European Commission
Directorate-General Taxation and Customs Union
VAT and other turnover taxes unit
B-1049 Brussels
Belgium

1 June 2006.

Dear Sirs/Mesdames

VAT Modernisation in Relation to Financial Services and Insurance

1. Consultancy Committee of Accountancy Bodies in Ireland-CCAB-I

The CCAB-I is a structure representing the interests of accountancy institutes and associations in Ireland

The constituent bodies of the CCAB-I comprise the Institute of Chartered Accountants in Ireland (ICAI), the Association of Chartered Certified Accountants (ACCA), the Chartered Institute of Management Accountants (CIMA), and the Institute of Certified Public Accountants in Ireland (CPA).

CCAB-I engages with Government, government offices and regulatory authorities across a whole range of issues which relate to the way business is conducted. The interests of the CCAB-I include but are not confined to taxation, auditing, accountancy, corporate governance, and all other matters which concern the regulation of economic activity in which business enterprises operate.

Members of the constituent bodies which make up the CCAB-I are accountants and operate either through professional practices offering to their clients services and expertise in audit, taxation, accountancy and consultancy, or they work directly in Financial Services, Industry, and business generally.

The members are mostly based in Ireland but many are based around the world and particularly in countries which are part of the OECD. It follows of course that members of these bodies are also based widely throughout the European Community.

The development of the application of VAT within the context of Financial Services is of major interest to members of the CCAB-I constituent bodies either because they work within that industry or because they are engaged in providing business services to it in a professional capacity

2. CCAB-I submission

This submission is made by the CCAB-I in response to the invitation by the European Commission to stakeholders for comments and feedback on the “Consultation Paper on modernising Value Added Tax obligations for financial services and insurances”.

In framing its commentary, the CCAB-I has taken on board its understanding of the objectives of the Commission in initiating the consultation process as well as the particular problem areas encountered by business when applying the present legislation.

Note has also been taken of the opinions and views expressed by speakers at the Conference in Brussels presented on 18 May 2006 by the Commission and the European Banking Federation.

3. Commission's objectives

From our reading of the Consultative Paper, the main objectives of the process initiated by the Commission, and therefore an important element by which the proposed solutions should be judged, are essentially as follows;

• To reduce administrative costs both for business and taxation authorities;
• To remove competitive distortions within the Community;
• To create more clarity and security for member States;
• To ensure that VAT is applied consistently and on a level playing field throughout the Community.

4. Problems with current legislation

From the Consultative Paper and from the comments of speakers at the Conference of 18 may 2006, we understand that the main problems experienced by financial institutions in the context of the current legislation may be summarised as:

• Legal uncertainty which has lead to an explosion of ECJ decisions;
• A lack of neutrality illustrated particularly by trapped VAT within services to B2B

The main problem at present is to calculate where appropriate the amount of deductible VAT. This requires:

• Establishing whether activities are taxable or not – a matter of legal uncertainty;
• Calculating the value of the services;
• Allocating costs and attached input VAT against the taxable amount.

It is not clear as to the extent that modern financial services fit within Article 13 B.

5. Requirements for an effective law

Proposals to modernise VAT laws in this area should rest on three pillars arising from decisions of the ECJ:

• There must be strict interpretation of the legal definitions;
• The nature of the service is more important than the category of supplier;
• Any interpretation must respect the principle of fiscal neutrality.

6. Addressing the problem of non-deductible VAT

The Consultation Paper at paragraph 4.2 puts forward five possible options to address the problem of non-deductible VAT. This submission comments separately on each.

6.1 Zero-rating B2B

It is clear that applying zero-rating to the supply of insurance and financial services to other taxable persons represents an effective and advantageous method of dealing with the problem. It is an option that CCAB-I supports.

It meets the need for legal certainty though we accept that it lacks fiscal neutrality. However, this second principle may be worth limiting if the overall result is to strengthen the financial services industry within the Community.

There are unanswered questions however within the Consultation Paper.

Reference is made for instance to a recent introduction in New Zealand of zero-rating for financial services but the Paper unfortunately drew no conclusions from this experience.

The Paper says very little about the treatment to be applied to services to B2C beyond saying that zero rating might “have a certain popular appeal”. The failure to discuss the aspect of financial services is disappointing.

That said, the overwhelming disadvantage of this option is the fact that its effects on national Budgets are such as to make its acceptance by Member States unlikely.

Unless there is a clear indication from the Member States that they will consider this particular option in ameaningful way, we would agree with a comment at the Brussels Conference that there is no point in further investigation of all aspects of this suggestion.

