Another Fine VAT Imbroglio On The Way
Yet another contentious dossier will be added to the raft of unresolved VAT
issues currently bogging down the EU's legislative processes after Tax Commissioner
Laszlo Kovacs said last week that he was planning to tackle the exemption of
financial services from VAT, which prevents companies in that sector from reclaiming
VAT they have paid out. Many member states and large parts of the financial services industry would
prefer to see zero-rating of financial services, which would permit the reclaim
of 'input' VAT. But it would also result in loss of revenue for member states,
so that the unanimity rule on taxation issues will probably stand in the way
of change, as has happened with proposals to do away with concessionary VAT
rates (opposed by Britain) and introduce destination VAT charging for e-commerce
services (opposed by Luxembourg). The new non-constitution for the EU, even if it is ratified, does not address
the unanimity rule on tax issues; but there is a way around it, called the European
Court of Justice, which has been busily rationalizing tax legislation with its
rulings, to the horror of eurosceptics and treasuries across the Union. Those
member states that currently charge full VAT on some financial services will
presumably resist Kovacs' proposals, but the ECJ has been nibbling away at the
inconsistencies created in international transactions by differential cross-border
VAT treatments. The ECJ has also levelled out the investment fund playing field with a recent
ruling that VAT exemption will apply to the management of Investment Trust Companies
as they "constitute investment funds comparable to AUTs and OEICs."
It is expected that the ECJ's ruling will also impact pension funds, unit linked
life assurance policies, investment clubs and venture capital trusts. The management
of conventional collective investment funds under UCITS has been exempt from
VAT for many years. The Commission has been studying the problem of exemption for financial services
for some time. A PricewaterhouseCoopers study earlier this year came down in
favour of change. The current rules militate against cross-border banking concentration,
something that is badly needed in Europe, because the provision of inter-bank
services is liable to VAT at rates up to 27%, which is unrecoverable. "When banks merge, savings can amount to as much as 15% on particular
services such as information technology platforms, but if, every time a bank
has to bill another department for services, that department has to pay VAT,
that can cancel out the profit," said an FBE (European Banking Federation)
spokesman. .
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