The European Commission launched a public consultation on the VAT treatment of financial and insurance services. The move is in application of the 2020 EU Tax package whereby the Commission announced its future action plans in the field of taxation. The Commission had earlier released a roadmap for discussion on the VAT treatment of financial and insurance services, and the public consultation is in furtherance of the input received on the roadmap.

For the purposes of VAT, financial and insurance services are generally exempt from VAT in the EU subject to few exemptions concerning accessory services. In contrast to zero VAT rating, a VAT exemption generally means that no credit is allowed for the input VAT. For financial and insurance undertakings, this translates in the inability to take a credit for the input VAT they pay on their own acquisitions of goods and services, such as IT systems. The non-recoverable VAT then becomes a final cost for financial and insurance undertakings, and is often passed-on, like any other business expenditure, to their clients.

The current VAT treatment of financial and insurance services was adopted in 1996 as an easy fix to the complexity of applying the standard VAT rules to the sector. The Commission now notes that the financial and insurance industry has undergone fundamental changes especially with the rise of digitalization. It concludes that the current rules need to be revamped towards greater simplification and the creation of a level playing field within the EU, but most importantly to instill greater tax neutrality. Indeed, one of the cardinal virtues of VAT is that it is designed to be neutral to economic operators: they charge output VAT on their supplies but are conversely able to deduct the input VAT charged to them on the acquisitions needed to produce those supplies. The system of exemption without a credit obviously disrupts this tax neutrality.

The options contemplated by the Commission are to either retain the exemption but limit its scope to specified services (such as only to interest-earning services as opposed to fee-earning services), or entirely rescind the exemption and apply the standard VAT rules to the industry.

Interested parties may send their input to the Commission until 3 May 2021.