VAT: treatment of insurance and financial services and ECJ case-law
The main piece of legislation governing the insurance and financial services is the VAT Directive which dates back to 1977. Insurance and financial services, including related services carried out by insurance intermediaries, have historically been exempted from VAT without the right to deduct associated input VAT (Article 135.1(a)). However, as a result of this exemption, insurance companies and intermediaries cannot recover VAT on their purchases of services or goods. This results in "hidden" VAT charges for supplies (i.e. office equipment or services outsourced, etc.) which financial services or insurance companies need to run their businesses. Moreover, the existing rules have not been uniformly applied across EU Member States.
In 2007, the European Commission proposed a Directive and a Regulation to simplify and modernise the VAT rules for insurance and financial services by ensuring legal certainty and by establishing clear definitions of VAT exempt services. As there was no prospect of adoption by the Council, the Commission withdrew this proposal in 2016.
In recent years, there have been problems in ensuring a clear and consistent application of VAT exemption across the EU countries which led to a significant growth in litigation with the European Court of Justice (ECJ) being asked to clarify the correct interpretation of the legislation. The rulings in the Skandia case (C-7/13) and the Aspiro case (C-40/15) have had an impact on the insurance business model a) by considering the head office-branch transactions as taxable transactions provided by a separate taxable person and b) by limiting the application of the VAT exemption to outsourced services respectively. Future decisions in the DNB Banka case (C-326/15) and Aviva case (C-605/15) also have the potential to do so in relation to the supply of services by independent groups of persons (IGP) whose members carry out activities under the public interest exemption (e.g. education, healthcare), excluding thereby the financial sector from benefitting thereof (Article 132.1 (f)). Previously, it had been understood that this provision can cover services provided by cost-sharing groups (CSGs) to their members that are directly necessary for the VAT exempt activities of these members, regardless of the type of VAT exempt or out of scope activities conducted by the members.
BIPAR has informed its member associations on the new VAT developments in Italy concerning the “independent financial advisers” and the introduction of the Skandia principles into national law.
BIPAR has a VAT Working Group and closely monitors the regulatory and case-law developments in VAT rules in relation to financial and insurance intermediation services.
Disclosure of tax planning schemes by intermediaries and advisors
The European Commission published in June 2017 a Report on “Disincentives for advisors and intermediaries for potentially aggressive tax planning schemes” that facilitate tax avoidance and tax evasion. In its response to the preceding EC consultation, BIPAR emphasised the importance of making a distinction between legal and illegal practices in order to ensure that any potential initiative does not generate confusion regarding existing practices. BIPAR also highlighted that any potential initiative must be based on a level playing field and take into account all distribution channels.
On 21 June 2017, the Commission proposed new transparency rules for intermediaries such as tax advisors, accountants, banks and lawyers, who design and promote (potentially harmful) tax planning schemes for their clients. On 13 March 2018, the EU Economic and Financial Affairs Council (ECOFIN) reached a political agreement on this Commission proposal.
According to these rules, cross-border tax planning schemes can bear certain characteristics – “hallmarks” - that indicate a risk of tax avoidance or evasion. Such hallmarks can include the use of cross-border losses to reduce tax liability, the use of special preferential tax regimes, or arrangements through countries that do not meet international good governance standards. Intermediaries who design or provide schemes bearing any one of these key hallmarks will now have to report these schemes to the tax authorities before they are used. In turn, EU Member States will automatically exchange this information with each other, enabling them to carry out audits and block the actually harmful arrangements.
The new reporting requirements will enter into force on 1 July 2020, with EU Member States obliged to exchange information every 3 months after that. The first exchange will take place by 31st October 2020.
Single EU VAT Area
In October 2017, the European Commission proposed a number of legislative proposals to reform the EU's VAT area. These proposals aim at modernising the current VAT system to adapt it to the digital economy and the needs of SMEs, and to tackle the VAT gap.
These proposals build on the Commission VAT Action Plan towards a Single EU VAT area of 7 April 2016 where the Commission introduced the principle of taxation in the Member State of destination. This is a departure from the current system where VAT is paid in the country where the goods or services originate.
In January 2018, the Commission proposed new rules to introduce simplification measures for SMEs. According to this proposal, while the current national exemption thresholds in Member States would remain, the new rules would introduce:
The simplification measures concern the VAT registration and VAT record keeping as well as the possibility of benefitting from less frequent filling of their VAT returns. In addition, VAT exempt companies will enjoy the relief from VAT registration or simplified registration and from invoicing obligations.
Dispute Resolution Mechanisms
Following consultation of the European Parliament, the Council adopted on 10 October 2017 new rules on Double Taxation Dispute Resolution Mechanisms. The objective of these rules is to ensure that businesses and citizens can resolve disputes related to the interpretation of tax treaties swiftly and effectively. The new rules will also cover issues related to double taxation which occurs when two or more countries claim the right to tax the same income or profits of a company or person (for example due to a mismatch in national rules or different interpretations of a bilateral tax treaty). Member States will have until 30 June 2019 to transpose the Council Directive.
Under this dispute resolution mechanism, Member States will now have a legal duty to take conclusive and enforceable decisions within two years from the initiation of the proceedings. The taxpayers faced with tax treaty disputes can initiate a procedure whereby the Member States in question must try to resolve the dispute amicably within two years. If at the end of this period no solution has been found, the Member States must set up an Advisory Commission to arbitrate. If Member States fail to do this, the taxpayers can bring an action before the national court to do so. The Advisory Commission will have 6 months to deliver a final, binding decision.
From 1st January 2017 onwards, non-life insurance business contracted outside the US but involving risk that touches on the US will be caught within FATCA scope. This could include, for example, worldwide travel insurance where this extends to holidays in the USA or product liability policies for EU firms selling in the USA.
Non-US insurance intermediaries will be obliged under FATCA to apply a 30% withholding tax on gross written premiums considered to be US-source unless certain documentation is provided. Money withheld needs to be paid over to the US Internal Revenue Service (IRS).
BIPAR issued an information note in December 2016 that set out the information BIPAR believes insurance intermediaries should be aware of to prepare for this change in FATCA.
What is FATCA?
The Foreign Account Tax Compliance (FATCA) has applied since July 2014. It is a US law designed to prevent tax evasion by US citizens, US residents and companies holding investments (so-called offshore account). FATCA's scope is broad. It applies to all financial services: banking, investment, life and non-life insurance and reinsurance.