Explanatory Memorandum to COM(2007)747 - Amendment of the VAT Directive, as regards the treatment of insurance and financial services - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2007)747 - Amendment of the VAT Directive, as regards the treatment of insurance and financial services. |
|---|---|
| source | COM(2007)747  |
| date | 28-11-2007 |
- Grounds for and objectives of the proposal
The objectives of the proposal are twofold:
- increasing legal certainty for economic operators and national tax administrations, reducing their administrative burden for correctly applying the rules for the VAT exemption of insurance and financial services;
- reducing the impact of hidden VAT in costs of insurance and financial services providers.
These objectives are achieved by the three measures contained in the proposal:
- clarification of the rules governing the exemption from VAT for insurance and financial services;
- broadening of the existing option for taxation by transferring the right to opt from the Member States to the economic operators;
- introduction of a cost-sharing group which allows economic operators to pool investments and re-distribute the costs for these investments exempt from VAT from the group to its members.
The clarification of the rules governing the exemption from VAT for insurance and financial services has the objective to provide a more uniform application of the VAT exemption, creating more legal certainty for economic operators and reducing the administrative burden for economic operators to comply with the rules. This clarification consists of the following elements:
- the conditions for applying the VAT exemption are based on objective economic criteria decoupling them from an interpretation based on national private law concepts which is one of the main reasons for different interpretation and application in the Member States (e.g. an insurance must address a risk and provide for an indemnity or a benefit); these objective economic criteria ensure that also new services which will be developed in the future will be covered by the VAT exemption if they fulfil these criteria;
- the new rules introduce the concept that the exemption shall cover the supply of any constituent element of an insurance or financial service, which constitutes a distinct whole and has the specific and essential character of the exempt service concerned;
- a common harmonised concept of intermediation is introduced for insurance and financial services;
- where this was possible, the new definitions also create more consistency with internal market rules (e.g. investment funds).
The proposal for a Directive is accompanied by a proposal for a Regulation which enumerates in a non-exhaustive way cases which are covered by or excluded from the VAT exemption for insurance and financial services.
Under the broadened option for taxation, it will be the economic operator who decides if he wants to be fully taxable; where he exercises this right, he will be able to deduct input VAT on his investments like any other economic operator. In this way a level playing field for the financial industry is created that was not achieved so far as only very few Member States have granted the option to business and this under differing conditions.
At the same time Member States are given the necessary flexibility to specify themselves the rules for applying that option, adapting it to their national tax supervision structures. Where the need arises implementing provisions could also be envisaged at Community level on the basis of Article 397 of the Directive.
Under the proposed cost-sharing model, in particular smaller economic operators can pool their investments (e.g.: computer technology of specialised staff) in groups which can buy these investments at better market conditions and re-distribute them exempt from VAT to the members of the group.
- General context
The definitions of exempt insurance and financial services are out of date and have led to an uneven interpretation and application of these exemptions by Member States. Stakeholders are confronted with a considerable legal complexity of varying administrative practices generating legal uncertainty for economic operators and fiscal authorities. This legal uncertainty has led to an increasing number of court cases and increased the administrative charges of operators and administrations for applying these exemptions. It is therefore necessary to clarify the rules governing the exemption from VAT for insurance and financial services with the objectives to create more legal certainty and to reduce the administrative charges for operators and administrations. A public consultation of stakeholders carried out in 2006 and an independent 'Study to increase the Understanding of the Economic Effects of the VAT Exemption for Financial and Insurance Services' commissioned by the Commission confirmed this conclusion.
The second problem is that of hidden VAT in the cost structure of insurance and financial services. In financial services and insurance services all economic operators are striving to improve their competitiveness since they are increasingly exposed to competition both between themselves on account of the trend towards a single pan-European market place as well as from economic operators established outside the EU. Consolidation within the sector has been driven to a great extent by the need for efficiency but cost reduction strategies manifest themselves in various ways. These developments are accelerated by the emerging of a wider regulatory framework for an integrated European financial services market as set out in the Financial Services Action Plan. This regulatory framework increases the competition between suppliers of insurance and financial services through the steady move towards a level playing field. In this environment, economic operators have developed various techniques for improving their own competitiveness but some of the more common basic techniques include the following:
- outsourcing of activities (with the intention of lowering administrative and labour costs, e.g.: depository of shares, administrative tasks etc.);
- pooling of activities (with a cost-sharing intention, e.g.: the common development of computer systems and software for several banks, the creation of credit factories which may either be associated with consolidation or be undertaken on the basis of);
- sub-contracting (insertion of a supplementary distribution level for the financial products or insurances).
These techniques involve that less value in created in-house but supplied as services by independent third parties to the suppliers of insurance and financial products. This generates the problem that such services may no longer come under the exemption for financial and insurance services and are therefore invoiced with VAT. This VAT is often not deductible for the client because he has no right for deduction as he supplies himself exempt insurance and financial services. Such non-deductible VAT becomes part of the costs. The proposal contains elements which will reduce that impact on the costs.
- Existing provisions in the area of the proposal
Articles 135(1)(a) to (g) and 137(1)(a) and (2)
- Consistency with the other policies and objectives of the Union
Where this was possible, the new definitions also create more consistency with internal market rules (e.g. investment funds, credit rating, derivatives).
The proposal is part of the Commission's Strategy for the Simplification of the Regulatory Environment (Section 66 of COM(2006) 690). Both economic operators and Member States' tax authorities will benefit from these simplifications. However, it is not possible to quantify these benefits.
