EC Adopts Communication On VAT Fraud

by Carla Johnson, Investors Offshore.com, London

22 February 2008

The European Commission on Friday adopted a Communication on possible far-reaching measures to combat VAT fraud. The measures in question are the introduction of taxation for intra-Community supplies and the introduction of a generalised reverse charge.

Under the former concept, intra-Community supplies would be taxed in the Member State of origin at the rate of 15%. Where the Member State of arrival applies a rate of more than 15%, the purchaser in the latter Member State would have to pay that additional VAT directly to that Member State.

Likewise, where the Member State of arrival applies a rate lower than 15% (due to the application of certain reduced VAT rates or the zero rate in certain Member States), the Member State of arrival will allow credit to the taxable person who is making the intra-Community acquisition.

Under a generalised reverse charge system, the VAT system that is currently applicable to Intra-Community supplies would also apply to domestic transactions. This means that VAT would not be charged by the seller to the customer if the latter was another taxable person. Instead, the customer (rather than the vendor) would be responsible for paying the VAT to the Treasury .

Both systems have the potential to considerably reduce the phenomenon of 'missing trader' (MTIC) fraud.

However, both also pose potential problems that would need to be examined further before either system could be agreed. The taxation of intra-Community supplies of goods could create competitive cash flow disadvantages for businesses trading in the internal market, and would require the re-allocation of VAT revenues between Member States.

As regards the possible introduction of a generalised reverse charge system for domestic transactions, the Commission insists that this could only work effectively if it was applied uniformly across all Member States, and argued therefore that it should not be made available as an optional system. However, given the dearth of experience with such a generalised system, the Commission is not opposed to a pilot project being launched by a willing Member State, provided that certain conditions are met.

László Kovács, Commissioner for Taxation and Customs, announced that:

"The system of taxing intra-Community supplies and a generalised reverse charge system both present advantages in the fight against MTIC fraud.However, the lack of empirical data and the need to preserve national budgets from other, new types of fraud oblige us to be very cautious in proposing changes to the current VAT system. Before continuing work in this area, political steering is needed to ensure that Member States are prepared to accept the consequences of any radical change."

Missing trader fraud is where a taxable person, having made an intra-Community acquisition on which VAT has not been charged, makes a subsequent domestic supply on which he charges VAT and then disappears without having paid that VAT to the Treasury.

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