EC Denies Austrian And German Request To Change VAT Rules

by Ulrika Lomas, Tax-News.com, Brussels

21 July 2006

The European Commission has refused to let the governments of Austria and Germany change their value added tax rules to help them fight widespread and growing VAT fraud.

Austria and Germany had asked to be allowed to apply a reverse charge mechanism to tackle the phenomenon of businesses disappearing without paying their VAT liabilities, a scam commonly known as 'carousel' or 'missing trader' fraud which, according to estimates, deprives European governments of some EUR50 billion annually in revenues.

Article 27 of the Sixth European VAT Directive provides for derogation from the harmonised VAT rules if the changes are "targeted, restricted and proportionate". However, according to the EC, in the case of Austria and Germany, the requests are too broad in scope and would require an amendment to the Directive itself.

"While combating fraud is a priority of the Commission, and Member States could use the money not paid by the 'missing traders' for accelerating economic growth, for creating new jobs, for increasing competitiveness by spending more on R&D, it is important that any measure taken by Member States to combat fraud is proportionate and does not impose new obligations on honest businesses," commented Taxation Commissioner Laszlo Kovacs.

"The Commission always has to ensure that measures proposed by Member States are in line with the EU legislation," he added.

The 'reverse charge' mechanism effectively passes the responsibility for payment of VAT from the supplier to the customer. Austria and Germany argue that this system will deny fraudulent traders the opportunity to sell goods without passing on VAT to the government as the tax will be collected by the retailer at the end of the supply chain.

The Commission is, however, expected to grant permission to the United Kingdom government to implement reverse VAT charging for certain goods such as mobile phones and computer chips.

The UK's tax authority, HM Revenue & Customs, has already published its plans to apply reverse charging, and expects them to be in place by October 2006.

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