EU VAT Reform - Financial and Insurance (FSI) Services

Indirect Tax Matters February 2021

The rules regarding VAT exemptions which relate to financial and insurance (FSI) services were first introduced in 1977. These rules are now set out in the EU Directive 2006/112/EC. The majority of FSI services do not afford the right to VAT input tax deductions and as a result, the VAT incurred on purchases must be absorbed. With the rise, in recent times, of the gig economy, where tasks are frequently outsourced to free-lance workers or contractors, the inability to claim input tax deductions is creating greater challenges for those in the FSI space.

The complexity of the FSI sector, as a whole, has increased considerably and over the past decade in particular, with fin-techs and non-traditional FSIs playing a significant role. The current rules relating to the VAT treatment of FSI services no longer reflects this complexity and resultantly, these rules are no longer fit for purpose. The volume of FSI VAT litigation being brought through the EU-courts serves to underline the inadequacy of the current VAT rules relating to FSI services. These rules are being criticised for their complexity, for being difficult to apply, and for their failure to adapt to account for new technological advancements and types of activity in the FSI sector. This has resulted in:

  • Increased legal uncertainty for businesses that provide FSI services
  • Inconsistency in the VAT treatment
  • Higher administrative costs

Due to some of the issues outlined above, the European Commission initiated a review of the VAT treatment of FSI services in April 2020, with a view to modernising the application of VAT in the sector. The five broad “Areas of Intervention” that the Commission identified for review are as follows:

  1. Service definitions (e.g. is a legislative revision of the FSI definitions needed or would clarification of the rules governing the current definitions suffice)
  2. Removal of the exemption (e.g. reviewing the impact of removing some (or all) of the FSI exemptions and / or the implications of introducing a reduced VAT rate)
  3. Option to tax (OTT) (e.g. should it be mandatory for Member States to implement OTT rules)
  4. Cost-Sharing arrangements (e.g. potentially introducing new arrangements for FSIs)
  5. Fixed rate of deduction (e.g. impact of mandatory or optional fixed rates of input tax deduction)

The Commission itself acknowledges that a one size fits all approach in terms of reform is unlikely to work and that a combination of various approaches could be more suitable. Approaches may therefore need to be tailored for specific industries (e.g. asset management, general insurance, life assurance to name but a few).

Public input is being sought by the Commission in their review of the rules on the VAT treatment of FSI services and as part of the Action Plan have promised to present a legislative proposal to modernise FSI VAT rules in 2022/2023. These modernisations should be designed to take account of the advance of the digital economy (the fin-tech sector) and the increase in the outsourcing of input services by those in the FSI sector. The final proposal should ultimately ensure a level playing-field within the EU, whilst simultaneously safeguarding the competitiveness of EU companies globally.

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