The Future of VAT for FSI – Outsourcing by financial service providers

In this contribution we will focus in some of the VAT aspects surrounding outsourcing. Contribution authors:

• Chiara Tomassetti - Equity Partner and Member of the EU and Italian FSI Team 
• Emmanuel Orlando - Of Counsel and Member of the EU and Italian FSI Team

A trend that we have seen over the past years within the financial services sector is that companies are focusing more and more on their core activities. With this several activities are being outsourced (i) through intra-group centralization of back- and midoffice activities, (ii) third party service providers or (iii) participation in eco-systems. The growth of the sharing economy and the technological revolution had an impact on the financial services sector, which increased the investment in digitization and innovation to satisfy the customers’ needs to provide personalized services. In their attempt to face these new challenges, companies are changing the way they work. Financial institutions are driven to use more “gig workers”, as it gives them the flexibility to find operators with diverse skills within the financial domain, faster than hiring from the market. The finance and insurance industry has more than its fair share of gig workers, with specialists in for example artificial intelligence and machine learning accounting

The VAT aspects relating to the outsourcing of activities is a complex matter in the FSI sector and may result in an additional cost. Because of the exemption, the providers of financial and insurance services cannot deduct the VAT incurred on inputs (so called “hidden VAT”). This derives the tax of its neutrality (differently from other VAT subjects, which may recover it). The gap is higher in relation with business clients, which are now confronted with a VAT cost which they would not have should if they would source these services directly.

Historically, two facilities were available for FSI service providers to mitigate hidden VAT: VAT groups and – until recently – cost-sharing exemption (“CSE”). However, in the Aviva, DNB Banka and Commission v Germany cases, the CJEU has not allowed the use of CSE for FSI. Moreover, the VAT grouping scheme is limited exclusively to operators established in the same Member State, is not harmonized in the EU and has been narrowed by the Skandia and Danske Bank judgments.

As part of its initiative to revise the EU VAT rules for FSI, the VAT aspects relating to outsourcing is an area which is to be addressed.

Various options could be suggested to the European Commission in order to help it to modernize the FSI VAT rules. Among the most interesting options, there are:

• The reintroduction of the Cost Sharing Exemption (CSE);
• The introduction of an option to tax financial services against a reduced or standard VAT rate, thus triggering a recovery right for the FS companies;
• The enlargement of the VAT group perimeter; and
• The introduction of the taxation while maintaining the exemption for some common financial services (the “universal” banking and insurance services).

Each solution should be considered taking into account their pros and cons. Different specialist from our EMEA FSI Indirect Tax network are more than willing to discuss this with you. 

This contribution on VAT aspects related for outsourcing was contributed by our EMEA FSI Indirect Tax experts Chiara Tomassetti (+39-3351350765) and Emmanuel Orlando (+39-402775383). Please feel free to reach out to them for a discussion on the matter. 

Our Deloitte EMEA FSI Indirect Tax network is set to contribute to the current debate on the revision of the EU VAT rules for financial services and insurance.
Over the coming months we will publish contributions from different parts of our network, please find all of them gathered here.