1 / 26

International Tax Dialogue Global Conference Session X VAT Treatment Of The Financial Sector: The EU Model and Experienc

International Tax Dialogue Global Conference Session X VAT Treatment Of The Financial Sector: The EU Model and Experience. Rolf DIEMER Head of Unit DG Taxation and Customs Union D1: Value Added Tax and other turnover taxes European Commission. Economic background. Financial Services

jersey
Download Presentation

International Tax Dialogue Global Conference Session X VAT Treatment Of The Financial Sector: The EU Model and Experienc

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. International Tax Dialogue Global Conference Session X VAT Treatment Of The Financial Sector: The EU Model and Experience Rolf DIEMER Head of Unit DG Taxation and Customs Union D1: Value Added Tax and other turnover taxes European Commission International Tax Dialogue

  2. Economic background Financial Services • are of central importance to our economy – in itself and as facilitator for ‘real’ economy • need to be competitive to offer the best contribution for growth and overall economic performance • Objective of truly European Financial Market (EU Financial Service Action Plan) • Apparently for many FS operators non-recoverable VAT single most important tax burden • PWC study: EU financial institutions are less profitable than their equivalents in other regions – VAT a reason? • Effects of financial and economic crisis – had VAT issues some influence? International Tax Dialogue

  3. Traditional EU exemption • Traditional EU exemption model of the 6th VAT Directive: exempt financial services; tax certain fee-based services; zero-rate ‘exported’ services • It is more than30 years old and reflects an economic reality that no longer exists: • Deals only the operations which existed at the time, • Services were mainly local and rarely cross-border, • Cross-border flows/structures not significant, • Non-recoverability of VAT not so significant in the 1970s International Tax Dialogue

  4. Unlike other VAT exemptions (e.g. health care) • no ‘social’ reasons • rendered in significant way also to other businesses • Exemption seen as short-term fix because of unresolved technical/practical difficulties in applying VAT to financial services, • how to identify and measure the value of financial services on a transaction by transaction basis, • tax recovery requires an invoice showing taxable amount and VAT at each level in the chain of activity International Tax Dialogue

  5. Political sensitivity to change • likely to effect tax revenue from business (but is VAT intended to be a business tax)? • increase in credit charges or mortgages to consumer? (perceived problem, actual incidence unclear) International Tax Dialogue

  6. Consequences of exemption • But exemption means: • tax cascading - non recoverable VAT enters into cost base, which over taxes business and under taxes consumers • bias towards vertical integration/self-supply which discourages outsourcing, favours organic growth over growth through acquisition • Complexity (notably pro-rata) • Distortions depending on customer status (under-taxation B2C and B2G; over-taxation B2B) International Tax Dialogue

  7. Other possible effects: • may be an incentive to sourcing certain financial services from non-EU sources who do not suffer from imbedded tax, • compliance costs, • “sticking” tax accrues to State where service is generated, not where service is consumed • differences in application across EU Member States mean that no level playing field has evolved. International Tax Dialogue

  8. Legal uncertainty • Without a definition (which reflects modern reality) of what constitutes “financial services” the scope of the tax is uncertain and inconsistent, • Borderline between taxable and exempt operations is often vague, • Rules on pro-rata are not clear and tax recovery rates vary significantly from one Member State to another, • Lack of clarity in the EU Directive, in the absence of any modernisation, has led to an increasing need to seek clarification through judicial means (e.g. on terminology: “negotiation”, “management”, “special investment funds”) International Tax Dialogue

  9. Full taxation? • In principle full taxation = ideal (… and more ‘honest’ …) solution (no ‘social’ reasons for exemption), like for other commercial services • … but can the exemption simply be abolished? • ‘Truncated Tax Calculation Account’ (TCA) method (Satya Poddar) • Tested and shown to be workable • But perceived compliance burden and complexity dampened both business and TA enthusiasm. • Large consultation with EU business: TCA rejected International Tax Dialogue

  10. On transaction-base there is still no clear and easy general way to define the tax base for many financial transactions • In some areas (e.g. consumer credit) taxation would politically not be feasible • Conclusion: full taxation is not an option, at this stage • … but new study by European Banking Federation to be published International Tax Dialogue

  11. EU reform plans 2007 • New approach: find (limited) solutions to most urgent and most important problems • Legal uncertainty (definitions, different applications, ECJ rulings etc) • VAT as an obstacle to modern business structures (outsourcing, pooling, cost-sharing) • Lack of neutrality of VAT • VAT as a factor in competition with third countries (additional cost) • Lack of a European level playing field (uniform application of rules) International Tax Dialogue

  12. Commission consulted on a number of possible avenues: • Zero rating • Review of exemptions (defintions) to extend/restrict their scope • Uniform limited input credit • Option to tax • [Allowing for cross border VAT bodies] International Tax Dialogue

