The EU’s European Commission has launched its latest public consultation on ending banking, insurance and other financial services’ exemption from VAT. In particular taxing fee-based services as opposed to interest-based (loan interest, credit etc). It last attempted to bring financial services into the VAT net in 2007, but disagreements between the UK, Germany and others on shared services ended the talks. European governments have since promoted turnover taxes such as Insurance Premium Taxes, and attempted without success to launch an EU-wide Financial Transaction Tax.
The Commission envisages putting forward a proposal for a Directive by the end of 2021 as part of the EU’s Tax Package VAT action plan. Follow all the European Union’s completed and planned reforms via VAT Calc’s EU VAT reform tracker.
EU financial services VAT roadmap
The EU is looking at two options in the area:
- Scrap the VAT exemption on all services, achieving clarity and simplicity. But this may create unintended negative impacts on credit and its wider role in helping economies thrive.
- Limit VAT to fee-based services and continue the interest-based service exemption. This is the more likely route as it would probably better address the risks of the impact of the review on consumer prices.
The EU’s current roadmap notes that several alternatives could be considered. For example, taxing financial and insurance services (all or some types) at the standard rate or allowing reduced rates while fixing a minimum rate.
In addition, the impact assessment will consider other measures, such as introduction of cost-sharing arrangements as a way to limit the problem of non-deductible input VAT (the ECJ has held that the current cost sharing rules are not applicable to the financial and insurance sectors).
Following the UK’s exit from the EU and the COVID funding crisis, the EU is keen to see if it can enable member states to levy VAT on some or all financial services. This would include allowing any VAT registered businesses to reclaim input VAT on which they currently suffer large irrecoverable VAT. Financial institutions have attempted to use VAT groups and cost-sharing arrangements, but these have been largely undone by a number of recent European Court of Justice rulings (DNB Banka; Avia)
Whilst VAT on financial services was first concluded as too complex and difficult to apply back in 1977, the successes of China, Australia and India have emboldened the EU. As new technologies ‘ fintech’ change the nature of businesses models and outsourcing, the EU is anxious to update the VAT rules.