Tuesday, May 27, 2008

EU to Modernize VAT Rules on Financial and Insurance Services

Excerpt from Practical European Tax Strategies by Tracey Paveley (Baker & McKenzie)

The European Union (EU) has recognized that the EU VAT legislation in relation to financial and insurance services is becoming increasingly out of date as providers introduce more sophisticated and diverse financial products into the marketplace. Businesses are finding it difficult to define these products for VAT purposes within the confines of the current legislation.

This uncertainty surrounding the VAT treatment of financial and insurance products has led to an increased amount of tax litigation, particularly as businesses are often required to negotiate the application of the VAT exemption in multiple Member States. This process can be very costly for businesses.

In addition, there is growing concern that EU financial institutions are less efficient than their U.S. counterparts. The embedded irrecoverable VAT cost suffered by EU providers of financial or insurance services is considered one of the factors contributing to this perceived inefficiency.

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