  13. Why not choosing zero-rating B2B supplies • Advantages: • For business, full recovery without output VAT, • Resolves misallocation of input tax, • Easily implemented. • Disadvantages: • Principle cost of eliminating the tax, • Conflicts with integrity of VAT system, • Distortive and conducive to inefficiencies, • Administratively complex, • Negative budgetary consequences. International Tax Dialogue

  14. Why not extending the scope of the exemption • Advantages: • Deals directly with many issues associated with outsourcing, • Can be implemented in a way which reflects reality of today rather than 1970’s. • Disadvantages: • Difficult to deal with all scenarios, no lasting solution, • Legislation likely to be complex if disruption to existing ECJ jurisprudence is to be avoided, • Risk of continued case-by-case interpretation, • Possible equality of treatment issues, • May simply shift problems of non-recovery elsewhere in chain? International Tax Dialogue

  15. Why not introduce a uniform input tax credit • Advantages: • Simple and known to work reasonably well in practice (e.g. RITC system in Australia). • Avoids need for case-by-case consideration, • By linking recovery to estimated wage element, is neutral between in-house and out-sourcing. • Disadvantages: • Possibly complexity; new dividing lines • Possible neutrality issues – but may have compensatory aspects, • Unlike AUS (e.g. labour) costs vary across EU – single composite recovery rate illusionary • Recovery rates in EU vary enormously between Member States and according to mix of activities which will make it difficult to agree a common base. International Tax Dialogue

  16. ECJ jurisprudence - principles • Strict interpretation of exemptions in Article 13. Exemptions require definition at Community level and must be applied uniformly to avoid distortions of competition. • Nature of the service is important – not who supplies it. • Principle of fiscal neutrality must be respected. • Other Community rules for financial services and insurances start to become relevant when the Court cannot find clarity from 6th Directive. • The ECJ cannot construct a positive solution! International Tax Dialogue

  17. Proposals (COM(2007)746 and 747 • Modernising the definition of exempt financial services and insurances via Directive and Regulation • Respecting limits of the current exemption • Ensuring that text better reflects the complexity and diversity of the modern industries • Including a regulation of application to detail and make directly applicable new definitions • Keeping as much as possible ECJ orientations (to use objective economic criteria to avoid concepts of national civil law) International Tax Dialogue

  18. What has changed? • The wording of most exemptions • The distinction between financial and insurance service • Too many similar products offered by the different industries; increasing overlaps/substitutes (life insurance) • Requires new definition or insurance: risk related (economic approach) • A common concept of investment funds • regulated funds only? International Tax Dialogue

  19. A new exemption for intermediation • A specific exemption for “partial” financial services • “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” • change of the legal or financial situation of a party? • Specific interpretation rules as to complex services (insurance, credit) International Tax Dialogue

  20. Are excluded from the exemption all services of a mere material or technical character such as • Compliance • general administration • IT software etc International Tax Dialogue

  21. Financial services - derivatives • Derivatives • How and to which extent exclude contracts that may result in delivery of goods • Distinguish firm and optional commitments • Sufficient for raw materials? • Need for a definition? • How distinguish from betting? International Tax Dialogue

  22. Cost-sharing • New exemption for cross border cost sharing arrangements • enable institutions to develop cost sharing and efficiency-driven consolidation without creating any new tax burdens • based on an existing concept (art 132 f of Directive 2006/112/EC) (ex art 13A par 1 f) • specific for financial services • cross border application within EU • to find solution to outsourcing issue (not via extension of exemption!) International Tax Dialogue

  23. Conditions: • Group supplies services to its members • Members established or resident in EU • Group acts autonomously & independently • Member supply exempt services (or out of scope) • Services are necessary for the supply of exempt financial services • Reimbursement only of exact cost (except transfer pricing adjustment) International Tax Dialogue

  24. Option to tax • Extending the existing option to tax these services which is currently at the discretion of Member States. • more general choice for all institutions/taxpayers, also for insurances, to reduce exposure to non-recoverable tax • EU-wide • no further detail which means available transaction by transaction, depending on operators capabilities • however, need for further implementing provisions (cross border issues) • therefore, entering into force only in 2012 International Tax Dialogue

  25. Related issues • VAT grouping • VAT treatment of branch-to-branch transactions --------------------------------- • Alternative taxes on financial services as substitute to VAT? • Islamic Finance – VAT treatment? May be resolved by full taxation but also – incidentally – by clarifying exemptions? • Tax ‘imported’ financial services in future? International Tax Dialogue

  26. Thank you for your attention Any question? Rolf.Diemer@ec.europa.eu European CommissionVAT and other turnover taxes - Taxation and Customs Union DG http://ec.europa.eu/taxation_customs/index_en.htm# International Tax Dialogue

More Related