EU reconsiders Financial Services VAT exemption
- Apr 10, 2019 | Richard Asquith
The EU’s European Council and Commission have announced a review of the financial services industry’s exemption from VAT. This follows failure to agree on an EU-wide Financial Transaction Tax.
There is a general perception that the banking sector does not contribute enough tax, particularly following the massive financial crisis bail outs. Some member states may view Brexit as an opportunity to scrap the exemption – the UK was one of the main challengers to extending EU VAT to financial services in 2011 when it was last discussed.
EU struggles imposing VAT; China and Australia map the way forward
Under the EU VAT Directive, banking and insurance are exempt from VAT. The relief is in place because of the difficulty in establishing pricing and tax calculations in complex banking contracts, and fears of increasing consumer credit costs.
The last discussions of removing the exemption had come to a standstill in Council, where it was discussed under the Polish Presidency in 2011. This was mainly due to the inability of Member States to reach an agreement on several politically sensitive issues (notably, as regards the application of the VAT exemption for the management of investment funds and pension funds; and also transactions concerning commodity derivatives and outsourced services).
An EU €56billion Financial Transactions Tax was then proposed by the EC for 2014. Following failure to gain unanimity on this, 11 states proceeded under the ‘enhanced co-operation’ protocol to push their own version. However, disagreements around the scope have now stalled the proposal.
Globally, VAT is being extended to include financial services, such as banking and insurance, with Australia and China as prime examples.
Insurance is subject to Insurance Premium Tax (IPT) as a sales tax to the final consumer. This is not regulated at the EU level. In the UK, IPT is 12% following four rises since 2011. Across the EU, the average rate is now 14%.