European Commission proposes to modernise the current legislation for financial services and insurances

(see MEMO/07/519)

The European Commission has adopted today a proposal for a Directive aiming at modernising and simplifying the complex VAT rules for financial and insurance services and securing a level playing field in the pan-EU market for these services as far as VAT is concerned. These services are generally exempt from VAT but the exemption dates from 1977 and the legislation has not kept abreast of developments since then. Today, the exemption is not applied uniformly by the Member States and thus frequently the European Court of Justice has been asked to fill the legislative gap and clarify the correct interpretation. The proposal will create more certainty and security for Member States and for financial and insurance institutions by setting clear modern definitions of exempt services. It will also allow these institutions to manage the costs of non deductible VAT by allowing them to opt for taxation and by clarifying and extending the tax exemption for cost sharing arrangements.

“Leaving things as they are is not an option! I am convinced that the balanced package of measures being proposed is the best option for VAT reform in the financial and insurance sectors. It will increase certainty for the industries as well as improve budgetary security for Member States by reducing the potential for legal challenge. It will also improve the competitiveness of the EU banking and insurance companies by allowing them to manage better their operations without hidden VAT. With this increased efficiency, I expect that this proposal will also benefit all consumers of these services " said László Kovács, Commissioner for taxation and customs.

The proposal follows a three fold objective:

• to increase legal certainty for all concerned, from the business sector to national tax administrations and thereby reduce their administrative burden in correctly applying the VAT provisions on their services.
• to ensure a more consistent application of the tax and deliver a level playing field in the internal market, at least as far as VAT is concerned.
• to allow businesses to manage better the impact of non-deductible VAT on their activities.

These objectives will be achieved by the three measures contained in the proposal:

• Redefinition of the scope of the exempt services to ensure that the exemption better reflects the complexity and diversity of the modern industries. The proposal for a Directive is accompanied by a proposal for a Regulation which expands the definitions of exempt services and will apply directly in all Member States.
• Possibility for banking and insurance companies to opt to tax their services if they wish. Such an option to tax already exists in the VAT Directive but is currently at the discretion of Member States and not widely used. Its limited availability today is potentially distortive and should therefore be equally accessible across the Community. This will allow institutions to reduce their exposure to non-recoverable tax, in particular in business to business activities. VAT taxable persons clients of bank and insurance companies will also reduce their costs as they will be able to deduct the VAT paid on financial and insurance services.
• Introduction of an industry specific exemption from VAT on cost sharing arrangements, including those which are cross border. This will enable institutions to pool their operations and to share costs between the group members without creating additional non-recoverable VAT.

Background

VAT current legislation (adopted in 1977) exempts financial services and insurances. Because institutions cannot recover VAT on their purchases of services or goods, this creates "hidden VAT" charges in supplies which financial and insurance companies provide to other businesses. They cannot deduct this input VAT on services or goods (e.g. outsourced services or 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 operating costs of EU business and 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.

Furthermore, the growing list of cases handled by the European Court of Justice in the recent years in this area of VAT demonstrates that there is an imperative need to modernise the legislation in line with the current development in the markets.
Further information on the proposal is available on the following website:

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

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