Commission to fight VAT fraud schemes

The European Commission adopted on Tuesday (18 August) proposals to combat the ever-expanding value-added tax (VAT) fraud schemes by accessing taxpayers databases across the EU and exchanging information between authorities of the member countries.

“In the current economic situation it is more important than ever to fight tax fraud efficiently and a fully functioning administrative cooperation between tax administrations is key in that respect,” said László Kovács, Commissioner for Taxation and Customs.

The new measures are particularly aimed at combating missing trader inter-community (MTIC) or ‘carousel’ VAT fraud, and include the significant step towards the creation of a legal base to establish Eurofisc – a “common operational structure” which would allow member states to coordinate “rapid action in the fight against cross border VAT fraud.”

This type of fraud takes a number of different forms. A simpler version is ‘acquisition fraud’ in which goods or services are imported into a country VAT-free and sold on in that country with VAT charged. Afterwards the importer disappears instead of paying VAT to the governent.

Carousel fraud occurs when those goods and services are then sold on within an EU country and eventually re-exported, possibly back to the original supplier, allowing fraudsters who use false VAT identification numbers or simply disappear after the sale to pocket the difference and depriving governments of billions of euros each year. 

The government is usually cheated twice in this case, once by the original importer, who dissappears without accounting for the VAT, and once by the re-exporter, who reclaims the VAT they paid to the government.

Coordination is crucial

In a response to such schemes, the new operational structure Eurofisc is intended to create a European network of officials from national tax administrations, which the Commission claims should allow “a very fast exchange of targeted information” between member states, as well as the “setting up of common risk and strategic analysis.” 

There are further changes, which the latest proposals bring in, including joint responsibility for the protection of tax receipts between states throughout the Union and direct access to national databases for other member states, in order to rapidly detect “cross-border fraud schemes”. 

The proposals include also the setting up of common minimum standards for registration of taxable persons in member states. According to the Commission, abuse of ‘inactive’ VAT identification numbers is a well-known phenomenon in VAT fraud. 

Still a hard sell

It remains to be seen however if all national governments will accept to share their VAT databases with their counterparts across the EU, despite both Council and Parliament have reiterated the need for better coordination, experts said. 

EU leaders have repeatedly stressed in the last two years the need for a common approach to combating tax fraud to supplement and support national efforts.

The European Parliament also issued a resolution last year on a coordinated strategy to improve the fight against fiscal fraud and even proposed “automated access by all member States to certain non-sensistive data (…) concerning their own taxable persons (business sector, certain data concerning turnover) and on the harmonisation of the procedures for the registration and de-registration of persons liable for VAT.”

The Commission argued that a common framework would be far more effective than bilateral arrangements, which may leave some countries without full and rapid access to some information.

The Commission hopes that by establishing clear rules for registration and deregistration of taxable persons it would become impossible for potential fraudsters to obtain or abuse a VAT identification number. The EU executive also expects that the honest traders will be reassured that the information they obtain from counterparts is more reliable.

Commissioner Kovács has stressed the need to ensure that tax authorities have all technical and legal means to take action against EU-wide VAT fraud and to ensure that each tax administration is prepared to protect other member states' tax revenue as effectively as their own.

The International VAT Association, an international body focusing on VAT issues, believes the among the goods most often involved in this fraud are computer chips and mobile phones.

According to the Prosecution Office of Her Majesty's Revenue and Customs (HMRC), one such example occurred in the UK, where in 2008 twenty one people were convicted in 2008, in connection with a £138 million (€175m) mobile phone VAT fraud. The case resulted from a substantial investigation by HMRC.

Britain  said last month that it would be making carbon trading exempt from VAT, the need for which was highlighted a case in which HMRC arrested nine persons on Wednesday 18 August, who they believe to be involved in a £38 million (€44 million) carbon trading VAT fraud scheme.

VAT fraud is reportedly widespread also in Eastern Europe. A 2006 paper by Constantin Pashev from the Center for the Study of Democracy in Sofia puts the losses of Germany as a result of VAT fraud at €17.6 billion. Compared to Germany and the UK, he suggests that “Bulgarian official figures of up to €300 million a year appear modest in absolute terms.” However, they are “about 4-5 times higher than the UK figure if taken as a percentage of overall VAT revenues,” Pashev writes.

Tax fraud is a major economic challenge for the EU. In a 2006 memorandum, the European Commission estimated the level of overall tax fraud at 2 to 2.5% of GDP, amounting to as much as €200-250 billion at the EU level. However, there are no firm figures on the scale of tax fraud, given the illicit nature of the activity and that few member states release data on the subject. 

The International VAT Association, a leading body on international VAT issues, voiced concern in a 2007 report that “European VAT fraud is growing at an alarming rate.” In the same report, it further comments that “suppression of fiscal borders in the EU has allowed businesses to purchase goods and services cross-border without being charged VAT.” 

The British Institute for Fiscal Studies reported in 2007 that UK VAT revenue losses for 2005-2006 topped £12.4 billion (€15 billion), or 14.5% of potential VAT revenues. Her Majesty's Revenue and Customs estimated that so-called missing trader inter-community (MTIC) or ‘carousel’ VAT fraud represented “less than a quarter of these losses” but that these had increased “rapidly despite its best efforts.” The Commission published an estimate which put carousel fraud in the UK in 2006 at “between €1.5bn and €3bn a year…represent[ing] about 1.5% to 2.5% of the total UK VAT receipts.” 

The new Commission initiative follows proposals made last year to speed up information exchanges between EU countries to fight cross border fraud (EURACTIV 19/03/08).

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