European Commission

The European Commission has published a public consultation as part of its review of the VAT rules for financial and insurance services. The review was first announced last summer in the Commission’s action plan for “fair and simple taxation supporting the recovery strategy” published in July last year and a combined evaluation roadmap/inception impact assessment was published in October (see our earlier newsletter). The Commission has already identified lack of neutrality, legal uncertainty and regulatory complexity as the main issues with the existing rules and plans to implement the results of its review in the final quarter of 2021. As noted previously, the Commission proposes two policy options:

• remove the exemption entirely, which could simplify VAT rules for the financial and insurance sector and eliminate the costs of irrecoverable input VAT;
• retain the exemption but narrow its scope to cover only some service types, such as those that are fee-based rather than interest-based.

The aim of the consultation is to find out stakeholders’ views of the current rules and how they work in practice to inform any future legislative proposal from the Commission. The consultation questionnaire asks stakeholders a range of questions such as what factors contribute to difficulty with complying with the rules cross-border, whether it would be beneficial to include in its proposals updated definitions of exempt services that will incorporate CJEU case law or to refer to other EU regulations regulating the sector and whether respondents would favour a fixed rate input tax deduction. The consultation will close on 3 May and the Commission will release the comments the responses it receives publicly following the consultation.

DLA Piper comment: With a previous public consultation in 2006, the EU Commission already tried to modernize the VAT rules for the financial and insurance sectors. However, the project failed both because of disagreements between Member States and the 2008 financial crisis. Today, thanks to the public consultation launched by the EU Commission, it is hopefully possible to overcome the obstacle of this VAT regime. Indeed, due to the VAT exemption regime, suppliers of financial and insurance services cannot deduct VAT incurred on inputs, in particular - but not exclusively - on capital goods such as IT costs. Said VAT downside connected to the unrecoverabiliy of input VAT may lead to an increase of the final price of the VAT exempt services.