Sweden proposes levying VAT on banking and insurance
The first draft discussions of the Swedish 2015 budget issued last week contains a controversial proposal to withdraw the Swedish VAT exemption on financial services.
Currently, all other 27 EU member states do not charge VAT on this sector. This move would challenge a proposal by other 11 other EU member states looking to introduce a Financial Transaction Tax (FTT) shortly with the aim of raising €35bn to help repair government balance sheets falling the banking and sovereign bail outs.
Sweden experimented with a FTT tax of its own in the early 1990’s, but had to withdraw it because trading in securities moved abroad to avoid the tax.
EU VAT Directive exempts financial services on VAT
The current EU VAT Directive Directive nº 2006/112/EC Article 135 exempts insurance, banking and most financial services activities from Value Added Tax . This was largely because of the difficulties in attempting to identify the points of transaction and the value added compared to other goods or services. The legislation involve was first drafted in 1997, and is considered out of date in terms of the complexity of services and the increasing mix of exempt and non-exempt activities undertaken by sprawling financial, banking and insurance groups.
Since 2008, the European Commission has been attempting to gain an agreement on a VAT Directive for Financial Services, which would have implemented VAT on these services. However, it failed to reach political agreement between the states on the treatment of outsourced services, and the plan was dropped in 2012.
European attempts at Financial Transaction Tax
Following the stalling of progress VAT on financial services and the huge sovereign bail outs of banks, a number of the member states turned to a turnover tax on certain financial products. After failing to gain EU-wide support from all member states, 11 EU countries published plans on 14 February 2013 to introduce a harmonised Financial Transaction Tax under the European Commission’s Enhanced Co-operation rules. They include: France; Germany, Belgium, Spain, Portugal, Italy, Austria, Estonia, Greece, Slovakia and Slovenia. The new tax will levy 0.1% on share and debt/bond transactions and 0.01% on derivatives. It is payable by financial institutions (banks; pensions; fund managers; market makers; and hedge funds). The tax has an extra-territorial element, which means instruments of companies located within the FTT countries which are traded in other countries (e.g. US, UK, Japan etc) are still liable to the tax.