France moves to block fraudulent German car sales

[Frankenspotter Photography/Flickr]

The VAT-free sale of high-end German cars is a big problem in France. [Frankenspotter Photography/Flickr]

The French Ministry of Finances wants to combat VAT fraud by changing the rules for selling foreign cars in France. Car dealers’ profits have been hard hit by a wave of fraud. EURACTIV France reports

“The situation is catastrophic. For many years VAT fraud has been killing the profits of the car dealers that obey the law, but it is just too common to fight.”

This statement from a disenchanted car dealer is by no means an anomaly. The French National Federation of Automobile Workers (FNAA) has taken up the fight, hoping to put an end to a decade of malpractice from some car sellers. Their cause has been helped by an amendment inserted into the corrective 2014 French budget bill on 12 November, aimed at fighting fraud. The amendment would introduce stricter controls on VAT declarations handed in to tax offices.

According to the Finance Ministry’s calculations, based on data from the Committee of French Automobile Manufacturers, the market affected was worth 1.1 billion euro in 2012. “We can estimate the fraud rate at between 20% and 40%, or between 45 and 90 million euro,” the Finance Ministry (Bercy) wrote in its corrective budget bill.

Bercy hopes that the amendment will help them recover 50 million euro in 2015, and 100 million in 2016, from the fraudulent activity of buying cars abroad, VAT-free, and selling them in France. “This fraud allows dealers to sell high-end cars at greatly reduced prices by not charging VAT,” Bercy stated.

According to the FNAA, this fraud costs the French car industry 5 billion euros per year in lost sales, while the state loses €1 billion in uncollected VAT on a total of 160,000 vehicles sold in the French market. If accurate estimations of the cost of fraud are, by definition, hard to come by, the explosion of used car sales is less disputable: French websites are flooded with second-hand German cars. “They are more common than French cars!” one dealer said.

German cars are the main problem

If the amendment says only that it intends to deal with “high-end” cars, the dealers are less euphemistic. The problem is almost entirely limited to German cars.

German car dealers and rental companies do not pay VAT on vehicles, and they can pass on the saving to the French market, VAT-free, once their cars are 6 months old and have 6,000 kilometers on the clock. The sale of these expensive cars would otherwise bring in a large amount of VAT for the French government. 

Aliou Sow, the Secretary General of the FNAA, said, “This is a fraud in two stages. First, an “agent”, employed to look for specific cars for a client, acts outside their brief: they buy cars in Germany to sell on. They then obtain VAT receipts from false companies set up in Spain or Romania, for example”.

Legal action

Legal action against VAT fraud has already led to some heavy sentences. The Rennes Court of Appeal convicted a gang for fraudulently selling German cars in France in December 2013, handing down a fine of 1.8 million euros. 

“This is a step in the right direction, but it is not enough,” said Yann Galut, a Socialist MP.

France and Italy, the EU’s weakest VAT collectors

Pierre Moscovici, France’s European Commissioner, assured EURACTIV on 10 November that “VAT reform in the EU and the fight against fraud are among [his] priorities, not at the top, but among the priorities”.

According to the European Commission, VAT is the EU’s main source of tax revenue, but also the tax most vulnerable to fraud. Uncollected VAT in France has been valued at between €25 and 32 billion.

>> Read: France’s €30 billion VAT gap revealed

The European Commission has estimated the European Union’s total losses from VAT fraud in 2012 to be 177 billion euros. France comes in second place for the revenue it loses, while Italy is far out in front with an annual loss of 46 billion euros to VAT fraud.

“It took some time to convince Bercy to act, because they thought the VAT was being stolen from Germany […] but in fact it is the French budget that is penalised, and badly,” Aliou Sow concluded. 

Uncollected VAT costs the EU 177 billion euro per year, according to the European Commission. The Commission's CASE report estimates France's VAT gap at 25 billion euro, a particularly extreme case. The rate of uncollected VAT in France is around 15%, compared to 10% in Germany and 44% in Romania.

VAT fraud, which deprives the state of vital resources, is committed by businesses, and probably accounts for over half of the total uncollected VAT. This fact has been brought to light in successive reports by the French Parliament in 2011 and 2013, and by the European Court of Auditors in 2012. 

November 2014: vote on the corrective 2014 budget bill in the French Parliament

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