Nonetheless, the players in the financial services sector have emerged in recent years as among the largest groups of companies in the world and, despite this fragmentation, financial service companies as a group have become by far the most profitable in the world. For example, the UK-based financial services conglomerate HSBC and Barclays are among the world's largest corporations. For this reason, the European Commission in the 1990s took up a plan to include financial services and insurances in the value added tax (VAT) system for all member states, with the primary purpose of making the markets for financial services efficient. The plan was embodied in the Sixth VAT Directive of EC, part of the Financial Services Action Plan which was issued in 1977. Under the EC Treaty, all member states are obliged to adopt EC Directives into their own statutes although they can choose the forms or methods by which to implement them1. The 1977 VAT directive, however, was met with hostility by member states, which were reluctant to implement the tax measure. This paper tracks the difficulty of modernizing the VAT system for financial and insurance services for EU that would be acceptable to all and would advance the EC policy of promoting integration and competition in this industry for Europe's future growth in prosperity and employment. A critical evaluation of the compromise measure proposed by EC is in order as a way of contributing to the consultation process being conducted by the Commission to craft a more realistic and more acceptable VAT system for financial and insurance services. Thus, the paper attempts to present an opinion on whether the new VAT system proposed by EC will be more successful than the first.
Problems & Issues
Financial markets have developed in such a way that even interpretation of classic terms like credit gives rise to difficulties. The Commission services have been confronted with an increasing number of cases where economic operators and member states had problems in interpreting the definitions of exempt services under the Sixth VAT Directive. These cases often reflect the complexity of financial and insurance products, extending to questions such as whether there is a taxable supply and where the place of supply is located.
The most serious objections to the imposition of VAT on financial services and insurance firms were the absence of a readily identifable mechanism for efficiently implementing the tax proposal, and the increase in consumer credit that it is expected to generate. Another issue raised against the imposition of VAT on customers of financial and insurance services was the way it offends political sensibilities2. The financial services industry, being engaged in the management of money, involves public interest because a bank run, for example, can harm a national economy. Thus, governments of EU member states carefully regulate the operation of these companies, such that in UK, the Financial Services Authority has been clothed with greater powers to go after financial services firms that mishandle their affairs and funds3. The difficulty for EC consisted mainly in the impossibility of establishing taxable amounts and the amounts of deductible VAT without