Tax chief touts ‘unwanted’ reform

László Kovács, the European commissioner for taxation, will next year present in-depth studies on introducing reverse charging, a measure to combat value-added tax (VAT) fraud, in the full knowledge that the initiative will not fly.

The commissioner has been under pressure since the German presidency of the EU in the first part of the year to introduce the reverse-charging mechanism, which would involve levying tax once at the point of consumption rather than at every step of the supply chain.

A Commission official said that Kovács was aware that the measures would be supported only by Germany and Austria, where the system would be piloted. "Other member states don’t want it," the official said. "They are afraid that it will create more fraud, particularly among Austria’s neighbours...I’m not hopeful, but we promised we would put forward a communication."

She added: "It is a proposal because it is an alternative. But it must be introduced everywhere because otherwise it will go against the single market." According to the official, countries neighbouring Austria worry that the pilot scheme might create disruption, with fraudsters fleeing the pilot system to sell VAT -exempt products at VAT-inclusive prices elsewhere.

Such is Germany’s determination to see the reverse-charging system introduced that it has thus far withheld its support for a general package of VAT reforms. In June, finance ministers bowed to Germany’s demands, asking Kovács to conduct a study on the potential effects of reverse-charging on the internal market and to consider the feasibility of piloting the scheme in Austria.

The Portuguese presidency is determined to seal a deal on the VAT package at a meeting of finance ministers next week (4 December). Kovács was supposed to come up with the proposals on reverse charging before then.

Instead, the commiss-ioner proposed last week (23 November) interim measures aimed at tightening the enforcement of tax rules across member states, mooting the use of criminal sanctions against fraudsters and suggesting ways of improving lines of communication between tax administrations.

Draft conclusions for next week’s meeting of finance ministers prepared by the Portuguese presidency urge Kovács to honour his promise to submit "findings in order to allow the Council to debate them in the first quarter of 2008". Legislative proposals on creating a tax-redistribution system for intra-community supplies would be presented alongside the reverse-charging study.

A German diplomat was circumspect about his government’s support for the reverse-charging mechanism: "During our presidency we said that tax fraud was a major problem. There are different ways of tackling it. Reverse charging is one."

VAT fraud costs the EU an estimated €50 billion-100 billion a year.

• The Commission published on Wednesday (28 November) proposals for an EU wide law simplifying the complex VAT rules for financial and insurance services.

László Kovács, the European commissioner for taxation, will next year present in-depth studies on introducing reverse charging, a measure to combat value-added tax (VAT) fraud, in the full knowledge that the initiative will not fly.