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Opting for Opting In? An Evaluation of the European Commission’s Proposals for Reforming VAT on Financial Services

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  • de la Feria, Rita

    (Centre for Business Taxation, University of Oxford)

  • Lockwood, Ben

    (Department of Economics, University of Warwick and CEPR Fellow)

Abstract

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, when firms cannot coordinate their behaviour, they have an individual incentive to opt-in on business-to-business (B2B) transactions, but not on business-to-consumer (B2C) transactions. We also show that opting in eliminates the cost disadvantage that EU financial services firms face in competing with foreign firms for B2B sales. But, these results do not hold if firms can coordinate their behaviour. An estimate of the upper bound on the amount of tax revenue that might be lost from allowing opting-in is provided for a number of EU countries.

Suggested Citation

  • de la Feria, Rita & Lockwood, Ben, 2010. "Opting for Opting In? An Evaluation of the European Commission’s Proposals for Reforming VAT on Financial Services," The Warwick Economics Research Paper Series (TWERPS) 927, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:927
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    Cited by:

    1. Thiess Buettner & Katharina Erbe, 2014. "Revenue and welfare effects of financial sector VAT exemption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(6), pages 1028-1050, December.
    2. López-Laborda, Julio & Peña, Guillermo, 2016. "Is financial VAT neutral to financial sector size?," Economics Discussion Papers 2016-31, Kiel Institute for the World Economy (IfW).
    3. Sijbren Cnossen, 2013. "A proposal to apply the Kiwi-VAT to insurance services in the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(5), pages 867-883, October.
    4. Leon Bettendorf & Sijbren Cnossen, 2014. "The Long Arm of the European VAT, Exemplified by the Dutch Experience," CESifo Working Paper Series 4730, CESifo Group Munich.

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