Taxation issues

Taxation issues

Background

Financial and insurance services are today exempt from VAT as provided in the EU VAT Directive which dates back to 1977.

On 27 November 2007, the European Commission adopted two proposals for a new Directive and a new Regulation with the objective of simplifying and updating the current VAT rules for financial and insurance services. However, since the EU Member States failed to reach a unanimous agreement, the European Commission decided in 2016 to withdraw the two proposals.

Since the VAT exemption dates from 1977, the legislation has not kept abreast of latest developments and the recent judgments of the Court of Justice of the EU (CJEU) have shown that there is a need to adapt the VAT Directive to current market realities in order to ensure legal certainty and establish a level-playing field on VAT for all financial service providers.

The VAT rules for financial and insurance services are back on BIPAR’s agenda since the Commission is currently analysing the functioning of the provisions of the VAT Directive and the impacts of possible future changes to the existing VAT rules.In particular, the analysis focuses on the rules relating to the VAT exemption for certain financial and insurance services, the VAT opt-in regime for financial service providers, the cost-sharing arrangements, the rules for proportional deduction, and the VAT groups.

In recent years, there have been problems in ensuring a clear and consistent application of the 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 ruling of the Aspiro case (C-40/15) has had a great impact on the interpretation of “activities of insurance brokers and insurance agents” for the purposes of the VAT exemption laid down in the VAT Directive. According to the Aspiro case, such activities should be connected with the core activity of a broker or agent, namely the finding of prospective clients and their introduction to the insurer with a view to the conclusion of insurance contracts. In addition, the Skandia case (C-7/13) had also an impact on the insurance business model as it considered the transactions between the head office and the company branch as taxable transactions which are provided by a separate taxable person. Moreover, decisions in the DNB Banka case (C-326/15) and Aviva case (C-605/15) also have the potential to affect the sector do so in relation to the provision stipulating 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. 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 a Working Party on Taxation and closely monitors the VAT regulatory and case-law developments in relation to financial and insurance intermediation services at EU level and at Member-State level.

EU Directive on Mandatory Disclosure of Reportable Tax Arrangements

On 25 June 2018, a new EU Directive (Council Directive 2018/822/EU -DAC6-) entered into force which introduces an obligation on qualifying “intermediaries” and relevant taxpayers to disclose to national tax authorities certain cross-border tax arrangements perceived as potentially aggressive. Such cross-border tax arrangements are considered reportable based on specific characteristics which indicate a risk of tax avoidance or evasion.

For the purposes of this Directive, intermediary means “any person that designs, markets, organizes or makes available for implementation” a reportable cross-border arrangement or any person that “provides, directly or by means of other persons, aid, assistance or advice” in relation to such arrangements. Consequently, financial and insurance intermediaries who may design, market or even provide assistance/advice on potentially aggressive tax arrangements will be obliged to report it to the tax authorities.

The Directive shall start to apply on 1 July 2020. However, reportable cross-border arrangements the first step of which is implemented between the date of entry into force -25 June 2018- and the date of application of the Directive -1 July 2020- must also be reported.

In response to the difficulties that businesses and EU Member States are facing due to the coronavirus (COVID-19) pandemic, the Commission proposed on 8 May 2020 to postpone the deadlines for information reporting and exhanging under the DAC6:

  • the date for the beginning of the 30-day period for reporting cross-border arrangements is postponed from 1 July 2020 to 1 October 2020.
  • the date for the reporting of cross-border arrangements that became reportable from 25 June 2018 to 1 July 2020 is postponed from 31 August 2020 to 30 November 2020.
  • the date for the first exchange of information between Member-States on reportable cross-border arrangements is postponed from 31 October 2020 to 31 January 2021.

However, the reportable arrangements made during the postponement period will have to be reported by the time the deferral has terminated.


- Published in June 2020 -

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