MEPs Back Update Of Financial Services VAT

by Ulrika Lomas, Tax-News.com, Brussels

29 September 2008

Members of the European Parliament have backed an update of the rules regarding the value-added tax (VAT) treatment of financial services and insurance, with a number of amendments.

The aim is to ensure legal certainty in a sector which has changed dramatically since the current rules were established over 30 years ago. The report, drawn up by Maltese MEP Joseph Muscat of the Party of European Socialists (PES), was adopted by 493 votes in favour to 90 against and ten abstentions.

Most financial services are exempt from VAT, but the legislation setting out how this exemption works in detail dates from 1977. The increasing level of cross-border supply of such services within Europe’s single market and the greater use of outsourcing of services to third countries have led to situations not provided for in the original legislation, which means there is unhelpful legal uncertainty.

While looking set to approve the update in general, MEPs adopted a number of amendments which would clarify the scope of the VAT exemption – for example by explicitly including all derivatives. They also adopted a number of amendments aimed at ensuring a level playing field between different Member States and different types of financial institution.

Another aspect of the proposal from the Commission would give financial services companies everywhere in the EU the option of taxation on their services, which would enable them to claim back VAT they pay on their expenses in providing those services (which is not possible if the ultimate supply is exempt). MEPs want to ensure that the Council adopts uniform rules for applying this possibility across the EU and that its operation is subsequently reviewed by the Commission.

The Commission’s other proposed innovation is to allow for cost-sharing groups so that economic operators can pool investments and re-distribute the costs for these investments exempt from VAT. MEPs want to broaden the scope of this arrangement.

As usual with taxation matters, the European Parliament’s position is not binding, and the final decision requires unanimity among the 27 Member States in the Council.

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