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, 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.
Source: Rita de la Feria
