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Another Fine VAT Imbroglio On The Way

by Ulrika Lomas,, Brussels

19 November 2007

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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