Why and how to apply VAT to financial services

Copenhagen Economics has most recently undertaken a number of studies on the taxation of banks. In this context, a private client has asked us to map out how a real VAT system for financial services in particular banking could look like.

The background is the current VAT exemption for financial services as well as potentially poorly designed proposals to deal with this exemption.

Our study provides three main conclusions:

• A real VAT system can be made to work
• The proposed alternatives such as a wage tax on financial institutions create more problems than they solve
• The need to move towards a real VAT based system becomes still more important with increasing digitalisation of the banking sector

Based on the study, we recommend that EU policy makers allow member states to experiment with real VAT systems for financial services based on the common principle in the VAT directive on cross border supplies of services to consumers.