Germany struggles to find VAT-fraud allies

German Finance Minister Peer Steinbrück is set to block progress once again on a package of value-added tax (VAT) reforms next week (6 June) if member states cannot agree on appropriate methods of combating tax fraud.

Although the so-called VAT package does not cover ways of tackling tax fraud, it has become hostage to member states’ inability to form a common stance on the subject, which costs the EU an estimated €50-100 billion a year.

"What we want is a joint attempt and trials and projects and ideas on how to combat tax fraud in the EU," said one German diplomat. "This has been a big issue throughout the German presidency. What we have always asked for is a clear, open-minded approach with good results."

"The minister has said that he sees a link between the VAT package and the need to do something about tax fraud," he said, referring to Germany’s unchanged position from the meeting of finance ministers in March. "We can’t solve one thing without the other."

The German presidency has made no secret of its desire to introduce a counter-fraud mechanism known as reverse-charging, whereby tax is levied once at the point of consumption rather than at every step of the supply chain, thereby reducing the opportunities for fraud.

The aim is to reduce carousel fraud which occurs when fraudsters sell VAT-exempt goods cross-border at VAT-inclusive prices, dodging payments due to national tax authorities. Losses are multiplied if the goods are re-exported.

The German diplomat suggested that a pilot project, possibly involving the reverse-charge mechanism, could be introduced in "a small member state". But smaller member states, which are also embroiled in VAT-related disputes of their own, would be unlikely to take kindly to the suggestion.

According to one EU official who worked on a compromise draft of the VAT reforms discussed by diplomats at a meeting yesterday (30 May), most member states have issues with the package. "It’s the first time the package is in one working paper and it is technically ready," she said. "But, there’s nothing we can agree upon."

Controversial areas are a one-stop shop scheme, which aims to reduce red tape for companies declaring VAT in their country of origin for activities carried out in another member state, tax exemptions for business services and rules on e-commerce removing the incentive for internet, telecoms and digital media companies to move to low-tax regimes by introducing levies at the point of consumption.

Germany’s determination to obtain permission to introduce reverse-charging on a voluntary basis led to it withholding support for the e-commerce rules last year, a move interpreted as a show of bargaining power.

Taxation Commissioner László Kovács has indicated that he will not issue proposals on tackling tax fraud until there are signs of consensus from member states. Following conclusions formed at the end of last year by the Finnish presidency, the Commission has been working on possible fraud-busting measures. Without clear signals from member states, however, it has been unable to look at specific solutions in-depth. "It seems they are not agreeing on anything. It is clear that they have no consensus," said a Commission official.

German Finance Minister Peer Steinbrück is set to block progress once again on a package of value-added tax (VAT) reforms next week (6 June) if member states cannot agree on appropriate methods of combating tax fraud.