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EU reviews ending Financial Services VAT exemption

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:

  1. 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.
  2. 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.

EU VAT reforms

Reform (click for details) Update
2025 VAT registration thresholds equivalence foreign businesses On track
Virtual events VAT rule changes Agreed
2024 Payment providers' seller transaction reporting and bookkeeping obligations On track
Digital Reporting Requirements including EU e-invoicing harmonisation Implementation of VAT in the Digital Age?
2023 DAC 7 - marketplace reporting harmonisation On track
Financial Services VAT exemption reform proposals Consultation complete; proposal 2023
Tour operator margin scheme VAT reforms EC undertaking fresh review
2022 IOSS reforms to prevent double taxation Proposals early 2022
EU reduced VAT rate freedoms Enter into force 6 April 2022
VAT in the Digital Age proposals On track for 7 Dec 2022 publication
Single VAT Registration in the EU - extension of OSS On track for 7 Dec 2022 publication
Proposal for VAT treatment of the platform economy On track for 7 Dec 2022 publication
EU DAC8 cryptocurrency tax reporting proposals On track for 7 Dec 2022 publication
VAT Gap Initiative Q3 2022
EU definitive VAT system On hold
2021 One-Stop-Shop (OSS) single EU VAT return In effect since 1 July 2021
Ending €22 import VAT exemption; new IOSS return In effect since 1 July 2021
Marketplace deemed supplier EU VAT reforms In effect since 1 July 2021
2020 EU four Quick Fixes for VAT In effect
Tax authorities anti-VAT fraud cooperation In effect
Tax Action Plan - 25 VAT and other tax reforms roadmap See 'VAT in the Digital Age' and others
2019 Simplification of e-services VAT compliance and thresholds In effect
Single and multi-use vouchers In effect
2018 Lower e-book and publications VAT rates In effect, although not all EU states have adopted the option
EU Generalised Domestic Reverse Charge VAT Mechanism In effect, although no country has adopted this voluntary option
2015 B2C electronic services VAT reforms - MOSS return In effect

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