EU Parliament draft report on taxation of financial services

The VAT treatment of financial services has long been a difficult issue for legislators within the EU, with a number of recent attempts at reform falling by the wayside. The latest attempt to reignite debate and modernisation has been launched by the European Parliament's Committee on Economic and Monetary Affairs (ECON) with the publication of a draft report calling for a review of the taxation of the financial sector and, in particular, the VAT exemption for financial services.

Fragmentation and complexity

A major theme of the report is the problems caused by fragmentation of the taxation of financial services across the EU, with diverging national treatment of financial transaction taxes and bank levies in particular. Such fragmentation gives rise to both additional compliance costs for financial service businesses and potential areas of double taxation, but, at the same time, opportunities for tax avoidance and tax arbitrage. The report notes that the European Parliament has consistently supported the concept of a single, EU-wide FTT but that the Commission's work programme for 2026 lists the FTT proposal as one to be withdrawn.

The Report blames the VAT exemption for financial services, at least in part, for this highly fragmented landscape of sector-specific taxes across the EU as Member States attempt to make up for the last revenue. It notes that attempts, including the 2007 proposal and the 2021 public consultation, to modernise the VAT treatment of financial services did not result in any reform. However, the Report now suggests that technological progress "has rendered the original technical justification for the VAT exemption obsolete".

VAT reform and modernisation?

In addition, this lack of reform has left the VAT Directives out-of-date, lacking any specific provisions dealing with new and innovative financial instruments such as crypto-assets, decentralised finance and fintech, leading to divergent national interpretations of the VAT rules and a lack of legal certainty for the industry. This has lead to a "complex, fragmented and incoherent tax landscape, making tax compliance costly and increasing firms' operating expenses". There is, therefore, a need for clear VAT definitions and simplified rules to reduce these compliance burdens.

Ultimately, the Report suggests that the exiting VAT exemption is no longer fit for purpose, particularly where there are clearly identifiable financial charges such as fees and commissions and calls on the Commission to publish a proposal to reform the VAT rules for the financial sector in a way that mitigates costs for retail consumers and ensures the financial sector makes a fair contribution.

The end of the FTT

More broadly, the Report "regrets" the withdrawal of the FTT proposal and urges the Commission to ensure that any proposal for a coherent framework for taxing the EU financial sector presents a concrete plan to address the policy gap created by this withdrawal. As part of this, the Report advocates developing common EU minimum standards for temporary windfall taxation of banks and exceptional profits in the financial services sector to ensure predictability.

Comment

There is clearly a lot of frustration at an EU level around the failure to reform and modernise the VAT treatment of financial services, highlighted by the earlier failures to make progress. However, there appears little that is new in this draft Report and, indeed, little of real substance to address the real technical difficulties that would present themselves should the Commission take up the challenge of presenting a new proposal.

It is not necessarily clear how the technical advancements referred to by the Report would help to identify the "consideration" for VAT purposes is a range of complex financial scenarios, particularly where they are not based on explicit fees or charges. Moreover, the technical challenges of identifying the consideration were only one of the original reasons for the exemption, another being the additional cost for retail consumers of financial products. That aspect has certainly not gone away and, arguably, is even more of a factor now at a time of wide-ranging challenges to the cost of living.

If you are interested in any of the points discussed in this article, or in VAT exemptions more broadly, whether across Europe or in the UK, our team, including specialists across Europe, is available should you wish to explore them further.