Insurance Europe has published a position paper that calls for the modernisation of Value Added Tax (VAT) rules for financial services to be put back on the European Commission’s agenda.
The paper points out that the VAT liability of financial services transactions continues to be governed by a VAT Directive that was implemented in 1977 and written even earlier. Insurance Europe believes that this Directive is in many respects outdated and not correctly applicable to modern financial services.
In particular, recent rulings of the European Court of Justice (ECJ) have shown that there is a need to adapt the VAT Directive to current market realities. It must also be accepted that ECJ rulings are an inefficient means of providing certainty to the European VAT system.
Due to this lack of adaptation to modern financial services and current market realities, Member States may implement their own interpretations of the law. This results in an uneven playing field within the EU, causing VAT to become a key factor affecting the competitiveness of the EU and a driver in business decisions for financial services companies.
This also leads to inappropriate taxation of financial services providers and lost VAT income for Member States. Insurance Europe is of the view that the lack of harmonisation of VAT law across the EU is in fact a significant barrier to a Capital Markets Union (CMU).
The paper highlights the areas in which the insurance industry lacks the needed clarity with respect to its VAT liability and that should be addressed in the context of a potential update of the VAT Directive. These are:
- The scope and application of the exemption for financial services & option to tax.
- VAT grouping.
- Cost-sharing groups.
- Outsourcing and third-party delegation.
- Transfer of insurance and reinsurance contracts.