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Commission seeks VAT overhaul for banks, insurance firms

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Published 29 November 2007
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Banks and insurance companies are likely to benefit from large savings thanks to new VAT rules proposed by the Commission on 28 November. Member states will fear a loss in tax revenue, but the Commission argues that "overall efficiency gains will compensate for limited revenue losses". Commissioner Kovacs expects all consumers of financial and insurance services to benefit from the new rules.

The Commission proposed, on 28 November, to amend existing VAT rules by clarifying exemption schemes for financial services and insurance, but member states have yet to agree to the highly sensitive proposal.

"Leaving things as they are is not an option. I am convinced that the balanced package of measures being proposed is the best option for VAT reform in the financial and insurance sectors," Taxation Commissioner Laszlo Kovacs said on 28 November 2007.

The proposal's key measures include:

  • Increased legal certainty for businesses and member states through clarifying and updating definitions of the exempt services;
  • Giving banking and insurance companies the option to tax their services if they wish to do so, and in return allow them to deduct VAT paid for supply services or goods, and;
  • The introduction of an industry-specific exemption from VAT on cost-sharing arrangements on purchases, for example IT systems - including cross border operations.
Positions: 

Guido Ravoet, Secretary General of the European Banking Federation (EBF), said the proposal was a "first step in the right direction", but also added that the proposal should "go further in modernising the legislation in order to correctly address today's banking activities and be flexible enough to include new activities as they develop."

Michaela Koller of the European insurance and reinsurance industry organisation CEA said: "European insurers welcome the Commission's intention to provide financial and insurance services operators with increased legal certainty on the scope of the VAT exemptions and [...] reduce the negative impact of non-deductible VAT on the costs of exempt operators."

Next steps: 
  • Member states must agree on the proposal unanimously after consultation with Parliament.
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Background: 

Financial services and insurance companies have generally been exempt from Value Added Tax (VAT) since 1977.

However, because of the exemption, banks and insurance firms cannot recover VAT on their purchases of services or goods. This results in "hidden" VAT charges for supplies, such as office equipment or services that have been outsourced, which financial services or insurance companies need to run their businesses.

Moreover, the existing rules have not been uniformly applied across EU member states. According to the Commission, the growing number of cases before the European Court of Justice (ECJ) in recent years shows that there is a need to update the existing rules and adapt them to current market developments.

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