Value Added Tax (VAT) is increasingly becoming a burden for the Financial Services Industry (FSI) and the cost of getting it wrong can be significant. Deloitte has identified the following five key VAT issues that we believe should be high on the agenda for financial services companies operating in Central Europe.
- VAT recovery review
Businesses which are partly or wholly VAT exempt are not able to recover all the VAT which they are charged by suppliers. In many cases this will represent a very significant tax burden. Despite the size of this cost, many businesses are not doing enough to manage it and in many cases are unnecessarily incurring too much VAT.
- EU accession in Romania and Bulgaria
From the moment that Romania and Bulgaria join the EU their indirect tax legislation will be replaced by new rules. There will be significant changes to the current system and some new opportunities. The date of accession is likely to remain unconfirmed until October and we would encourage businesses to start preparing for a new indirect tax environment which may take effect as early as 1 January 2007.
The challenges for FSI businesses include:
- Correctly calculating recoverable VAT.
- Assessing the VAT liability of transactions under the new legislation.
- Correctly applying the transitional provisions for contracts which apply before and after EU accession.
- Reviewing the VAT exemption for insurance intermediaries
The question of whether different services performed by insurance intermediaries are exempt from VAT is ambiguous given a recent judgement issued by the ECJ that provided a very narrow definition. As a result, many insurance suppliers need to consider taking advice on the VAT liability of their services. Since most insurance providers are VAT exempt, any VAT charged by insurance intermediaries may create an irrecoverable VAT cost.
- No VAT on services charged between different branches of the same company
The European Court of Justice’s (ECJ) recent judgement in the FCE Bank case clarified that services supplied between a head office and branch are outside the scope of VAT (within the EU).
The ECJ did not rule on the situation where the branch or head office is located outside the EU but presumably the same arguments apply. In practice, different member states seem to take varying approaches where there is a choice between whether a supply is made by the main business establishment or a local establishment.
- Abuse of law analysis
The ECJ recently ruled on the abuse of law principle in the joined cases of Halifax, RAL and University of Huddersfield.
The abuse of law principle applies to VAT where:
- There is an objective failure of the intended purpose of the law.
- Where the essential aim of an arrangement is to create a VAT benefit.
The above definition clearly classifies many planning arrangements as an abuse of law. However, it also leaves uncertainty as to the legality of many others.
Read more on the top 5 VAT issues for summer 2006 and their solutions in the document attached below.
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