The proposal will improve legal certainty and reduce the administrative burden of operators and national tax authorities. As it would have a positive impact on costs, it should not have negative effects on the cost of retail consumer insurance and financial services.
- Consultation of interested parties
Consultation methods, main sectors targeted and general profile of respondents
Fiscalis seminar, December 2004 in Dublin with representatives from the insurance and financial services industry and from the fiscal authorities of Member States
Tax Conference in Brussels on 11 May 2006 with representatives from the insurance and financial services industry and from the fiscal authorities of Member States
Public consultation of stakeholders in June 2006
Fiscalis seminar in March 2007
Publication of working documents containing first legal drafts on the Directorate General's website in June 2007
Roundtable with stakeholders in July 2007
Summary of responses and how they have been taken into account
The Fiscalis seminar in December 2004 in Dublin analysed the various problem areas for economic operators, in particular the outsourcing phenomenon and led to the conclusion by both, economic operators and Member States that a legislative initiative of the Commission services is required.
In the follow-up to this seminar DG TAXUD services commissioned a study with an independent expert to increase the understanding of the economic effects of the VAT exemption for Financial and Insurance services and undertook a series of bilateral consultations with Member States and DG MARKT which resulted in the elaborating of a basic document (Working Document Taxud 1802/06) outlining the basic problems which were identified as well as possible technical measures to address them. This document was discussed with stakeholders and Member States in the Tax Conference in Brussels in May 2006.
A second Fiscalis seminar was held in March 2007 with the objectives of familiarising concerned officials from the national tax administrations with the policies driving change in the regulatory framework, and the economic drivers for cross-border financial integration. The programme also covered practical implementation issues in the current legislation.
Draft legislations was extensively discussed with all stakeholders involved.
An open consultation was conducted over the internet from 9 May 2006 to 9 June 2006. The Commission received 82 responses. The results are available onec.europa.eu/taxation_customs/common
- Collection and use of expertise
Scientific/expertise domains concerned
Study to increase the understanding of the economic effects of the VAT exemption for Financial and Insurance services (Tender no taxud/2005/AO-006)
Methodology used
independent outside study
Main organisations/experts consulted
Price Waterhouse Coopers
Summary of advice received and used
The existence of potentially serious risks with irreversible consequences has not been mentioned.
There was broad consistency between the conclusions of the study, the Commission's own analysis in Working Document Taxud 1802/06 and the reactions from stakeholders in the public consultation, allowing Directorate General Taxation and Customs Union to impose the necessary priorities and focus its work on the most appropriate solutions.
Publication on the Directorate General's website
ec.europa.eu/taxation_customs/common/publications
- Impact assessment
The options which were considered, are described extensively in the impact assessment
Zero rating on page 31
Extending the scope of exempted services on page 32
Uniform limited input tax deduction on page 33
Option to tax on page 34
Cross border VAT bodies on page 37
Single legal entities and cross-border transactions on page 37
VAT grouping on page 38
Cost sharing arrangements on page 41
Reduced VAT rate for bought-in service on page 44
Other options on page 44
The Commission carried out an impact assessment listed in the Work Programme, whose report is accessible on Document Taxud 15570.
Contents
- Summary of the proposed action
This proposal consists of three measures:
- clarification of the rules governing the exemption from VAT for insurance and financial services;
- broadening of the existing option for taxation by transferring the right to opt from the Member States to the economic operators;
- introduction of a cost-sharing group which allows economic operators to pool investments and re-distribute the costs for these investments exempt from VAT from the group to its members.
- Legal basis
Article 93 of the Treaty
- Subsidiarity principle
The proposal falls under the exclusive competence of the Community. The subsidiarity principle therefore does not apply.
- Proportionality principle
The proposal complies with the proportionality principle for the following reason(s).
The proposals are contained in a draft Directive; there can only be one correct interpretation of the rules governing the VAT exemption for insurance and financial services which apply throughout the Community; this objective can only be achieved by amending the old rules in Directive 2006/112/EC. Allowing suppliers of exempt insurance and financial services to group their investments and re-distribute these exempt from VAT from the group to its members requires an appropriate vehicle which works also in cross-border scenarios; the creation of such a vehicle can only be achieved by an amendment of Directive 2006/112/EC.
Clear rules based on economic criteria reduce the substance for possible litigation and therefore generate an environment of legal certainty within which the administrative charges for agreeing possibly with several Member States on how the rules are to be interpreted and applied are considerably reduced.
- Choice of instruments
Proposed instruments: directive.
Other means would not be adequate for the following reason(s).
The existing Council Directive 2006/112/EC can only be amended by another Directive.
The proposal has no implication for the Community budget.
- Simplification
The proposal provides for simplification of legislation.
The proposal includes the following elements of simplification:
- it bases the conditions for applying the VAT exemption on objective economic criteria which make the exemption from VAT more manageable;
- it clarifies that the exemption covers the supply of any constituent element of an insurance or financial service, which constitutes a distinct whole and has the specific and essential character of the exempt service concerned; this reduces the potential for litigation;
- it introduces a common harmonised concept of intermediation for insurance and financial services; the same principles apply to insurances and financial services.
- Correlation table
The Member States are required to communicate to the Commission the text of national provisions transposing the Directive as well as a correlation table between those provisions and this Directive.