WRITTEN QUESTION E-1631/02

by Theresa Villiers (PPE-DE) to the Commission

(10 June 2002)

Subject: VAT and financial services

1. The Commission began to study the feasibility of applying VAT to financial services, including insurance, in 1993. Could it please indicate what studies have been completed on the feasibility of applying VAT to financial services and what studies are still underway?

2. Could the Commission state whether it has organised any conferences or seminars on the feasibility of applying VAT to financial services and what conclusions were drawn?

3. Has the Commission conducted any discussions (a) internally, (b) in the context of the European Union VAT Committee, or (c) with the Ecofin Council on the feasibility of applying VAT to financial services, and, if so, what was the outcome?

4. Has the Commission had the opportunity to consider any reports by consultants on the feasibility of applying VAT to financial services and, if so, what was the outcome?

5. Is the Commission planning to bring forward any proposals on the application of VAT to financial services?

6. Does the Commission believe that it would be desirable to apply VAT to financial services?

7. Could the Commission please indicate the composition of the European Union VAT Committee, the date of the next meeting and the subjects on the agenda for the next meeting?

Answer given by Mr Bolkestein on behalf of the Commission

(8 July 2002)

The Commission maintains the belief that VAT exemptions, in principle, should be minimised to the greatest extent possible. By their nature they cause distortion and increase the burdens on industry and tax authorities. The exemption for financial services is no exception to this policy.

Accordingly, the Commission engaged consultants Ernst & Young to identify possible ways for taxing financial services, as the first part of an ongoing programme of research into the treatment of financial services under the VAT regime. These studies, which included a simulation of a cash flow system of VAT for these services, were completed in 1998. The resultant report is available on the Europa website(1).

Various conferences were organised with the participation of industry and Member States at that time. The general view was that although a cash flow system would in principle ensure taxation of the supplies in question, its introduction and operation would entail considerable burdens on both industry and tax authorities. There could also be a significant impact on prices for final consumers. Furthermore, although the distortions presented by the current system would be addressed in respect of activity within the internal market, major distortion could arise between Community based institutions and competitors based in third countries.

As a result the Commission has used this study as a basis to identify comparative approaches by other VAT/goods and services tax (GST) systems and in particular it has explored with partners in the Organisation for Economic Cooperation and Development (OECD) forum whether an international approach to the treatment of cross border financial activity could be found.

No specific discussions have taken place in the VAT Committee or within the Council on this matter. The Commission has identified this area as one which needs to be addressed under the New VAT Strategy(2) which was launched in June 2000. It has not, however, been identified as a priority issue and no proposals are anticipated in the immediate future.

The Union VAT Committee is composed of representatives from all Member States. Their role is to discuss questions of interpretation of current VAT law. The next meeting will be in late November 2002 and the Commission will send the Honourable Member a copy of the Agenda when it is finalised.

(1) http://europa.eu.int/comm/taxation_customs/publications/reports_studies/report.htm.

(2) COM(2000) 348 final.