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

Rita de la Feria and Ben Lockwood

No 271180, Economic Research Papers from University of Warwick - Department of Economics

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.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 40
Date: 2010
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Citations: View citations in EconPapers (7)

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Journal Article: Opting for Opting-In? An Evaluation of the European Commission's Proposals for Reforming VAT on Financial Services (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:271180

DOI: 10.22004/ag.econ.271180

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