Europe Urges Drastic Action To Combat VAT Fraud

by Ulrika Lomas, Tax-News.com, Brussels

31 May 2006

European Union Commissioner for Taxation Laszlo Kovacs will present a paper which calls for "drastic" action to be taken by member states to combat value added tax fraud, which is said to be costing national governments EUR60 billion ($76 billion) annually in lost revenues.

According to the UK's Guardian newspaper, in a paper due to be published today, Kovacs will present three options for VAT reform: enhanced administrative cooperation and improvements to the current system; a 'reverse charging' system whereby VAT would be paid at the point of consumption; and turning the current system on its head by charging VAT at the first point of supply.

Kovacs has indicated that he favours the last of these three options, but has acknowledged that such a radical change would be difficult to implement and that he would have difficulty in securing the agreement of all 25 member states, which would be needed for any change in European law to take place.

"It is the most innovative and most promising solution but I think it's the most difficult to achieve," he told CNBC in a recent interview.

This being the case, Kovacs is likely to argue in his paper that member states should attempt to tackle fraud by improving the current system.

It has been reported that the Tax Commissioner will present his proposals to combat VAT fraud at the next meeting of European finance ministers (Ecofin) on June 7.

There has been much publicity on the problem of 'carousel fraud,' otherwise know as missing trader intra-community fraud, in the United Kingdom recently, after trade figures released by the Office of National Statistics revealed that the widespread use of the scam has added GBP5 billion (EUR7.3 billion) to the country's exports in the first quarter of 2006 - a five-fold increase compared with the same period in the previous year.

The current EU VAT system allows fraudulent traders to import goods, typically small electronic items such as mobile phones and computer components, free of VAT and pass them on with the tax added but without passing the requisite amount of VAT to the government concerned. In many cases, the goods are passed along a long chain of traders, making the fraud hard to detect and the perpetrators difficult to apprehend.

While the UK government estimated that carousel fraud cost it anything up to GBP1.9 billion in 2003/4, more recent data has led some analysts to suggest that the revenue loss could now be as high as GBP10 billion.

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