VAT for Financial Services: Ill-Suited System for Achieving Neutrality or a Local Equilibrium?

In this article, the authors examine the value added tax (VAT) regime applicable to financial services in the European Union, with a particular focus on tax neutrality and possible reform pathways. The analysis outlines the economic, quantitative and legal effects of the current framework, including the distortions and inconsistencies it generates. It recalls existing estimates of non-deductible VAT in several European countries and provides a more precise assessment for the Italian financial sector, estimating this cost at approximately EUR 3.6 billion in 2023.Although the existing rules are increasingly ill-suited to the challenges of a rapidly evolving financial sector, the authors emphasize that the longstanding debate on full VAT neutrality has often exceeded what is realistically achievable or even desirable. They therefore argue for a pragmatic reform approach, focusing on strategies capable of delivering a more efficient and responsive VAT framework. In this context, retaining the exemption regime (while addressing definitional shortcomings and reinforcing the Commission’s role through targeted delegated powers) is presented as a viable and practicable solution to some of the most pressing issues. This approach amounts to a form of “local equilibrium” for financial services within the VAT system, offsetting inherent limitations with significant systemic advantages.