Reports on Financial Tax

Effects of VAT exemption for financial services in Sweden

Key findings: the effects of tax exemption for financial services in Sweden.

The exemption leads to higher costs for Enterprises:

- With a standard VAT system, enterprises would be able to deduct all incoming VAT against their outgoing VAT i.e. deduct the VAT banks pay on inputs and the VAT on value added in banks etc. Now they have to pay the hidden input VAT related to financial institutions purchase of equipment, premises etc. that do not appear as VAT cost items on bills from financial service suppliers.

- We expect large corporate customers to be less affected because their funding costs are much more determined by international capital markets (preventing full pass through of banks´ input VAT to this customer segment).

By contrast consumers face lower costs.

- They pay the hidden VAT on input but avoid paying VAT on the value added in the financial sector.

The exemption also leads to a revenue loss of 16-18 billion SEK: the undertaxation of private consumers is higher than the over-taxation of Enterprises. 

This tax loss must not be confused with a tax advantage for the financial sector: in line with other reviews, we expect that the lower/higher costs for financial services are passed on to consumers in the form of lower/higher prices with the caveat about international competition in financial services.

The VAT exemption in isolation may lead to a higher demand for financial services in Sweden in the order of around 7 per cent and hence also larger gross profits before return on capital. For the banking sector alone this may amount to roughly 2½ billion SEK.

However, the overall welfare and revenue effect for Sweden are more complicated. There is a number of taxes on financial services in Sweden that reduce demand for these services: should they be reduced/restructured in the advent of introduction of a Swedish tax to compensate for the VAT exemption? In that case, what is the consequences for revenues as well as the struc-ture and composition of financial services?

This larger question is beyond the remit of our study, but we recommend such considerations to be included in a wider review of the taxation of financial firms and products in Sweden.