Brussels, 28/11/2007 (Agence Europe) - László Kovács, the European commissioner for taxation, presented two new legislative proposals on Wednesday 28 November - a directive and a regulation - designed to clarify the value added tax (VAT) obligations applicable to financial services and insurance (see EUROPE 9545). This clarification would improve legal certainty for operators and thereby limit the number of cases brought before the European Court of Justice. Mr Kovács is conscious of the fact that his room to manoeuvre is limited by the reluctance of the member states faced with the possible loss of tax revenues, and has preferred to adapt the rules by attempting to “eliminate certain negative aspects” of the current legislation instead of making “radical proposals”. The Commission hopes that the new rules, which should be adopted unanimously, will enter into force at the end of 2009.
In order to reduce their costs, insurance and financial service enterprises have externalised certain activities (e.g. administrative tasks), pooled other activities (e.g. adjustments to IT systems) and used sub-contractors (e.g. distribution of financial products). These techniques pose a problem as the exemption from VAT obligations of services provided by third parties is subject to the (sometimes differing) interpretation of the national tax authorities.
The draft directive is therefore pursuing three objectives. First, it wants to ensure more uniform application of the exemption from VAT applicable to financial services and insurance. To do this, it defines economic criteria to enable the list of services exempt from VAT which has been in place since 1977 to be updated, and ensure that they cannot be subject to differing national interpretations.
The draft directive also gives economic operators the choice whether or not they want to be fully subject to VAT from 1 January 2012. Enterprises making use of this right will be able to deduct VAT paid on their investments. At the moment five member states - “Germany, Belgium, Estonia, France and Lithuania” - have already implemented the optional system, Mr Kovács explained. The member states should have the necessary flexibility to determine the rules governing this system at nation level in order to adapt it to the national context. What would be the advantage of this kind of system? According to a Commission expert, the enterprises concerned with clients subject to VAT would be able to deduct the VAT paid on the goods and services they purchase.
Finally, the directive authorises economic operators to pool operations for their investments, for example when they want to acquire IT technology or expert services. Cost sharing arrangements can therefore be put in place in the form of groups of VAT-liable operators, including across national borders.
In order to ensure uniform application of the new rules across the EU, the draft regulation gives the following specific definitions from the draft directive: insurance and reinsurance transactions, granting of credits, transactions linked to financial deposits and account management, foreign exchange transactions and liquidity providing transactions, provision of securities, intermediation in financial and insurance transactions and mutual fund management. (M.B.)