EUROPE - The European Commission is conducting a review of existing legislation for value-added tax (VAT) on financial services and insurance companies, which might finally determine whether European pension funds should be exempt from paying VAT on outsourced investment services.

VAT legislation was first introduced in 1977 but there are now widening discrepancies between European member states as to when VAT should be paid, and under what circumstances should be exempt.

Most importantly for the pension sector, officials in the Dutch pensions market have been arguing in recent months the Netherlands financial services market is at a disadvantage to local counterparts in Belgium, and Luxembourg, for example, because funds in these Member States are not required to pay additional VAT.

A working group presenting advice to the new Holland Financial Centre, recently suggested further work was needed on the domestic front to remove fiscal barriers, such as the requirement on pension funds to pay VAT on asset management services and pension provision services. (see earlier IPE Story: Netherlands 'needs FGRs to become pensions champion')

Details of this EC review, presented by László Kovács, Commissioner for taxation and customs, reveal three key areas are being assessed, one of which is the "redefinition of the scope of the exempt services" as well as the expansion of the definition of services.

Officials state the intention is to set out modern definitions of exempt services and ensure it is applied universally across Europe to removed the "distortive VAT conditions and "improve the competitiveness of the EU banking and insurance companies by allowing them to manage better their operations without hidden VAT".

And while the main purpose of the initiative is to "protect the tax revenue of Member States and to reduce opportunities for aggressive tax planning", the EC also said clarifying definitions and exemptions - without needing to go to the European Courts of Justice - should also "increase the capacity to increase the VAT recovery rate" and in turn present "a reasonable prospect of cost reductions [to business clients] over time" along with compliance costs.

"This is likely to be particularly attractive for business-to-business operations and could yield significant cost savings, albeit at the expense of tax revenue", the EC stated in a question and answer paper regarding modernising VAT rules.

That said, any suggestion of exempting investment services from VAT liability appears to have been dismissed by the Dutch government as finance minister Wouter Bos yesterday stated, in a letter responding to ministers' questions, it has no intention of exempting such services from the VAT requirement and would strongly urge the EC to follow its thinking.

Senator Simon van Driel noted in his letter to finance minister Wouter Bos countries such as Belgium, Luxembourg and Germany give pension funds a VAT-exemption on services of asset managers, based on European legislation.

"The Dutch ministry however sticks to the point that it does not want to introduce such an exemption," Van Driel argued.

So Wouter Bos commented in a reply: "Pension funds are different from what the question suggests, as insurers are exempt from a VAT-levy based on their performance to the insured."

He added the investment management of a pension fund by external asset managers is specifically exempt in the VAT law of 1968, though arguing the pension sector wants to include the services under the exemption for managers of collective investment funds, as outlined in the VAT guidelines.

"During discussions about the [EC] guideline proposals, the Netherlands will insist on the recovery of a level-playing field within the EU," concluded Bos.

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