IFSC companies could be affected by VAT ruling

Up to two-thirds of IFSC-based companies in Ireland could be adversely affected by an unexpected VAT ruling handed down this week by the highest court in the European Union, according to a leading tax specialist here.

The Court of Justice of the European Union has ruled that services supplied between a group’s headquarters and its branches should be subject to VAT.

The case was triggered by a decision of the Swedish tax authority to charge VAT on the supplies of IT service from Skandia American Corporation in the US to its Swedish branch.

Financial services companies operating in Europe could now see their VAT bills soar as previously VAT-free services will be subject to the tax, at rates of between 15 and 27 per cent. The financial sector will not be able to recover the VAT charges in the way that other businesses can as they are deemed to be VAT exempt.

Commenting on the ruling, Dermot O’Brien, a specialist VAT consultant with his own practice, said: “Most of the IFSC companies are foreign owned and most would buy in services from overseas.”

Jarlath O'Keefe, head of indirect taxes at Grant Thornton, said the judgment could have "major implications" here in terms of the potential to add "significant VAT costs for financial services companies who provide cross-border intra-company transactions and currently avail of VAT grouping provisions". He said the decision would widen the VAT net for financial services companies with banks and insurance entities being hardest hit.