APPLICATION OF VAT TO THE FINANCIAL SECTOR Mr. Chillanyang Cyprian A Presentation to the VADA Technical Workshop. Kampala, Uganda. 14th June 2016. 10th June 2016 VAT and the financial Sector

VAT and the financial Sector Curriculum Vitae Assistant Commissioner Business Policy, Uganda Revenue Authority since 2011. 20 years hand on experience in tax administration. Academic qualifications: Master of Arts in Economic Policy and Planning (Makerere University) Bachelor of Statistics (Makerere University) PostGraduate Diploma in Tax and Revenue Administration Post Graduate Diploma in Project Management and Planning Various Certificates in International Taxation, Oil and Gas Management, taxpayer management Key Achievement: Formulation and management of the taxation Policy Transformation of Revenue Administrations Steering and implementation of Electronic taxation (Etax) 10th June 2016 VAT and the financial Sector

VAT and the financial Sector Outline 1.0 The General Principles of VAT 2.0 The Financial Sector and its importance 3.0 Categories of Financial Services 4.0 VAT treatment of the Financial Sector and the Rationale 5.0 Irrecoverable VAT Problem and the Banker’s Loby. 6.0 Can Normal VAT be applied to Financial Services? 7.0 Salient Issues the taxation of Financial Services 8.0 The Case of Uganda. 10th June 2016 VAT and the financial Sector

The General Principles of VAT 1.1 VAT vs GST 1.2 Taxable Supplies Turnover Registration 1.3 Standard Rate, Zero rate and Exempt Taxable unless listed in the Exempt Schedule 1.4 VAT Payment, Refund and Offset 1.5 Time of supply 10th June 2016 VAT and the financial Sector

The Financial Sector, Origin and Importance 2.1 The oldest Banking Institution in the World is Banca Monte dei Paschi, di siena SPA (MPs) Italy – Founded in 1472 2.2 Financial Services are the economic services provided by the Finance Industry, which encompass a broad range of businesses that manage money –including credit unions, banks – credit card companies, insurance companies, accountancy companies, consumer finance companies , stock brokerages, investment funds and some Government – sponsored enterprises. 10th June 2016 VAT and the financial Sector

The Financial Sector, Origin and Importance ( Contd..) 2.3.1 For the last 2 decades, Financial sector is more profitable that the Non Financial services sector . Barriers of entry Banking regulations VAT exemption 2.3.2 Financial Sector could make more substantial contributions if new taxes are directed at the abnormal profits. Justification for FAT, LED. 10th June 2016 VAT and the financial Sector

Categories of Financial Services 3.1 Financial Intermediate services lending ,deposit taking 3.2 Fee based services – Electronic banking, custody, agency services, asset management, advisory & consultancy, settlement services. 3.3 Other margin based financial services e.g. trading in shares, derivatives, Forex , bonds. 3.4 General commodities tracking services e.g. precious metals, trading 10th June 2016 VAT and the financial Sector

VAT treatment of the Financial Sector and Rationale 4.1 Historically, financial services are Exempt from VAT. Under the Sixth VAT directive in 1977, Art 135 (1) , the EU exempted mainstream financial services including Insurance Companies. 4.2 Why? Difficulty of measuring the value added to financial services on a traction by transaction basis. 2/3 of all the financial services are margin based this makes the implementation of the invoice – credit VAT system difficult to in this respect. Financial services facilitate the buying and selling of goods and services 10th June 2016 VAT and the financial Sector

VAT treatment of the Financial Sector and Rationale (Cont’d…) 4.3 Exceptions i. Some countries apply VAT on insurance services except for life insurance ii. Fee based services – Electronic banking, custody, agency services, asset management, advisory & consultancy, settlement services. 10th June 2016 VAT and the financial Sector

Irrecoverable VAT Problem and the Banker’s Lobby 5.1 Consequences: 5.1.1 Irrecoverable VAT Problem (€ 33B) Exemption means they cannot charge and cannot claim 5.1.2 Imported services 5.1.3 For business users the price is higher due to irrecoverable VAT. 5.1.4 While for individuals (end users), it is cheaper than if VAT was applied 10th June 2016 VAT and the financial Sector

Irrecoverable VAT Problem and the Banker’s Lobby (Cont’d..) 5.2 Prof. ben Lockwood / PWC Report: 5.2.1 The VAT Exemption that applies to European Banks does not lead to a tax advantage 5.2.2 If Banking services were subject to VAT, this would not lead to any significant increase of EU VAT revenues 5.2.3 The Banks are neither over taxed nor under taxed w.r.t VAT 5.2.4 Why banks have lobbied internationally to have VAT apply to many of their financial services. End Users – not envisaged Better placed to pass the VAT to end users Business owners are able to claim credit 10th June 2016 VAT and the financial Sector

Can Normal VAT be applied to Financial Services 6.1 The Modern VAT framework: 6.1.1 Argentina Apply VAT on interest payable on many types of loans (Except mortgages) Grant I/P credit to business borrowers 6.1.2 Israel Apply VAT on financial services computed on the basis of Banks total wages and profits no input tax for B/S borrowers 6.1.3 South Africa Applies VAT on many financial services, where there is an explicit fee or charge rather than a margin. 6.1.4 China Reviewing their Financial sector in this direction (2012) 80% of all revenues by Banks are from interest 10th June 2016 VAT and the financial Sector

Can Normal VAT be applied to Financial Services (Cont’d…) 6.2 Prof Alan Scheuk principles for taxation of financial intermediation services 6.2.1 Interest Income would be subject to VAT based on the Value Added 6.2.2 The Export of Financial Services should be exempt or zero rated consistent with the other modern services are treated the input of should be subject to VAT Withholding 6.2.3 Financial institutions should be able to claim input VAT credits for their expenses similar to other B/S making taxable supplies 6.2.4 VAT taxpayer paying interest on business borrowings should be eligible to claim input VAT credits 10th June 2016 VAT and the financial Sector

Salient issues in the Administration of VAT in the Financial Sector 7.1 The Banks are able hide some of these revenues 7.2 The divergent terminologies for fees 7.3 Staff competence 7.4 Transfer Pricing by Banks 7.5 Bank Confidentiality 7.6 The advent of Mobile Money by Telecoms 7.7 Other taxes applicable to the Financial sector. Corp. Tax, Stamp Duty, Excise Duty, Financial Activities Tax, Payroll taxes. 10th June 2016 VAT and the financial Sector

VAT and the financial Sector The Case of Uganda 8.1 VAT 18%; Productivity of VAT 22%; VAT Gap 8.2 In the year 2013/14 Financial institutions contributed 9.62% to the total revenue collections (10.57% in 2012/13 and 6.81% in 2011/12). 8.3 Taxable; Asset Financing, Consultancy, Brokerage, Custodial Services, Rent and; 8.4 Insurance services are standard rated except supply of Financial services, supply of health, life, micro insurance and reinsurance insurance services. 8.5 All Financial Institutions under LTO. 8.6 Cordial relationship with the Uganda Bankers Association 10th June 2016 VAT and the financial Sector

Questions and Comments THANK YOU 10th June 2016 VAT and the financial Sector