VAT fraud in the European Union. A tax net full of holes

Date: 13/05/06

Europe's slow progress in combining to fight tax cheats

NO ONE knows quite how much value-added tax (VAT) the European Union loses to fraud. Loose estimates say euro100 billion ($128 billion) a year. Certainly, no one thinks the problem has shrunk since May 2004, when the European Federation of Accountants (FEE) was told that that sort of sum was going missing. The European Commission has called the loss "a real worry...[that] jeopardises legitimate trade...and distorts competition."

The malady's origins lie in a 1992 decision by the Council of Ministers to stick with a nationally based system of VAT despite the advent of a single European market. Since then little progress has been made in swapping information between tax authorities. On May 17th a working group of national finance-ministry officials is due to consider the "transitional" regime. They would do well to note a commission recommendation of more than a year ago, lamenting the lack of "easy access by electronic means to all relevant information from tax and non-tax sources."

To consumers, VAT looks like a sales tax. In fact, it works by imposing a levy on the "value added" at each stage in the production of a good or service. Fraud puts lots of holes in it, from a builder's undeclared cash jobs to elaborate "carousel" fraud. This occurs when a crook acquires goods from a supplier in another EU state, then disappears without paying his share of VAT. These "missing traders" are getting more sophisticated. Mobile phones, for example, might be exported out of the EU and re-imported to a different member state just to confuse tax inspectors.

Member states are getting frustrated at the lack of progress in finding a united way of stopping cross-border fraud. At a recent conference, members of the International VAT Association, a group of companies representing VAT-paying businesses, heard that countries, including Austria, Britain, France and Germany, were now trying their own ways to stop the bleeding. Their general approach is to suggest different ways of passing all VAT liability on to the end supplier to the final consumer.

At the last count, 140 "derogations" from common European standards had been sought. These are intended to cope with a variety of scams, but mainly carousel fraud. The trouble is that these national variations threaten to force extra complexity on to exporters to the EU. Moreover, Stephen Dale, of FEE, argues that all the derogations, combined with reduced paperwork controls, could spawn other fraud, such as more cheating on corporation tax.

According to Donato Raponi, a commission official whose job is to "fight against fiscal fraud", the EU's system is basically "very good". But at present, trade data have to be passed to a trader's national tax authority only after three months and the taxman has another three months to hand them on to his counterparts across the EU. All this is "far too long". A shared database for all EU tax authorities would solve this problem.

A recent questionnaire from Brussels to national tax authorities tried to quantify the problem, but revealed little. Only Britain and Germany reported back. The Germans put their annual VAT damage at euro17 billion, of which euro6.8 billion was due to the black economy and euro2.1 billion to carousel fraud. Britain's estimated loss in 2004-05 was pounds 11.3 billion ($20.9 billion), up to pounds 1.9 billion of it from carousel fraud.

Following next week's meeting, finance ministers themselves are due to gather on June 7th. They, too, ought to do what they can to improve the exchange of information among tax authorities. But few interested observers--among accountants, at least--think that they will do much.

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