Tax policy chief moves to plug VAT-fraud loopholes

By Anna McLauchlin

Date: 24/05/06

Almost 15 years after the creation of the internal market, the European Commission is looking for ways to close the loopholes that allow fraudsters to cream off billions of euros every year in tax fraud.In a communication to be published on Wednesday (31 May), Tax Commissioner László Kovács will suggest changes to VAT law that could prevent so-called carousel or missing-trader fraud.

Such fraud takes advantage of VAT (value-added tax) exemptions available on the intra-EU trade of goods. It is largely used in the sale of small but expensive items such as computer chips or mobile phones.

Traders are allowed to sell VAT-free imported goods with the VAT added on and must then post the VAT back to customs. Instead of doing so, fraudulent traders disappear with the money or send the goods around a circle of traders several times, then re-export them. The last trader in the chain reclaims the VAT.

Carousel fraud has been around since the birth of the internal market in 1992, but the Commission has up until now been reluctant to tackle the issue at regulatory level. In 2003 it said that there was "no other solution" than to enhance co-operation between EU authorities.

But fraud of this kind is on the rise. Last year in Britain, for example, it cost the government _2.2 billion and the current tax year is expected to show the first annual drop in VAT revenue since the 1970s.

National and European courts have dealt a further blow to governments by supporting unwitting traders who have claimed damages for the fact that they were not allowed to recover VAT charged on purchased goods that were part of missing- trader scams.

National governments have begun to fight back. The UK this year secured a derogation from EU VAT law and can now hold traders in a carousel jointly liable for the tax evaded if they should have been aware that the deal was fraudulent, a position that was backed in a case at the European Court of Justice earlier this month (11 May). Belgium plans to propose a similar regime later this year.

Another solution being debated in several member states, including Germany, Austria and France, is to impose a 'reverse charge' system, This means that suppliers of goods do not account for the VAT on sales to other VAT-registered firms. The end purchaser assumes responsibility for accounting for VAT, and recovering any rebate.

A Commission spokeswoman said that, as a result of the problems, a pan-European approach would be desirable.

"The amount of fiscal fraud has been rising substantially over the past few years," she said. "This communication will suggest classic ways of tackling it such as increased co-operation between authorities, but ultimately it is a problem of the existing VAT system. We need to close the loopholes, for example by using reverse charges."

But legislative changes could have their own pitfalls, warned Johan Van der Paal, tax partner at Deloitte.

"If you impose a reverse charge system, the goods are not taxed properly until the last stage of the transaction," he said. "If there is no VAT to recover in the chain, then it becomes more attractive to move legitimate goods into the fraudulent circuit [black market]."

Van der Paal added that governments should be wary of targeting bona fide operators, for example by making them liable for fraudulent trading. "It will become much more costly for businesses to cover such liabilities, not only for their direct counterparts but people that they don't know," he said.

Article reports that in a Communication to be published on 31 May 2006, the European Commissioner for Taxation and Customs Union, László Kovács was to suggest changes to VAT law that could prevent so-called carousel or missing-trader fraud. Such fraud takes advantage of VAT (value-added tax) exemptions available on the intra-EU trade of goods. It is largely used in the sale of small but expensive items such as computer chips or mobile phones.

European Commission: DG Taxation and Customs Union: Taxation: VAT http://ec.europa.eu/comm/taxation_customs/taxation/vat/index_en.htm

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