EU executive proposes VAT change for finance firms

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:

-- Allowing a company to decide whether it wants to be fully taxable so that it can deduct VAT from services it buys in

-- Companies will be able to pool their investments and re-distribute the purchases exempt from VAT to members in the group.

Known as a cost-sharing vehicle, it would allow companies to cut procurement costs through economies of scale. For example, IT systems could be bought in one EU state and the costs shared among the company's different operations across the EU.

-- Clearer definitions of what constitute financial services for exemptions from VAT

The European Banking Federation said the package was a good first step but wanted it to go further by including new activities as they develop.

"This is still very much work in progress," the EBF said.

The Italian Banking Association (ABI) said the revision of the VAT rules was essential for fairer competition, a view backed by one of the bloc's top insurers.

"The proposed modernisation, once refined and delivered, should benefit insurers, consumers and the economy as a whole," said Philip Scott, group finance director for Aviva .

Financial services companies argue that being able to recoup VAT would put them on an equal footing with non-EU competitors that are not within the scope of the tax.