Opting for opting in? An evaluation of the Commission’s proposals for reforming VAT for financial services
Fiscal Studies 31(2), 171-202
This paper provides a legal and economic analysis of the European Commission's recent proposals for reforming the application of VAT to financial services, with particular focus on their 'third pillar', under which firms would be allowed to opt in to taxation on exempt insurance and financial services. From a legal perspective, we show that the proposals''first and second pillars' would give rise to considerable interpretative and qualification problems, resulting in as much complexity and legal uncertainty as the current regime. Equally, an option to tax could potentially follow significantly different legal designs, which would give rise to discrepancies in the application of the option amongst Member States of the European Union (EU). On the economic side, we show that quite generally, when firms cannot coordinate their behaviour, they have an individual incentive to opt in on business-to-business (B2B) transactions, but not on business-to-consumer (B2C) transactions. We also show that opting-in eliminates the cost disadvantage that EU financial services firms face in competing with foreign firms for B2B sales. But these results do not hold if firms can coordinate their behaviour. An estimate of the upper bound on the amount of tax revenue that might be lost from allowing opting-in is provided for a number of EU countries.
WP 09/09, Rita de la Feria & Ben Lockwood, Opting for Opting In? An Evaluation of the European Commission’s Proposals for Reforming VAT on Financial Services
Research Highlight 2009
Should financial service companies be allowed to opt-in for VAT?
The European Commission recently proposed reforms to the application of VAT to financial services. In particular, the Commission proposed that firms should be allowed to opt into taxation of currently exempt insurance and financial services. An interdisciplinary research project addressed both the legal and the economic implications of the proposals. From a legal perspective, an option to tax could potentially follow significantly different legal designs, which would give rise to discrepancies in the application of the option amongst Member States. On the economic side, the research indicated that firms would have an incentive to opt in only for business-to-business transactions. An estimate of the upper bound of the amount of tax revenue that might be lost from allowing opting-in was calculated at less than 0.5% of total revenue.