EC Seeks To Modernize VAT Treatment Of Financial Services

by Ulrika Lomas, for LawAndTax-News.com, Brussels

15 May 2006

The European Commission announced last Thursday that it intends to submit a legislative proposal by the end of 2006 for modernising the current legislation for VAT on financial services and insurance.

It has launched a public online consultation, and will work closely with the European Banking Federation in this process.

The main objectives of a modernisation would be to reduce the administrative costs for administrations and traders, to remove potential or actual competitive distortions between suppliers across different Member States, and to create more clarity and security for Member States and traders.

“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." announced László Kovács, Commissioner for Taxation and Customs, continuing:

"I hope we will be able to submit a legislative proposal, before the end of 2006."

Current VAT 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.

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 therefore reflect this VAT cost and, as it cannot be recovered by business customers, the charge cascades through the system, increasing the cost of the goods and services supplied.

A modernisation of the VAT legislation on financial services is intended to address the following issues:

• Allowing that insurance and financial services customers are not left with "hidden VAT" whilst,
• At the same time maintaining 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 being 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 to a list of 5 main options for structural reform, describing the main advantages and disadvantages of each option.

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