The European Banking Federation (EBF) has welcomed the findings of a study of VAT in financial services in Europe which it says” mirrors its pre-occupations. “
The study was commissioned from PwC by the European Commission with the aim of increasing understanding of the economic effects of the VAT exemption for financial and insurance services, to provide evidence of the inefficiency of the current system and to identify legislative options to eradicate these inadequacies.
The EBF says the PwC study provides “robust support” for the case made by the EBF for a reform of the current VAT regime and confirms the validity of the technical solutions proposed by the EBF, as well as the necessity to consider their implementation as the highest priority, in order to safeguard the competitiveness of the European financial services industry in the global marketplace.
Since the adoption of the 6th VAT Directive in 1977, which is the core VAT legislation applicable in the EU, the VAT system applicable to financial services has never been adapted to the new requirements of the financial industry over the last 30 years. The VAT regime is outdated and, accordingly, results in unacceptable legal uncertainty, says the EBF.
Under the current system banks are only granted a highly restricted right to recover the VAT they have incurred on their own expenses. The regime is therefore characterized by its lack of neutrality and penalizes intra-group cross-border supplies. VAT has reduced or even eliminated the incentive for banks to integrate and centralize back office functions into specialist centers of excellence.
“VAT has effectively become a tax on efficiency,” says Guido Ravoet, Secretary General of EBF. “This undermines European financial integration and risks having detrimental effects on international competition, as companies in the European financial services sector “will continue to have sub-optimal structures of operations often dictated by VAT.”
The EBF says that, while banks welcomed the launch in March by the European Commission of a period of open discussion on alternative methods of reform of VAT on financial services, they are concerned that some European governments might have over-estimated concerns about potential budgetary implications of a reform and overlooked the beneficial impact on their economies and tax revenues that would flow from more efficient business structures.