European States Meet To Discuss VAT Fraud Response

By Lorys Charalambous, Tax-News.com, Cyprus

08 October 2014

Six European countries held a meeting in Prague recently to discuss closer cooperation on combating value-added tax (VAT) fraud, focusing in particular on the use of the reverse charge mechanism.

The meeting involved officials from the Czech Republic, Hungary, Poland, Slovakia, Germany, and Austria.

The reverse charge mechanism shifts the liability for the payment of VAT from the supplier to the customer, who then accounts for both output tax and input tax – a tax-neutral consideration. The mechanism ensures that VAT is not passed from the customer to the supplier, preventing unscrupulous suppliers from vanishing with VAT that is required to be remitted to local tax authorities.

The mechanism is in particular aimed at enabling states to mitigate the impact of Missing Trader Intra-Community (MTIC) fraud, where fraudsters take advantage of the fact that goods or services may be imported from another member state free from value-added tax and then sold to the domestic market inclusive of value-added tax. The trader that imported and re-sold the goods then "goes missing" without remitting the VAT collected on the domestic transaction to the local tax authority.

At a press conference following the meeting, Hungary's Minister for National Economy, Mihály Varga, said that large-scale and well-organized fraud cases "have been regularly sapping fiscal resources," and that this had led to lower tax revenues for member states. He reported that the nations had "agreed that there must be closer partnership between tax authorities. We will also extend reverse-charge VAT as much as possible in the EU."

To support efforts to tackle VAT fraud, the European Union recently approved a Quick Reaction Mechanism (QRM), which allows member states to respond more quickly to serious cases of sudden and massive VAT fraud by expediting EU approvals for member states to apply a temporary reverse charge.

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