The current VAT rules applicable to the financial and insurance sectors are generally thought to be complex, obsolete and not up to date with changing business models (e.g. showing increasing rates of outsourcing) and technology trends affecting these sectors. Beyond lagging these technology-driven changes, the current VAT exemption regime governing the financial sector is contrary to the core objective of the VAT system itself, i.e. to maintain neutrality. Due to the lack of detail and consistency of interpretation across the EU, the current VAT regime fails to create legal certainty and generates significant compliance costs for financial institutions. The discussion surrounding the need to reform and modernise the VAT system applicable to the financial sector is years old, but impetus remains to further develop ideas and proposals. A reform of the current VAT framework for financial and insurance services has been announced, and the European Commission is set to present a new legislative package by the end of 2021. In this context, the Commission recently launched a public consultation, ending on 3 May 2021, to gather views on the current system and suggestions for improvement.
The current VAT regime applicable to financial services is laid down in points (a)-(g) of Article 135(1) of Council Directive 2006/112/EC (the VAT Directive), enacted in 1977. Based on the current VAT rules, financial and insurance services are VAT exempt. The main rationale for this exemption, which constitutes a divergence from the general principle of taxation, is the difficulty with which the appropriate tax base for credit services can be established : as the prices of many financial and insurance services are based on margin, it can be difficult to determine the taxable basis and apply the invoice-credit system for VAT purposes…