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

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

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

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

Andrew Moss, group finance director, Aviva, said: “Aviva believes the Study makes a valuable contribution to the current review of VAT legislation for financial services. Without a future-proof amendment of the current rules, European insurers’ costs will increase by many hundreds, or even thousands of millions of Euros. Some EU-based insurers have already relocated to more favourable tax regimes. Failure to act now is likely to mean more and more insurers looking to move out of the EU.

“The Study clearly shows that EU-based insurers are at a competitive disadvantage: we suffer reduced profitability compared with non-EU insurers. A significant factor in this difference is the amount of VAT incurred that cannot be recovered, therefore increasing our cost base.”

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

The Study confirms that, on average, EU-based insurers make net profits of 4.3% of sales, compared with rates of 8.2% and 9.1% for the US and Australia respectively. In seeking to address solutions to the adverse impact of VAT for insurers, the Study points positively to the impact that both national and pan-European VAT grouping can provide. At the moment, national VAT grouping is allowed in only a few Member States.

Andrew Moss commented: “VAT grouping should be available across Europe for all insurance groups. It would prevent VAT being imposed on the sharing of staff across borders. It will mean that large and small groups can organise themselves on the optimum commercial basis and will enable them to compete on the world stage on equal terms with other players.

“It is important that the review results in greater harmonisation across Europe. At present, too many Member States impose their own interpretations of EU VAT legislation. Coping with these differences creates a major headache for insurers.”

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Enquiries:
Media:
Sue Winston, head of group media relations +44 (0)20 7662 8221
Vanessa Booth, group media relations manager +44 (0)20 7662 2482


Notes to editors:
About the report

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

About Aviva

• Aviva plc is the world’s fifth-largest insurance group and the UK’s largest insurance services provider (based on gross worldwide premiums at 31 December 2005), and is one of the leading providers of life and pension products to Europe, with substantial positions in other markets around the world.
• Aviva’s principal business activities are long-term savings, fund management and general insurance, with worldwide total sales of Ł36 billion and assets under management of Ł322 billion at 31 December 2005.