Estonia Rejects Reverse Charge Mechanism

by Ulrika Lomas, Tax-News.com, Brussels

01 August 2011

The Estonian government has rebuffed a recommendation from the European Commission that it introduce a reverse charge mechanism to combat value-added tax (VAT) fraud in EU carbon markets.

The decision is in response to calls from the European Commission, sent to Estonia in June along with twelve other EU member states, to implement the mechanism.

Missing Trader Intra Community fraud, commonly known as carousel fraud, arises where VAT standard-rated goods or services are effectively traded VAT free between EU member states. This is because the VAT is due in the country in which the customer belongs, meaning that the VAT can be accounted for and simultaneously reclaimed by the customer. The customer then has the opportunity to charge VAT on its onward domestic supply and disappear without accounting for the VAT due. This process is often repeated several times by the same criminal gang. Carousel fraud is traditionally organized with small goods of high value but subsequently has spread to carbon markets.

Under the mechanism, liability for the payment of VAT on emission allowances and services is shifted from the supplier (as normally required by EU rules) to the domestic customer, preventing fraud.

On July 29, 2011, the Estonian government said it would not yet implement a reverse charge policy as there had not been any evidence of abuse of the system to date, although it is being robustly monitored. The government said its decision is motivated by attempts to maintain a simple tax system but said it would however introduce the system if fraud occurs.

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