Why the EU’s VAT exemption on insurance and financial transactions may need revising
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Why the EU’s VAT exemption on insurance and financial transactions may need revising

Sponsored by

Lobo Vasques
Many issues have been raised about the current solution

Mariana Rapoula of Lobo Vasques explains her take on why the VAT Directive’s lack of clarity is contributing to distortions within the single market.

Current VAT rules on financial and insurance services in the EU have long been criticised for being too complex and for having fallen off the pace of the sector’s latest developments.

The lack of VAT neutrality, the legal uncertainty and the ensuing high administrative costs stemming from the existing rules have recently led the European Commission to launch a citizens' initiative to propose new/amended VAT EU legislation. The public consultation phase has just closed.

What can we expect?

While waiting for the Commission’s feedback, one should reflect on the many issues that have been raised about the current solution.

Some criticise the fact that most financial and insurance services are VAT-exempt, which could bring about cascading VAT in the supply-chain and an unnecessary VAT burden. This flouts the fundamental principle of VAT neutrality within a business-to-business (B2B) context and increases the cost of EU financial services, whose providers are therefore less competitive than their US (and after Brexit, also British) counterparts (the UK has announced their intention to allow deduction of input VAT attributable to financial and insurance services).

Others argue that the VAT burden is so significant that it influences commercial decisions due to the outsourcing bias and costly compliance obligations.

Other issues worth mentioning include that Article 135(1) of the VAT Directive requires member states to exempt insurance and financial transactions, without accurately defining the scope of the exemptions and provides little to no criteria on how to work around the lack of legal definitions for the terms laid down in the legal provisions. Directives 2004/39/EC) r 2016/97/EC could arguably offer some guidance, but fall short of making up for the VAT Directive’s shortcomings.

The resulting quasi-legislative role of the court

In the absence of the legislative progress, the ECJ’s case law can be considered. As case law focuses on specific cases, this is a drama in four acts: case law offers no legal certainty, gives a quasi-legislative role to the court, does not ensure consistent harmonisation, and therefore further contributes to the distortive effects of the VAT exemption and to divergent judgments regarding the same legal provisions.

Cases such as Aspiro (C‑40/15), and many others, are a case in point.

Aspiro was a third-party service provider responsible for handling the claims of an insurance company. A request was lodged for an individual written interpretation of the law, to establish whether Article 135(1)(a) should be interpreted to mean that the services were covered by the exemption when supplied by a third party in the name and on behalf of the insurer, and without any legal relationship with the insured person.

Article 135(1) of the VAT Directive states that insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents are VAT-exempt, but it does not define broker, agent or related services.

The ECJ ruled that the handling of claims by a third party like Aspiro, without the outsourcing being linked to finding prospective clients and introducing them to the insurer to execute insurance contracts, was not VAT exempt.

This decision confirmed that the scope of the exemption for insurance and related services is narrower than the scope defined for other financial services, in the sense that the broad scope of other financial exemptions to outsourced activities does not extend to insurance. The insurance exemption for ‘related services’ is limited to ‘insurance agents and brokers’ strictly defined by law.

However, since the specific legislation defining agents and brokers is modomestic, should that legislation go beyond the strict EU position, there might be room to broaden the scope of the exemption, which could raise issues of non-harmonisation among member states.

Until the VAT Directive is amended and reviewed, which may be happening soon, it is relatively fair to say that the VAT legislation’s lack of clarity and ability to address its many scope-related issues continues to bring about or contribute towards distortions within the single market.

 

Mariana Rapoula

Consultant, Lobo Vasques

E: mariana.rapoula@lobovasques.com

more across site & bottom lb ros

More from across our site

Paul Griggs, the firm’s inbound US senior partner, will reverse a move by the incumbent leader; in other news, RSM has announced its new CEO
EMEA research now open
Luis Coronado suggests companies should embrace technology to assist with TP data reporting, as the ‘big four’ firm unveils a TP survey of over 1,000 professionals
The proposed matrix will help revenue officers track intra-company transactions from multinationals
The full list of finalists has been revealed and the winners will be presented on June 20 at the Metropolitan Club in New York
The ‘big four’ firm has threatened to legally pursue those behind the letter, which has been circulating on social media
The guidelines have been established in the wake of multiple tax scandals and controversies that have rocked the accounting profession
KPMG Netherlands’ former head of assurance also received a permanent bar and $150,000 fine; in other news, asset management firm BlackRock lost a $13.5bn UK tax appeal
The new, fully integrated office will also offer M&A, dispute resolution, IP and corporate tax services
The new guidance concerns a recent 1% excise tax on the repurchases of corporate stock for both US and certain foreign companies
Gift this article