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VAT Report Paints Desperate Picture Of EU-Wide Losses

by Ulrika Lomas,, Brussels

06 April 2007

As the EU works on proposals to cut down on cross-border or 'carousel' VAT fraud, the Brussels-based International VAT Association (IVA) has released a report warning European VAT fraud is growing at an alarming rate, to the point that it is beginning to affect the accuracy of Member states’ trade statistics.

Estimates vary concerning the actual level of VAT losses, says the IVA, with figures ranging from €60bn - €100bn per annum for all Member states. Much of the fraud is missing trader intra-community (MTIC) fraud, or “carousel” fraud, predominantly achieved using mobile telephones and computer chips as a conduit to facilitate the fraud.

A number of member states, led by the UK. but joined by Germany and France, have pressed the EU to allow them to take national measures to combat such fraud, but the EU has resisted these requests, preferring to develop a universal solution.

The IVA's report analyses a number of options for addressing the current haemorrhaging of Europe’s VAT system and draws the following key conclusions:

  • Moving away from today’s fractionated payment system to a sales-tax approach based on the “reverse-charge” mechanism would multiply the potential sources of tax evasion in the EU.
  • The existing ‘transitional’ VAT system, despite its flaws, has contributed effectively to the collection of a broad-based consumption tax.
  • Europe’s first priority should be to strengthen fiscal cooperation between Member states. Information-sharing and coordinated action form the backbone of Europe’s VAT enforcement provisions.
  • Supporting this, Member states’ administrations should consider establishing a multi-jurisdictional, VAT enforcement unit.
  • Member states’ administrations working with businesses should be able to determine how, through the use of new technologies the opportunities for fraud can be significantly reduced – whether through transaction tracking or more rapid exchanges of information.
  • The use of traditional measures to combat fraud – which include subjecting new VAT registrations, refund claims and a sample of intra-EU traffic flows to additional checks – should be approached in a more coordinated and consistent fashion across all jurisdictions.
  • Any move to a ‘country-of-origin’ principle, which should provide the best VAT system for Europe’s Single Market, is fraught with political challenges. Notwithstanding this fact, there are significant benefits to be obtained in the fight against VAT fraud, in exploring the notion of a ‘hybrid’ system between the origin and transitional systems of today. This would be pursued via the application of a standard EU-based tax on intra-EU supplies, possibly at a standard rate of 10% - sufficient to reduce the incentive of carousel fraud.
  • Finally, Europe is witnessing a rise in fraud using the reverse charge mechanism applied to cross-border supplies of services. The increasingly sophisticated fraud industry, in a bid to counteract new enforcement controls over goods, is leveraging services as a new tool to expand their industry.

The Commission has said that it largely agrees with the IVA's analysis of the problem. When the Commission promulgated a consolidated and revised version of its VAT Directive late last year, which did not however make substantive changes to the law, it said that it would propose a 'comprehensive' solution to the problem by June, 2007.

It is not only carousel fraud that is exercising the Commission: the new e-commerce regime introduced in 2003 has also thrown up problems. Pending a review of the e-commerce directive, the Commission has extended VAT arrangements for e-commerce until the end of 2008.

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