Banks and insurers on Wednesday gave a qualified welcome to European Commission proposals which would clarify and update the value added tax regime for financial and insurance services.
The problems have arisen because financial services and insurance are VAT-exempt under legislation dating from the 1970s.
These sectors are not required to charge the tax when they are supplying the exempt services, but are also generally unable to recover the VAT they pay on the goods and services acquired for their businesses.
While this non-recoverable tax is a significant revenue source for national tax authorities, it bumps up the cost of such services, and puts European Union-based banks and insurers at a disadvantage compared with, say, US counterparts.
As financial markets and practices have evolved, there has been increasing confusion over the extent of the exemption and precisely what businesses are covered. This has led to several long-running cases at the European Court of Justice, and different interpretations in different member states.
Proposals put forward by the European Commission on Wednesday focus on three measures. First, there would be a redefinition of the scope of the exempt services in an effort to bring more clarity. Second, banks and insurance companies would be given the option of taxing their services if they wished.
This is a provision which exists in the VAT directive but is not widely used by EU member states and could be particularly useful if products are being offered to other businesses (rather than the retail market).
Finally, there would be an industry-specific VAT exemption on "cost-sharing" arrangements, including cross-border ones. This would allow institutions to pool their operations and share costs without creating any additional non-recoverable VAT.
The measures received a broad thumbs-up from insurers and banks, although there were some caveats over specifics. "The changes will increase clarity, allowing firms to operate and plan more efficiently," said the Association of British Insurers.
The European Banking Federation also said it was a "first step in the right direction" although it added that there should be greater certainty established around the areas of provision of payment services, derivatives, securities, custodial services and intermediaries.
Some lawyers warned that the definitions will have to be tested in practice. "It's a question of how workable they are in real life," said Greg Sinfield, a partner at law firm Lovells. The taxation commissioner Laszlo Kovacs said he was hoping for a "positive reaction" from most member states, but acknowledged that they would probably see a "slight" loss of tax revenue in the short-term.
These sectors are not required to charge the tax when they are supplying the exempt services, but are also generally unable to recover the VAT they pay on the goods and services acquired for their businesses.
While this non-recoverable tax is a significant revenue source for national tax authorities, it bumps up the cost of such services, and puts European Union-based banks and insurers at a disadvantage compared with, say, US counterparts.
As financial markets and practices have evolved, there has been increasing confusion over the extent of the exemption and precisely what businesses are covered. This has led to several long-running cases at the European Court of Justice, and different interpretations in different member states.
Proposals put forward by the European Commission on Wednesday focus on three measures. First, there would be a redefinition of the scope of the exempt services in an effort to bring more clarity. Second, banks and insurance companies would be given the option of taxing their services if they wished.
This is a provision which exists in the VAT directive but is not widely used by EU member states and could be particularly useful if products are being offered to other businesses (rather than the retail market).
Finally, there would be an industry-specific VAT exemption on "cost-sharing" arrangements, including cross-border ones. This would allow institutions to pool their operations and share costs without creating any additional non-recoverable VAT.
The measures received a broad thumbs-up from insurers and banks, although there were some caveats over specifics. "The changes will increase clarity, allowing firms to operate and plan more efficiently," said the Association of British Insurers.
The European Banking Federation also said it was a "first step in the right direction" although it added that there should be greater certainty established around the areas of provision of payment services, derivatives, securities, custodial services and intermediaries.
Some lawyers warned that the definitions will have to be tested in practice. "It's a question of how workable they are in real life," said Greg Sinfield, a partner at law firm Lovells. The taxation commissioner Laszlo Kovacs said he was hoping for a "positive reaction" from most member states, but acknowledged that they would probably see a "slight" loss of tax revenue in the short-term.
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