Financial Activities in European VAT - A Theoretical and Legal Research of the European VAT System and the Actual and Preferred Treatment of Financial Activities

Abstract: Value added tax (VAT) is a key part of the fiscal revenue of many countries. Yet this broad-based tax on consumer spending exempts financial services. This seems puzzling to many, particularly given the significance of that sector and the size of its value-added in today's world economy. The fact that the European Commission is currently reviewing the tax treatment of financial activities in the EU underscores the importance of addressing the issue. Conventional wisdom holds that taxing financial services under a transaction-based VAT system entails difficulties that render it impossible to tax the services. The thesis investigates where the difficulties lie. The research is undertaken using benchmarks, namely the character of European VAT as an indirect tax on consumption expenditure and the specific features of financial activities, namely that they turn around money and the functions of money. The various key VAT concepts (e.g., taxable person, taxable transactions, taxable amount) are researched in order to establish whether the inclusion of financial activities in the European VAT system entails specific difficulties both from a practical, legal point of view and from a theoretical point of view (in the light of the benchmarks). The thesis contains an extensive investigation of the law inter alia as regards the scope of the exemption for financial services and the scope of the European VAT system. It is found that, particularly with regard to defining the scope of European VAT, what constitutes a taxable transaction, the taxable amount and calculating a deductible proportion, clear practical and theoretical difficulties exists. Finally, the thesis describes and evaluates alternative treatments to an exemption of financial services such as using both additive and cash-flow methods. The current review of financial services is also discussed. It is found that no clear best practice can be established. However, based on both theoretical and practical considerations, a preferred treatment is presented.