Aviva calls for swift progress on EU review of VAT legislation for insurers

Article date: 11 December 2006

Aviva plc, the international savings and investment group,welcomes the publication of ‘The Study to Increase theUnderstanding of the Economic Effects of the VAT Exemption forFinancial and Insurance Services’, (‘the Study’)by the European Commission earlier today. The Study was produced byPricewaterhouseCoopers.

The Study acknowledges the negative effect the current VAT regimehas on insurers. It goes on to recommend three key changes tosupport the EU insurance industry:

  • Extension of the scope of the VAT exemption forinsurance-related services
  • Introduction of VAT grouping in all Member States andthe possibility to set up VAT Groups on a pan-European basis
  • Improved pan-European VAT guidance on the scope of exemptionsto be available to Member States and taxpayers

Andrew Moss, group finance director, Aviva, said: “Avivabelieves the Study makes a valuable contribution to the currentreview of VAT legislation for financial services. Without afuture-proof amendment of the current rules, Europeaninsurers’ costs will increase by many hundreds, or eventhousands of millions of Euros. Some EU-based insurers have alreadyrelocated to more favourable tax regimes. Failure to act now islikely to mean more and more insurers looking to move out of theEU.

“The Study clearly shows that EU-based insurers are at acompetitive disadvantage: we suffer reduced profitability comparedwith non-EU insurers. A significant factor in this difference isthe amount of VAT incurred that cannot be recovered, thereforeincreasing our cost base.”

The European Commission’s current review of VAT legislationfor financial services was started in response to a 2005 ruling bythe European Court of Justice that very narrowly interpreted thecurrent insurance exemption contained in the 6th VAT Directive(77/388/EEC). If fully implemented across the EU, it would meanthat many of the services insurers currently outsource, such aspolicy records maintenance and claims handling, would start to bearVAT. Aviva believes the current review must provide EU
businesses with a VAT exemption that is robust, whilst recognisingthe revenue needs of Member States.

The Study confirms that, on average, EU-based insurers make netprofits of 4.3% of sales, compared with rates of 8.2% and 9.1% forthe US and Australia respectively. In seeking to address solutionsto the adverse impact of VAT for insurers, the Study pointspositively to the impact that both national and pan-European VATgrouping can provide. At the moment, national VAT grouping isallowed in only a few Member States.

Andrew Moss commented: “VAT grouping should be availableacross Europe for all insurance groups. It would prevent VAT beingimposed on the sharing of staff across borders. It will mean thatlarge and small groups can organise themselves on the optimumcommercial basis and will enable them to compete on the world stageon equal terms with other players.

“It is important that the review results in greaterharmonisation across Europe. At present, too many Member Statesimpose their own interpretations of EU VAT legislation. Coping withthese differences creates a major headache forinsurers.”

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Sue Winston, head of group media relations +44 (0)20 76628221
Vanessa Booth, group media relations manager +44 (0)20 76622482

Notes to editors:
About the report

  • The current expectation is that the proposal will be put tothe EU Council mid 2007.

About Aviva

  • Aviva plc is the world’s fifth-largest insurance groupand the UK’s largest insurance services provider (based ongross worldwide premiums at 31 December 2005), and is one of theleading providers of life and pension products to Europe, withsubstantial positions in other markets around the world.
  • Aviva’s principal business activities are long-termsavings, fund management and general insurance, with worldwidetotal sales of £36 billion and assets under management of £322billion at 31 December 2005.

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