The inclusion of insurance services in the European VAT system—a problem that cannot be solved?

Abstract

In the European Union insurance premiums are not subject to value added tax (VAT), but—in most member states—to special taxes. As these and VAT on inputs are not recoverable there are high cumulative and hidden tax burdens. However, the inclusion of insurance (and other financial services) in the VAT system poses serious conceptual problems. Solutions suggested and discussed in literature as well as relevant regulations in countries outside Europe do not meet the principles constituting the European VAT system. The paper develops a realizable proposal for the inclusion of insurance services in this system meeting its constituting principles.