EU VAT Treatment of Insurance and Financial Services (Again) Under Review

The EU VAT system, like many VAT systems around the world, exempts insurance and financial services. As opposed to merit goods or services, such as health or education, the rationale for exempting these services is not to diminish the regressivity of VAT, or to encourage their consumption, but rather to avoid practical and technical difficulties. Yet, exempting insurance and financial services creates significant legal difficulties and economic distortions. This paper discusses these, particularly in light of the Court of Justice's case law, and gives detailed consideration to the 2007 proposals to reform the EU VAT treatment of insurance and financial services. It concludes that the proposal falls short by not considering full taxation of these services