Tax on financial services distributed for consultation

The report on the tax on financial services (SOU 2016:76) which was presented on 7 November 2016 has now been sent by the Government for consultation. The deadline for replies is no later than 15 February 2017. Here is a summary of the report and some comments on it.

The report contains a proposal for the introduction of a new special government-levied tax. This tax is referred to as a “tax on financial services” and is to apply to operations having sales of certain financial services which are exempt from VAT. The aim of this new legislation is to reduce the tax advantage which the financial sector can be assumed to have as a result of the fact that sales of financial and insurance services are exempt from VAT.

In summary, the tax on financial services implies that an entity, which is liable for the tax, according to the main rule is to pay 15 percent tax on its salary costs; these costs are equal to the taxpayer’s basis for social security contributions. If the taxpayer can evidence that only a portion of the salary costs refer to sales of financial services, which are exempt from VAT, the basis of the tax charge can, instead, be determined through a reasonable allocation of those costs.

According to the Committee’s calculations, the reduction in tax revenues would be approximately SEK 18-19 billion as a result of financial services being exempt from VAT, compared with the situation in which these companies would have had to pay VAT. This can be compared with the Committee’s assessment that the proposed tax on financial services will, in the long term and on a net basis, give rise to tax revenues of approximately SEK 4-7 billion at 2018 price levels, and will probably come in at the higher end of this interval. In order to compensate the entire, estimated reduction in tax revenues, there would be a requirement of a tax rate of around 40 percent, which the Committee deemed to be unreasonable and would result in distortion effects in the market. A tax rate of 15 percent is seen to be reasonable, also with consideration of the fact that the tax is proposed to be non-deductible for income tax purposes.

The Committee’s proposal in more detail:

• Two requirements are to be met to incur tax liability in this context:

1. A sale of a financial or insurance service which are not subject to VAT due to that it is exempted according to Chapter 3, § 9 and 10 of the Act on VAT (ML) shall have taken place. It is sufficient to have only one sale of a service to be seen to meet this necessary condition. The definition of sales also includes the acquisition of financial or insurance services from abroad which are seen to be sold in Sweden but which are exempt according to Chapter 3, § 9 or 10, ML. On the other hand, the sale of such services to abroad are not covered. If the service is exempt due to any reason other than the reasons stipulated in Chapter 3, § 9 or 10, ML, then, this does not comprise sales as referred to in the requirement.
2. An obligation of payment of fees is to be in effect according to Chapter 2 or 3 of the Act on Social Security Contributions (obligation to pay employer’s contributions or make one’s own contributions (self-employed)). In a VAT group, it is sufficient that one group member is liable for such fees for the necessary condition to be seen to be fulfilled. The requirement can be seen to be fulfilled for a partnership either through the company having employees and paying employer’s contributions or through them having a partner who is a natural person and who makes their own contributions.

• The necessary conditions imply that the tax applies to a large number of situations and is not limited to those we usually see as being part of the financial sector . A taxable subject can be either a natural person or a legal entity or a VAT group. Neither does it have any significance if this is a private legal entity or a public body, such as a government, municipality or county council (however, the Central Bank is exempt). The Committee’s proposal lacks, entirely, any specification of the amount of sales required for tax liability to apply. No matter the limited amount of sales of financial services exempt from VAT in relation to total sales, the first necessary condition is seen to be met.
• The basis for the tax is the taxpayer’s combined salary costs, incurred during the income year in question, which also comprises the basis of social security contributions. For a VAT group, it is all of the members’ salary costs which comprise the basis, and for a partnership both its own employer’s contributions and a partner’s own contributions provide the basis. If a taxpayer can evidence that only a portion of the salary costs refers to sales exempt from VAT according to Chapter 3, § 9 or 10, ML, then, the taxation basis is, instead, determined through an allocation of the costs based on reasonable grounds. In the proposed legal text, there is no guidance as to how such an allocation is to be made. The comments in the report mention, amongst other things, that the allocation is to be based on the same overall approach as found in the VAT system, implying that the allocation should result in the most fair or exact outcome. It is said that in, general, this is a sales-based allocation approach, but this does not exclude the possibility of applying another allocation method, for example, based on time incurred or labour.
• The basis for the tax is to be reported annually in the income tax return and the Tax Agency is to determine the tax in its final tax assessment decision. The tax will, in this manner, also be included in the basis of the debiting of preliminary tax. Furthermore, there is a proposal that the sale of services which are not liable to VAT on the basis of the exemption according to Chapter 3, § 9 or 10, ML, are to be separately reported in the VAT return.
• The principal in a VAT group is to report and pay the tax. However, all group members incur joint and several responsibility for payment if the principal does not fulfill the requirements.
• The tax on financial operations is 15 percent and is not deductible for income tax purposes.
• The proposed regulations are proposed to come into effect on 1 January 2018 and are to apply to salary costs paid after 31 December 2017.
• The Act on Advance Rulings which provides the possibility of applying for a binding advance ruling in issues regarding certain taxes and fees also covers tax on financial services.

Comments

It can be noted that the report contains a proposal on tax on financial services which will apply to many more companies and individuals than are usually seen to belong to the financial sector. This is a result of the fact that there are no tax allowances in the proposal, which has been motivated by the argument that the introduction of a threshold amount would be in conflict with the EU’s rules on state aid. Examples of services which can be exempt from VAT according to Chapter 3, §9 and 10, ML and which can be sold in companies other than financial companies and insurance companies are intermediaries selling finance and insurance services (sales financing, etc.), the purchase of financial or insurance services from abroad, onward invoicing of such services and intra-group lending.

The proposal for a tax on financial operations is controversial and already prior to the report being sent out for consultation, received extensive criticism. Financial industry organisations and unions within the finance and insurance sectors have, amongst other things, noted that the proposal will probably imply that many jobs disappear through the transfer of operations abroad and through rationalization measures. It is also claimed that the proposal will hinder the country’s work towards becoming a financial centrum and, not the least, the development of the FinTech sector.

Other criticism refers to the fact that it will be an administratively heavy process to evidence a specification of the tax base according to reasonable grounds, that there is a major degree of uncertainty regarding such a specification and, as mentioned herein, the fact that the tax covers many more companies and individuals than those comprising players within the financial sector.

It can be noted that the Tax Agency’s expert in the investigation in their special statement, states that the Tax Agency does not support this proposal of the law with reference to, amongst other things, the fact that it will impact several hundred thousand companies who cannot be seen to incur a tax advantage from financial services being exempt from VAT, and also due to the fact that the legislation will be difficult to apply.

As a counter-weight to the criticism, there would appear, on the other hand, a continued political will to increase taxes in the financial sector more that is currently the case. Consequently, it remains to be seen how this issue will be finalized and there can be reason to, already at this point in time, analyse the manner in which the proposal could impact your operations if it becomes law.

Views regarding the report can be presented by any party wishing to do so, that is, even if one is not appointed to participate in the consultation process. At PwC, we can assist in analyzing and calculating the potential effects of the proposal or, for example, we can assist in preparing a consultation reply.