EU Commission review of the VAT rules on financial services

Update

For details of the Public Consultation, see Public Consultation on EU VAT on financial and insurance services.

The EU Commission has launched a roadmap for public feedback as the first stage of its review of the application of the VAT rules to financial services and insurance transactions. The roadmap is available for four weeks for feedback before the Commission publishes a full Public Consultation in early 2021.

Longer term, the Commission envisage putting forward a proposal for a Directive by the end of 2021. Options available include the removal of exemption from some or all finance and insurance transactions to a more modest modernisation of the existing rules to remove existing distortions and improve legal certainty.

This is an important review and one that all affected businesses should watch carefully and feedback on where possible.

Background

The EU Commission recently published a Tax Package of measures which included a proposal to update and simplify the VAT rules for financial services. For more details of the Tax Package, see The EU Commission's new Tax Package.

The Commission has previously attempted to modernise these rules, most notably with a 2006 Public Consultation on the VAT treatment of financial and insurance services. That consultation led to a wide-ranging and long-running review led by the Commission with input from Member States with a view to modernising the VAT finance and insurance exemptions to take account of developments in the market such as outsourcing and the increased use of technology-based solutions. Ultimately, that project faltered as a result of disagreements amongst Member States (but also due to a change of focus following the 2008 financial crisis) and was finally (and quietly) laid to rest in 2016.

Recent developments

As a first step in the revival of the review, the Commission has now published a roadmap for public comments. The Commission uses a roadmap to define the scope of, among other things, an evaluation of an existing law or policy. Roadmaps describe the problem to be tackled and objectives to be met, explain why EU action is needed, outline policy options and describe the main features of the consultation strategy. A roadmap describes the problems to be addressed and the policy objectives of the review, but does not, at this stage, put forward concrete proposals.

In this case, the roadmap describes the current VAT rules for financial and insurance services as complex and difficult to apply and not having kept pace with the developments of new services in the sector. The current rules on VAT treatment of financial and insurance services do not reflect the reality of the sector and are applied inconsistently by the Member States. The Commission is concerned that this has resulted in a lack of VAT neutrality, legal uncertainty and high administrative and regulatory costs. This is likely to contribute to distortions in the Internal Market and national measures alone are insufficient to modernise the rules and make their application more coherent across the EU.

As a result, the new initiative focuses on addressing these issues through modernisation of the VAT treatment of financial and insurance services.

The roadmap sets out the policy objectives to be achieved. In particular, the Commission identify the most important policy objective as being to address the competitive disadvantage faced by financial and insurance operators, which is caused by irrecoverable VAT that they are facing because their services are exempt from VAT. The second objective relates to clarification of the VAT rules for the financial and insurance services and their further harmonisation to the extent possible in order to diminish currently existing discrepancies in the VAT treatment of the services in question across the EU. Other policy objectives, closely linked to the ones above, are to provide a level playing field for EU businesses and in this way to contribute to the smooth functioning of the Internal Market and, in general, to contribute to the wider review of the VAT system with the aim of making it more robust and efficient.

The  roadmap suggests that an impact assessment could be structured around two main possible policy options:

• to remove the existing exemption in order to tax financial and insurance services; or
• to keep the exemption, but to modify its scope through taxing only some types of services, e.g. fee-based as opposed to interest-based.

In general terms, the roadmap suggests that the removal of the exemption would both free the suppliers of financial and insurance services from irrecoverable input VAT and greatly simplify the VAT rules for the sector. Limiting the scope of the exemption would, on the other hand, probably better address the risks of the impact of the review on consumer prices.

The 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).

Next steps

The roadmap reports that the evaluation and impact assessment work has already commenced through data collection and analysis of options undertaken as part of an ongoing supporting study for the review of the VAT rules for financial and insurance services, in light of the existing regulatory and other indirect taxation rules. In parallel, the Commission is consulting Member States, stakeholders and VAT experts participating in the works of the Group on the Future of VAT and in the VAT Expert Group and is gathering feedback from several EU stakeholder associations.

The consultation on the roadmap itself is open for four weeks, ending on 19 November. Feedback will be taken into account for further development of the initiative. The Commission will summarise the input received in a report explaining how the input will be taken on board and, if applicable, why certain suggestions can't be taken up.

The consultation strategy involves a public consultation taking place in the first quarter of 2021 and publication of the impact assessment in the third quarter of 2021. Longer term, the Commission plans to put forward a proposal for a Directive based on the feedback and impact assessments in the fourth quarter of 2021.

Feedback can be provided on the roadmap on the EU Commission website.