Member states have considerable freedom – subject to a floor of 15% – to decide on the general rate of the value added tax (VAT). But the European VAT Directive1 regulates exemptions from VAT and reduced rates to prevent competitive distortions in the internal market place. According to the VAT Directive financial services are usually exempt from VAT.
In 2008, the European Commission presented a proposal2 to improve the VAT regime governing financial services – which dates from 1977. A major shortcoming of the present framework is that the exempted financial services are not very well defined. The exemptions are not applied uniformly across Europe, which has triggered numerous legal challenges before the European Court of Justice.
The ambiguity of the existing VAT Directive also affects occupational retirement provision – particularly in the area of external asset management services. Pension funds are not explicitly mentioned in the VAT Directive, but some member states categorise pension funds as special investment funds. Investment funds do benefit from an exemption, resulting in a differential treatment of pension funds across Europe. In some countries, pension funds do not have to pay VAT on external asset management services, but elsewhere they do.
EFRP is in favour of explicitly exempting pension funds under the new VAT regime for financial services. The unequal application of VAT rules undermines the development of cross-border retirement provision by pension funds.
1 Directive 2006/112/EC, 28 November 2006 on the common system of value added tax, OJL 347, 11/12/2006
2 Proposal for a Directive on the common system of value added tax, as regards the treatment of insurance and financial services, COM(2007) 747/final2
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