Presidency faces road-block on anti-VAT fraud measure

The Finnish presidency of the EU is playing down its chances of securing a deal on reform of value-added tax (VAT) at a meeting of finance ministers later this month (28 November).

A dispute over so-called reverse charging of VAT could thwart attempts to reach a agreement, just as it did in June, when Germany retaliated by blocking revisions to the rules on the taxation of e-commerce companies, which tend to base operations in countries with the lowest VAT rates.

Reverse-charging is used to combat fraud and Germany claims that VAT fraud costs it €17-18 billion per year. Under reverse charging, tax would be levied once at the point of consumption, rather than at every step of the supply chain from factory to consumer so reducing the opportunities for fraud.

In June Austria joined Germany in its support for a reverse charging system, but according to a Finnish diplomat, the two countries have "not been able to convince others" of the case for introducing the system. "I can’t see agreement on reverse charging," she said, adding:

"The country that has spoken out most against it is France."

According to the Finnish diplomat, if the proposals to revise the e-commerce directive are blocked again, the existing arrangements could be renewed for another year.

Amendments to the directive had been proposed to tackle problems of ‘off-shoring’ among internet, telecoms and digital media companies, which prefer to register in countries with low VAT rates such as Luxembourg (15%), Portugal (13% on the island of Madeira) and Germany (16%).

Those three countries together opposed the revision. The opposition of Luxembourg and Portugal to the directive was straightforward, but Germany, which plans to raise its VAT rate by three percentage points next year, was less concerned with the e-commerce directive than with the issue of reverse charging.

"We have substantial problems when it comes to fraud in Germany and also in the EU," said one German diplomat. "This might be solved if we reverse charge."

According to the Finnish diplomat, the need for the e-commerce directive could be circumvented if VAT rules on the supply of services were passed. But Germany could also block these rules if it fails to get its own way on reverse charging.

The Finnish presidency of the EU is playing down its chances of securing a deal on reform of value-added tax (VAT) at a meeting of finance ministers later this month (28 November).

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