European Commission Proposal of VAT Reforms for Financial and Insurance Services Explained

This blog was last updated on March 30, 2021

We recently shared news of the European Commission (EC) opening a feedback period concerning an initiative to review VAT rules for financial and insurance services. The feedback period has now ended, and a public consultation period is set for the first quarter of 2021.

The consultation will gather stakeholders’ views on the current VAT treatment of financial and insurance services. When the rules exempting such services were introduced, the rationale was that there were numerous technical hurdles in calculating the taxable base for financial and insurance services. Yet, such exempt status has led to competitive disadvantages and complexities in the law. Present day VAT laws around financial and insurance services have been unable to remain up to date with new industry developments and have increased litigation and led to inconsistent application by EU Member States. Therefore, the EC’s initiative specifically aims to confront the lack of VAT neutrality, the legal uncertainty, and the regulatory complexity through a change in policy.

Two options for policy change

Two noteworthy options for policy change are being explored by the EC with the hope that these will create a fair arena in the financial and insurance business sectors and will make the VAT system of the EU more streamlined.

• The first option would eliminate the VAT exemption on financial and insurance services altogether. The elimination of the exemption would allow financial and insurance services to recover input VAT and streamline the rules on VAT around the industries.
• The second option would keep the exemption but limit its scope by taxing certain financial and insurance services (e.g., fee-based as opposed to interest-based services). The EC expects that this option may better address risks associated with the impact on consumer prices.

Either option will reasonably have substantial economic and administrative impacts for the finance and insurance sectors if acted upon. The measures would likely ease tax compliance and increase VAT revenues, enhance competitiveness of the sectors by potentially removing monetary obstacles, and provide benefits to consumer pricing with more choice across borders.

After the public consultation in the first quarter of 2021, the next step in the process is for the initiative to seek EC adoption. This is aimed for the last quarter of 2021.