Germany Puts Brakes On E-Commerce VAT Proposals

by Ulrika Lomas, Tax-News.com, Brussels

12 June 2006

German insistence that the European Union changes its tax legislation to crack down on widespread value added tax fraud has put the brakes on e-commerce VAT reforms which would prevent firms from taking advantage of low rates of VAT in locations such as Madeira and Luxembourg.

At the latest meeting of European Union finance ministers (Ecofin), German Finance Minister Peer Steinbrueck told fellow ministers that Germany would not support the e-commerce VAT measure unless it was given permission by the European Commission to introduce 'reverse charging' to reduce missing trader fraud, which Berlin claims costs the government as much as EUR18 billion annually in VAT revenues.

The EU's Commissioner for Taxation, Laszlo Kovacs, last week presented a paper which proposed a number of ways in which new legislation could reduce missing trader fraud, which some estimates have claimed costs EU member states a total of EUR60 billion in lost revenues annually.

One of these options was a reverse charging system whereby VAT would be paid at the point of consumption which, it is intended, would prevent fraudulent traders from being able to import goods and sell them on without paying the appropriate amount of VAT to the relevant tax authority.

However, not all member states are in favour of this proposal and some favour a less radical solution, such as better surveillance and monitoring systems within the current VAT framework.

Germany's hardline stance on the issue means that a separate proposal to charge VAT on electronically delivered services on the basis of where the customer is situated rather than the jurisdiction in which the vendor is based has been stalled.

At present, many companies are taking advantage of the fact that VAT rates differ widely across the EU by registering their businesses in jurisdictions where VAT rates are low, particularly in Luxembourg and the Portuguese island of Madeira, which have the lowest permitted rate of VAT in the EU, at 15%.

Karl-Heinz Grasser, Finance Minister of Austria, which currently holds the six-month rotating EU presidency, announced yesterday that this system will now continue until December 31.

According to Grasser, he has the support of about 20 members for the new proposal, but he noted that opposition from Germany, Luxembourg and Portugal remains strong.

"I am convinced that the package is a good one," he stated.

"May be the time is not right for a decision today. It is better to be ambitious for the package than to have a bad compromise on the table," he added.

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