Financial Services Tax Relief Creates Trouble for EU Ministers (1)

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Joe Kirwin

The European Union’s expected approval this week of a measure to curb tax fraud is now in doubt due to countries’ demands to restore a separate tax break for the trading bloc’s financial sector.

EU finance ministers had targeted June 23 as the approval date for a pending bill that contains a series of “quick fixes” to stem value-added tax fraud. Led by France, however, member states including Austria, Italy, and Luxembourg have risked derailing the timetable from efforts to add a VAT exemption to the bill for the banking, financial services, and insurance sector.

The countries’ move comes after the EU’s top court ruled in September 2017 against the exemption for the trading bloc’s financial services sector, increasing costs for affected businesses ( C-326/15, C-605/15).

The exemption focuses on VAT-free shared services that companies establish to boost operational and financial efficiencies. Following the ruling, finance businesses have been unable to recover VAT charges that occur in these cost-sharing groups due to their sector’s existing tax exemptions.

A review from the EU over VAT exemptions in cost-sharing independent groups is “vital,” according to Insurance Europe, a Brussels-based group that represents 35 insurance bodies across the EU.

As “financial undertakings carry out activities that are exempt from VAT, insurers can not deduct VAT paid on their inputs,” a spokeswoman told Bloomberg Tax in a June 19 email.

She added that the insurance industry “relies” on independent cost-sharing groups because they “enable the centralization of support functions and the mitigation of the cost of irrecoverable VAT.”

More Opposition

While Austria, Ireland, Italy and Luxembourg support France’s plan to restore the VAT exemption, several other EU member states oppose the proposal. These countries include those from the Nordic region, according to EU diplomats who spoke to Bloomberg Tax on the condition of anonymity.

“We oppose this plan because we believe it is late in the game to be introducing this measure,” said a Swedish diplomat, who asked to remain anonymous. “It needs more economic impact analyses.”

Denmark is threatening to veto the VAT fraud plan because the inclusion of the exemption would put at risk billions of kroner in Danish bank-payroll taxes.

Finance Minister Kristian Jensen said Denmark could lose a “substantial part” of the 9 billion kroner ($1.4 billion) in taxes the ministry collects from financial institutions if lawmakers adopt the proposed change.

“We will not accept a compromise that includes the current proposal” by France, Jensen said June 20 in an interview at parliament after updating lawmakers. “Denmark and Sweden agree on this, but we’re also the only two countries that have a problem with this.”

In a further blow to France’s efforts, the European Commission sees the plan as one that diverges from EU tax policy.

“The European Commission is insisting the proposal conflicts with the need to have a more harmonized VAT system,” an EU diplomat said June 19. “It is also opposed on legal grounds because it says the proposal violates its sole right to propose EU legislation.”

The commission’s stance is significant for any member states’ efforts to alter EU laws.

Based on the EU’s treaty law, the commission has the sole right to propose legislation. However, it isn’t unusual to add significant changes to legislation once the proposal has moves to the Council of Ministers. The commission, though, must agree to these changes.

Going Along With It

Contrasting to the Nordic countries, some EU member states are willing to go along with France’s proposal if the group VAT exemption contains a “territoriality clause,” according to confidential EU documents obtained by Bloomberg Tax.

“These delegations are of the view that such a limitation would be justified by the need to ensure correct and straightforward application of these rules on cost-sharing by the taxable persons concerned,” according to the document, which summarizes French support of the plan. It adds that “this limitation would preserve the taxing rights of member states that choose not to exercise this option.”

France and the other proponents insist adding the exemption for cost-sharing groups is in line with the “spirit” of the other quick fixes that also stem from recent ECJ rulings.

“From our point of view the spirit of the Commission proposal was to quickly settle issues that arise from case law that do not need a complete overhaul,” the document states.

--With assistance from Peter Levring (Bloomberg)

To contact the reporter on this story: Joe Kirwin in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax