The EU Federation writes to the Council of Ministers regarding VAT Treatment of Insurance and Financial Services
The EU Federation writes to the Council of Ministers on the proposed Council Directive amending Directive 2006/112/EC regarding VAT Treatment of Insurance and Financial Services
The content of the letter is now available for our public as below:
Factoring is a method of providing working capital finance to a supplier of goods and services. This is achieved by the supplier assigning and selling its accounts receivables to a factoring company. The factor will provide a range of services to its clients which can include:
1. accepting the risk of bad debts
2. collecting debts
3. providing cash flow finance in respect of the debts
The selection, of which services will be provided by the factoring company, will depend on the terms of the contract between the supplier, as assignor, and the factor. In most cases cash flow finance will be provided by means of an immediate part payment of the debt upon its assignment in return for a discount against the purchase price, this provides immediate liquidity for the supplier.
Factoring is especially attractive to small and medium-sized enterprises, particularly during periods of rapid growth, because cash flow is preserved and bad debt risk can be eliminated. The majority of clients using factoring are SME’s, however it is also an attractive proposition to larger companies.
The proposed Presidency text suggests clarification of Article 135 of the VAT Directive 2006/112/EC The original Article 135 provides for the exemption from VAT for certain transactions including under sub article (d) "transactions … concerning… debts... but excluding debt collection" and this has always been treated by VAT Authorities in Member States as meaning that the assignment of a debt to a factor is an exempt activity but that the collection activity is subject to VAT.
We note that the working document from the Presidency dated March 20th 2009 (7889/09) and the working document from the Presidency dated September 9th 2009 (13055/09) claim that this exemption should be redrafted under Article 135(1)(d) as "transfers …of debts and claims".
The working document then in the proposed definition states that this means "the assignments of obligations or claims of a pecuniary nature, excluding those constituting a supply of securities". The Presidency text suggests that this provision is limited to the transfer only of debts and claims that are not represented by securities.
Under the examples given the Presidency refers to "debt collection on behalf of a third party"/ collection of debts on behalf of a creditor” and goes on to state that this should exclude from exemption only cases of so called 'quasi factoring' i.e. where the factor manages and recovers the debts owed to his client but without bearing the related risk of loss. Amongst factoring companies this is usually called 'recourse factoring’ This is contrasted by the Presidency with 'true factoring'. In the factoring industry this is usually called 'non-recourse factoring'. Accordingly the proposal would treat the assignment of the debt as an exempt transfer by the assignor and any collection activity by the factor would be beyond the scope of VAT.
These proposals constitute more than just a clarification exercise. The result would be to distort the market which presently enjoys the status of selling a single generic product always based upon the assignment of debts but with different characteristics depending upon the chosen services. Until now there has been no distinction for VAT between recourse and non recourse factoring facilities. This matter has already been the subject of an ECJ ruling where it was stated; ‘there is no valid justification for treating true factoring and quasi-factoring differently from the point of view of VAT’. The proposal, as it currently exists, would put non-recourse factors at a severe financial disadvantage to their recourse competitors in that any input tax incurred in the collection activity would be irrecoverable, unless there would exist an option to opt for VAT.
The legal environments under which factoring operate vary substantially from one country to another. Any proposed change should be subject to consultation with all interested parties in order not to affect the financial stability of factoring companies or to jeopardise their ability to provide cash flow solutions to SME companies or to compete on level terms with each other and the banks in the provision of funding..
The proposed introduction of a VAT distinction between recourse and non-recourse factoring raises serious objections on our part.
In both types of factoring (with and without recourse), the assignor and assignee are interested in the quick collection of the debt in order to minimise risk and minimise cost of non-payment respectively; so, one cannot consider that in one case the collection is made for a third person (the assignor) and in another case for the factoring company itself ;
The duality of approach does not take into account that the characteristics of the factoring contract may change in the course of relationship. A contract without recourse may, due to specific circumstances (changes in the situation of the assignor, changes to the debtor profiles, changes in the economic environment), be turned into a contract with recourse, and vice versa. Besides, a given contract can be without recourse up to a certain amount of purchased receivables and with recourse for the amount beyond.
In these cases, it would be difficult to apply the rule proposed in the Note of the Presidency. The factoring company and the VAT authorities would face impossible difficulties in deciding which proportion of their activities are taxable and which are exempt.
More generally, the risk exists that this distinction would incorrectly be expanded to other fields than VAT.
To avoid changes damaging to the industry and affecting the competitive position between factoring companies, our suggestions would be to:
1. delete any distinction in the text between true factoring and quasi-factoring (and, consequently, suppress, in the items typically excluded from the exemption, the words 'on behalf of a third party' concerning 'debt collection') ;
2. mention in the Regulation factoring activities among examples typically included in the definition given by art. 135 a of the Directive ;
3. introduce the possibility to opt for VAT for factoring activities (for instance, by allowing the factor to opt for VAT for 'transfers of debts and claims') ;
4. give the right to raise the option to VAT only to financial institutions and not to member-states (especially for transfers of debts and claims and for granting of credit).