Opting for opting-in? An evaluation of the European Commission’s proposals for reforming VAT on financial services

This paper provides a legal and economic analysis of the European Commission’s recent proposals for reforming the application of VAT to financial services, with particular focus on their “third pillar”, under which firms would be allowed to opt-into taxation on exempt insurance and financial services.

From a legal perspective, we show that the proposals’ “first and second pillar” would give rise to considerable interpretative and qualification problems, resulting in as much complexity and legal uncertainty as the current regime.

Equally, an option to tax could potentially follow significantly different legal designs, which would give rise to discrepancies in the application of the option amongst Member States. On the economic side, we show that quite generally, firms have an incentive to opt-in only on business-to-business transactions. An estimate of the upper bound on the amount of tax revenue that might be lost from allowing opting-in is provided.