Banks, insurance firms and other businesses in the financial sector could save millions of euros if plans on VAT unveiled by the European Commission yesterday is approved by the 27 member states.
The Commission yesterday adopted a proposal for a directive aiming at modernising and simplifying the complex VAT rules for the sector.
The proposal aims also at securing a level playing field in the pan-EU market for these services.
These services are generally exempt from VAT. Although the exemption dates from 1977, the legislation has not kept abreast of developments.
The exemption is not being applied uniformly by the member states and quite often, the European Court of Justice is asked to fill the legislative gap and clarify the correct interpretation.
The proposal will create greater certainty and security for member states and for financial and insurance institutions by setting clear definitions of exempt services. It will also allow these institutions to manage the costs of non-deductible VAT by allowing them to opt for taxation and by clarifying and extending the tax exemption for cost sharing arrangements.
The proposal introduces three main changes.
These include a redefinition of the scope of the exempt services to ensure that the exemption better reflects the complexity and diversity of the modern industries.
Secondly, the possibility for banking and insurance companies to opt to tax their services if they so wish.
And thirdly, the introduction of an industry specific exemption from VAT on cost sharing arrangements, including cross border arrangements.
European Taxation Commissioner Laszlo Kovacs said leaving things as they are is not an option.
"I am convinced that the balanced package of measures being proposed is the best option for VAT reform in the financial and insurance sectors.
"It will increase certainty for the industries and improve budgetary security for member states by reducing the potential for legal challenge," he said. According to Mr Kovacs the proposal, will also improve the competitiveness of the EU banking and insurance companies by allowing them to better manage their operations without hidden VAT.