1. Clearly identifiable fees and commissions to facilitate levying VAT;
2. Clarify VAT treatment of emerging services; and
3. Simplify and harmonise– VAT grouping and cost-sharing mechanisms.

The European Parliament’s Committee on Economic and Monetary Affairs (ECON) has published a draft report, calling for a coherent tax framework for the financial sector. At the centre of the debate is reform of the VAT exemption for financial and insurance services under Council Directive 2006/112/EC.

Separately, the European Commission VAT on financial service review is underway. Countries such as China and Australia have successfully levied VAT on a range of banking and insurance services.

The 1997 outdated VAT Exemption

Financial services have been exempt from VAT since 1977, when taxing margin-based intermediation was considered technically impractical. ECON argues that this rationale no longer holds.

The exemption creates the “irrecoverable VAT” problem: financial institutions cannot deduct input VAT, embedding hidden costs into pricing structures. This distorts business models, discourages outsourcing and can disadvantage fintech and fee-based providers.

Fragmentation to tax on banking and insurance

In the absence of coordinated reform, Member States have introduced a patchwork of national measures — including financial transaction taxes, bank levies and temporary windfall taxes. The report notes that more than 90 sector-specific taxes now apply across the EU.

Such fragmentation increases compliance costs, creates legal uncertainty and heightens the risk of double taxation. It also encourages regulatory arbitrage and weakens efforts to deepen the Banking Union and the Savings and Investments Union.

Clarity and harmonisation to enable VAT exemption removal

ECON calls on the Commission to propose reform of the VAT rules for financial services. It highlights the possibility of:

1. Tax clearly identifiable fees and commissions– Unlike margin-based intermediation, these charges can be taxed with relative simplicity and reduced distortion.
2. Clarify VAT treatment of emerging services– The VAT Directive lacks specific provisions for crypto-assets, decentralised finance and fintech, leading to divergent national interpretations.
3. Simplify and harmonise definitions– VAT grouping and cost-sharing mechanisms differ widely across Member States, exacerbating fragmentation.

With the Commission withdrawing its Financial Transaction Tax proposal, the report argues that the current framework is no longer sustainable. A modern, coordinated VAT regime is presented as essential to reducing distortions, strengthening competitiveness and ensuring the financial sector makes a fair and predictable contribution to EU public finances.