On February 8th, 2021 the European Commission has initiated the public consultation phase to review the VAT treatment of provision of insurance and financial services.
A few months ago, the European Commission has published its combined evaluation roadmap and inception impact assessment on the proposed amendments to the VAT rules for financial and insurance services. The initial estimated deadline is to introduce legislative amendments in the 4th quarter of 2021. On February 8th, 2021 the public stakeholders have been invited to provide their second round of feedback and opinions on how the new rules should look like with the deadline for final submission being May 3rd. The initiative has garnered a lot of attention and back in November, 28 feedbacks have been submitted by industry participants from all over Europe.
By way of background, currently, the provision of insurance (and reinsurance) services and certain financial services are exempt without credit. This means that all the input VAT expenses incurred by the business operators in this industry provide the exempt supplies to the final consumer, cannot be recovered. The principal reasoning behind having these two industries as exempt from VAT was mainly because it was difficult to determine their tax base. Moreover, in some other cases, there was a public policy aim to reduce the tax burden on the final consumer (especially for consumer credit). With the exemptions being originally introduced in the 1970s both industries have changed dramatically especially with the advent of the digital age.
The Commission's aim is to simplify and improve the current set of VAT rules applicable to the provision of financial and insurance services by proposing the adoption of a new Directive. The two main problems mentioned in the impact assessment report are the lack of VAT neutrality, legal uncertainty and complexity surrounding the application of these exemptions. The Commission aims to tackle these problems by bringing further harmonization to the VAT rules on EU level and clarifying the rules.
There are two main options the Commission is currently looking at:
- To retain the exemption, but modify its scope by taxing only certain supplies of services. As an example, the Commission mentions levying VAT on services where a fee is charged while continuing to exempt interest-based ones; or
- To completely remove the VAT exemption status for the insurance and financial services.
Both approaches have their merits with the complete removal of the exemption providing for simplified rules and operation of the industries while the change of taxation rules could help address some of the policy concerns related to consumer prices. As offshoot of the second alternative, the Commission has also mentioned the possibility of setting alternative reduced VAT rates for certain supplies.
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