We still recommend this as the way forward. A major difficulty for financial services providers lies in the fact that hidden or trapped VAT represents a significant cost to Europe's economy and at the same time offers a major advantage to potential and actual competitors from outside the Community.

While Member States do need to generate the funds so as to provide their citizens and economies with certain essential support services and infrastructures, this should not happen at the risk of stifling economic development in areas such as the provision of financial services. We positively welcome the option put forward by the Commission in its Paper and urge its implementation.

6.2 Extending the scope of exemptions

The option here is to extend “the scope of exemptions to services to services supplied by other taxable to insurance and financial service suppliers”.

The intention is to reduce the problem of “trapped” or “hidden” VAT.

We do of course applaud the intention but it seems that it may be extremely difficult and perhaps impractical to confine the exemptions to the desired services.

The difficulty could lead to the risk of adding to legal uncertainties while failing to meet a principle of ECJ jurisprudence that it is the nature of the service that is important and not the nature of the supplier and/or recipient.

Our view is that the more immediate task is to ensure that existing definitions are re-worked and that steps should be taken to ensure that the definitions are uniformly and consistently applied in all Member States.

Again the opinion was expressed at the conference that we did not need an extension to exemptions but rather a clearer Community-wide clarification of what are financial and insurance services. We concur with this view.

6.3 Standard input credit

It is proposed that input credit should be uniformly calculated on the basis of a fixed percentage on a designated list of acquired services. Aimed at issues associated with outsourcing, the intention is to allow exempt businesses to recover sufficient VAT so as to equalise its costs to those applicable had the costs been in-house.

The Consultation paper refers to the Australian example but does not draw any conclusions from that experience.

Referring to the Australian Goods and Services tax Ruling (GSTR 2000/22) we would observe that the Australian model is quite flexible in allowing different methods or a combination of different methods, both direct and indirect as well as by reference to general and specific formulae.

We note that “ a choice of method should be based on its appropriateness in the circumstances… (and that) a change in method is acceptable” where the new method is more appropriate.

Australia in this regard can be regarded as an integrated business environment whereas in Europe it is necessary to deal with twenty-five economies the costs of whose financial industries can vary considerably even before taking on board the developing status of the accession States.

It would be useful to know what the reaction and experience has been of the Australian Financial Services sector to the various methods of calculation available.

Whatever formula might be reached at this time, it would be based on current conditions. We know that financial business has developed considerably over recent years. Given that development and expansion continue in a similar way, there must be a risk that the formula might soon be out of date. This suggests a constant review process.

It may also be noted that there may be other exempt business activities which may not have the economic strength of financial services but for whom out-sourcing might be seen as a useful business tool. There is a risk of discrimination.

We can see value in what is being proposed but see a need for my detailed examination of the issues especially in regard to the impact on individual Member States.

6.4 Option to tax for B2B supplies

The suggestion is to allow business to opt to tax supplies of insurance and financial services to other taxable persons (B2B) subject to precise conditions for matching deductible input VAT.

In essence, there is little practical distinction between this and the proposal outlined here in paragraph 6.1 above.

There is little to add to our earlier observations though it is not clear why this is regarded as achieving fiscal neutrality ( paragraph 4.2.4 of the Consultation Paper) if the same service is taxed or not taxed, as the case may be, either at the discretion of the supplier in the case of B2B or because the recipient is within B2C.

We also query whether this may be a long term solution. Some years ago, suppliers of certain professional services had the option in Ireland to tax their supplies. The exercise of the option was generally driven by the proportion of customers who were taxable, the option eventually being withdrawn.

6.5 Cross-border bodies

Finally, the Commission refers to the creation of cross-border VAT bodies where they realise taxable supplies in a manner which does not have negative consequences for either administrative charges or budgetary security of Member States.

The Consultation Paper seems to imply that the way forward here (paragraph 4.3) is through the Societas Europaea (SE). However, existing approaches to the SE are “tentative”, “the SE may allow an institution to restructure pan-European operations in a manner which does not generate unintended sticking VAT”, and there is a certain lack of clarity as to how this might work in practice.

More detailed work appears necessary if one is to be able to draw a positive conclusion.

7. Summary recommendation

Fiscal neutrality is seen as a problem area in relation to most of the potential solutions that have been put forward.

We suggest that while this principle should of course be to the forefront of discussions, it is probably more practical to concentrate on solutions that achieve a greater degree of certainty as well as assisting in reducing “trapped” VAT.

In this regard we recommend further examination of the options set out in paragraphs 4.2.1 and 4.2.3; i.e. zero rating and fixed input credit.

We will be happy of course to continue to respond to the consultation process as it develops.

We thank you for giving us the opportunity to contribute to the discussion.