EU VAT and Financial Services: Which Rules, What Consequences and Which Possible Solutions?

VAT has never been applied on financial services due to, among other reasons, the difficulty of determining the taxable base for each individual transaction. The essential characteristic of EU VAT is that it taxes the consumption in a specific country, irrespective of the country of production. However, exemptions have turned VAT into a tax on production, attributed to the country of production, and an incentive to use multiple channels in order to outsource production to low tax jurisdictions, particularly those outside the European Union. In this article, the author suggests that financial services supplied by regulated organizations to business and to government organizations should be zero rated and business-to-consumer services could be taxable on the gross margin, possibly at a reduced VAT rate.