London
Banks and insurers in Europe are bracing for extra value added tax (VAT) bills that could potentially run into billions of euros after an unexpected decision from the European Court of Justice.
The ruling on a dispute between Skandia America Corporation, a US arm of the insurer, and the Swedish tax authority means that services supplied between a group’s headquarters and its branches are set to be subject to VAT.
Stephen Morse, a tax partner at PwC, said many financial services companies operating in Europe would see their VAT bills soar. He said individual charges for the biggest banks and insurance firms could rise by tens of millions of euros. “The case significantly expands the VAT net for financial services firms. Banks and insurers are likely to be affected most,” he said.
The ruling means that previously VAT-free services will now be subject to the tax — at rates of 15-27 per cent. The industry will not be able to recover the VAT charges in the way other businesses can as they are deemed to be VAT exempt, resulting in significant extra costs for the firms.
The ruling concerns the costs shared between the head office and its branches in other countries, which will now become liable to VAT. Until now, European VAT law allowed countries to treat companies and their overseas branches as single entities for VAT purposes.
The case is expected to affect 15 member states but is thought to have the biggest impact on the UK because of its large number of foreign headquartered financial institutions and the widespread use of offshoring. Advisers said it would cost financial institutions hundreds of millions of pounds in the UK alone.
Richard Iferenta, head of financial services indirect tax at KPMG in the UK, said: “What this ruling does is, at a stroke, add hundreds of millions of pounds to the annual cost of financial institutions doing business in the UK and other EU member states.
He added that “with the UK’s position as a global financial services centre and the consequential level of inward investment into the UK by foreign financial services business that flows from that, the financial impact of the judgement may be felt hardest in the UK.”
Tax authorities across the EU will now consider how they implement the rules. The UK’s Revenue & Customs said: “HMRC is considering whether the judgement has any application to UK grouping provisions, which are different to those in Sweden”.
Advisers said there was little doubt that the UK would implement the ruling, despite having argued that its existing rules, which included anti-avoidance measures, were consistent with EU law.
The ruling will force financial institutions to review the services they are buying in from outside the EU and possibly make changes to reduce the impact of the change. But advisers said that restructuring was unlikely to help companies avoid higher taxes altogether.
— Financial Times
