Euro Financials Closer To VAT Reform

Industry associations believe a European Commission proposal is a good start towards reform of VAT arrangements for the financial services and insurance sectors.

The Commission proposal unveiled on November 28 redefines the scope of exempt services, gives banking and insurance companies the option to be taxed and introduces the idea of an industry-specific exemption from VAT on cost sharing services.

These suggestions would be included in a EU directive and a regulation which would expand the definition of exempt services and would apply in all member states.

The Commission said reform is needed because the general VAT exemption on financial services and insurance was first enacted in 1977 and legislation has not kept pace with developments in the sectors. The Commission added that the exemption is not operated in the same way in every member state and the European Court of Justice has to step in from time to time to clarify what it means.

"The proposal will create more certainty and security for member states and for financial and insurance institutions by setting clear modern definitions of exempt services," the statement said. "It will also allow these institutions to manage the costs of non deductible VAT by allowing them to opt for taxation and by clarifying and extending the tax exemption for cost sharing arrangements.

"The proposal for a Directive is a first step in the right direction and the European Banking Federation will continue to work with the Commission in addressing the technical issues that are apparent in the proposal," said Guido Ravoet, secretary general of the EBF.

"The CEA welcomes that the draft VAT legislation now focuses on the nature of the activity performed, regardless of the identity of the supplier," a statement from the European Insurance and Reinsurance Federation said .

Member states have the option to tax banking and insurance companies at the moment, but only some of them do so. The Commission believes this is "potentially distortive". The Commission believes it should be applied in every country by January 1 2012 because it would help the financial services and insurance sectors reduce the amount of non-recoverable tax they incur. Clients of banking and insurance companies would also save money because they would be able to recover the VAT paid to these companies.

An exemption from VAT on cost sharing arrangements would mean institutions could pool their operations and share costs between the group members without creating additional non-recoverable VAT, the Commission said.

"I'm not sure the proposal is going to achieve legal certainty," said Greg Sinfield, a partner of Lovells, a law firm, in London. "There are still grey areas and overlaps, but it's an improvement on what we have."

The Commission's proposed reforms, which it first consulted on in June 2006, may not good for everyone. The option to tax and the cost sharing proposals, in particular, could see member states losing revenue because of the increase in the amount of VAT companies could recover.

This means the negotiations between the member states and the Commission before the reforms become law are likely to be difficult. The member states need to agree unanimously on the proposals for a directive and a regulation. The directive, which the Commission wants to be enforced by December 31 2009, will then need to be incorporated into national law, though the regulation will apply throughout the EU without further action.Industry associations believe a European Commission proposal is a good start towards reform of VAT arrangements for the financial services and insurance sectors.

The Commission proposal unveiled on November 28 redefines the scope of exempt services, gives banking and insurance companies the option to be taxed and introduces the idea of an industry-specific exemption from VAT on cost sharing services.

These suggestions would be included in a EU directive and a regulation, which would expand the definition of exempt services and would apply in all member states.

The Commission said reform is needed because the general VAT exemption on financial services and insurance was first enacted in 1977 and legislation has not kept pace with developments in the sectors. The Commission added that the exemption is not operated in the same way in every member state and the European Court of Justice has to step in from time to time to clarify what it means.

"The proposal will create more certainty and security for member states and for financial and insurance institutions by setting clear modern definitions of exempt services," the statement said. "It will also allow these institutions to manage the costs of non deductible VAT by allowing them to opt for taxation and by clarifying and extending the tax exemption for cost sharing arrangements.

"The proposal for a Directive is a first step in the right direction and the European Banking Federation will continue to work with the Commission in addressing the technical issues that are apparent in the proposal," said Guido Ravoet, secretary general of the EBF.

"The CEA welcomes that the draft VAT legislation now focuses on the nature of the activity performed, regardless of the identity of the supplier," a statement from the European Insurance and Reinsurance Federation said .

Member states have the option to tax banking and insurance companies at the moment, but only some of them do so. The Commission believes this is "potentially distortive". The Commission believes it should be applied in every country by January 1 2012 because it would help the financial services and insurance sectors reduce the amount of non-recoverable tax they incur. Clients of banking and insurance companies would also save money because they would be able to recover the VAT paid to these companies.

An exemption from VAT on cost sharing arrangements would mean institutions could pool their operations and share costs between the group members without creating additional non-recoverable VAT, the Commission said.

"I'm not sure the proposal is going to achieve legal certainty," said Greg Sinfield, a partner of Lovells, a law firm, in London. "There are still grey areas and overlaps, but it's an improvement on what we have."

The Commission's proposed reforms, which it first consulted on in June 2006, may not good for everyone. The option to tax and the cost sharing proposals, in particular, could see member states losing revenue because of the increase in the amount of VAT companies could recover.

This means the negotiations between the member states and the Commission before the reforms become law are likely to be difficult. The member states need to agree unanimously on the proposals for a directive and a regulation. The directive, which the Commission wants to be enforced by December 31 2009, will then need to be incorporated into national law, though the regulation will apply throughout the EU without further action.