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Cicero Policy BrieferIssue 2, July 2006
EU VAT Reform: some momentum but Member State positions
remain unclear
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| “Member States have been on the back foot of late on this issue ” |
On 9 June, DG Taxation and Customs Union (TAXUD) closed a public consultation on a review of financial services and insurance provision under the 1977 Sixth Directive (77/388/EEC), the legislative act that governs the application of all VAT across the EU.
Sources within the Commission inform Cicero that there has been a “voluminous” response to the consultation. The Commission plans to discuss the issue informally with Member State governments later this month. A proposal for a Council Directive amending 77/388/EEC is expected before the Council by the end of the year.
The Commission sees three major problems with the current arrangements on the application of VAT to financial services and insurance products and operations.
Firstly, the definition of VAT-exempt services predates 1977 when the Sixth Directive came into force, with a broad range of today’s financial services products difficult to define under these rules. Secondly, the existing provisions on business-to-business (B2B) services mean that so-called ‘hidden’ non-deductible VAT builds up in the supply chain, as suppliers of VAT-exempt services cannot recover the VAT paid on inputs. Thirdly, the rules for calculating deductible input VAT are complex, disparate across Member States and, in the Commission’s view, represent an excessive burden for business.
In a speech to a joint Commission-European Banking Federation (FBE) conference on the issue in Brussels on 11 May, Commissioner László Kovács set out the Commission’s objectives in bringing forth a new amendments proposal. In addition to viewing the current VAT rules as a major obstacle to a European single market in financial services, the Commissioner suggested that these rules further placed the European banking sector at a competitive disadvantage as current rules favoured ‘third country operators’ in the tax treatment of outsourced services.
Mr Kovács also added that VAT regulations should not create a burden on European business that would lead to offshoring and thus risk jobs in Europe.
The initiative to review rules on the application of VAT to financial services and insurance has been broadly welcomed by the industry. However, it has been pressuring the Commission for some time to take some action on this issue and the Commission’s position reflects much of the European banking sector’s particular VAT concerns.
While the Commission and (most of) the European financial services and insurance sectors are reading from the same page on amending the Sixth Directive, the position of EU Member State governments on any proposed reforms is far less clear.
Major changes to the VAT rules in question will have fiscal implications for Member State governments. Already this year VAT has proved a divisive topic, with Germany, Portugal and Luxembourg last month torpedoing a broader proposal on cross-border services and e-commerce that would have harmonised some VAT rates.
Member States have also been on the back foot of late on this issue, with a series of Community-level legal rulings on VAT application going against governments. Most notable amongst these was the European Court of Justice’s potentially far-reaching decision in favour of Abbey National and Inscape Investment Fund on 4 May, in which it ruled supporting a broader interpretation of fund management activities that may be exempted from VAT.
Thus far, Member State governments have been unusually quiet on the question of VAT on financial services and insurance products and operations. And ultimately it is their positions that count, as fiscal questions remain an intergovernmental competence and any proposal for Council Directive to amend the Sixth Directive will require unanimous Member State support.
Conor Foley can be contacted on +32 (0) 2537 3058 or click here to email.
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