UPDATE 1-EU executive proposes VAT change for finance firms

(Adds news conference, more detail, industry reaction)

By Huw Jones

BRUSSELS, Nov 28 (Reuters) - Insurers, mortgage lenders and banks could save millions of euros under plans unveiled by the European Commission on Wednesday to give them sales tax refunds and help trim the cost of financial products for consumers.

EU Tax Commissioner Laszlo Kovacs said revenue loss to the bloc's 27 member states would be limited in the short term and they would be compensated over the medium term by the ability of EU financial firms to compete better with their non-EU rivals.

Unanimity among EU states is required for tax proposals to become law.

"We have every good reason to believe that member states will react positively, even if they lose a small part of their tax revenue," Kovacs told a news conference.

EU VAT legislation exempts financial service firms and insurers from charging VAT on their offerings, but they must pay the tax on any products or services they buy.

Non-financial companies reclaim the VAT they pay on products and services.

Financial firms' margins are effectively cut by the VAT they pay, unless they bump up the prices they charge customers.

The Commission was unable to say how much the revenue losses would be for EU states, but said it would not amount to hundreds of millions of euros. The current system increases costs by 4 percent for businesses, it said.

The VAT exemption had little impact when it came into force in 1977, but as companies increasingly outsource key tasks, they face increasing VAT costs on those outsourced services that they cannot deduct.

The Commission launched a review in 2005 and the outcome is the package announced by Kovacs on Wednesday to give a company the right to choose if it does not want to be exempt from charging VAT and therefore be able to deduct the tax from what it buys.

Kovacs said the change would allow companies to reduce their exposure to non-recoverable tax on their inputs, especially related to business-to-business activities, while he expected competition in the sector would discourage them from passing on all the sales VAT to retail customers.

INDUSTRY HAPPY

The package's core provisions include: