Why and how to apply a Value Added Tax on financial services by Helge Sigurd Næss-Schmidt, Christian Heebøll, Christian Lund published by Copenhagen Economics (8/2006).
The crisis has triggered a renewed interest in the taxation of the banking sector. A key trigger is the exemption from VAT on credit provision as well as some other financial services prevailing in the EU as a direct result of the exemption contained in the EU VAT directive. IMF among others have proposed the introduction of substitutes for the real thing like Financial Activity Taxes in various versions. Some countries have already variants in place France and Denmark. Norway and Sweden is also considering the introduction of tax systems to compensate for the lack of a proper VAT on financial services. The problems associated with FAT taxes such as the Danish tax on wage income are well known also in the general literature. It may well increase cost of providing credit to households, thus compensating for the lack of VAT on consumer credit provision, but it will also strengthen other distortions arising from the lack of VAT on banking credits namely over taxation of credits to VAT-registered businesses. This is then the background to this study: why not go for the real thing. Currently, the EUs VAT directive is de facto stopping member states for doing exactly that. This study suggest that the time could be ripe for reconsidering the impossibility of a real VAT on financial services. As a whole, distortions may have risen over time while the technical barriers to a smart VAT system on financial services may have fallen. In other words, a cost-benefit calculation may suggest that the benefits of reform has risen because the costs of status quo are rising while the costs of reform has fallen. The report use data from Sweden to illustrate key points, but arguments relevant for all countries with VAT-systems.
