Vienna tips VAT breakthrough

Date: 15/06/06

The Austrian government expects EU ministers to seal a deal later this year on a package of value-added tax (VAT) reforms, despite perceived setbacks at last week's Ecofin Council (7 June).

Although Austria failed to secure a final agreement during its six-month stint in the EU presidency, government sources said they were confident that the package as developed by the Austrians would be agreed with few changes during the succeeding Finnish presidency.

But the increased complexity of the final package, which is now expected to include proposals on so-called reverse charging of VAT, backed by Germany and Austria, might yet make it more difficult for member states to reach agreement.

Governments lose billions of euros each year through tax fraud. In its simplest form, fraudsters sell VAT-exempt goods at VAT inclusive prices, neglecting to pay the difference to tax authorities.

In its more complex incarnation, known as carousel-fraud, companies collude in a chain of cross-border, circular trade, collecting VAT refunds from governments every time goods are exported.

Reverse charging of VAT is a system whereby the tax is levied once at the point of consumption, rather than at every step of the supply chain from factory to consumer. Opportunities for fraud are therefore substantially reduced.

An EU official pointed out that countries such as Portugal and Spain had already expressed reservations on the appropriateness of introducing the measure, which can be used to combat tax fraud.

Germany's determination to see the introduction of EU legislation allowing voluntary implementation of reverse charging led to it opposing a new e-commerce directive, a move widely interpreted as a show of bargaining power.

In its absence, finance ministers unanimously approved an extension to the end of 2006 of the current VAT arrangements for e-commerce suppliers from third countries.

But that will not solve the problem of companies supplying from within the EU shopping around the various tax regimes for the lowest rate.

The new e-commerce directive had been proposed in response to EU member states' concerns over the loss of tax revenue from the trend for 'off-shoring' among internet, telecoms and digital media companies.

Such businesses prefer to register in countries with low VAT rates such as Luxembourg (15%), Portugal (13% on the island of Madeira) and Germany (16%), all of which opposed the measure.

But observers believe that Germany, which, in any case will be raising its VAT rate to 19% next year, was less concerned with the e-commerce directive than with the issue of reverse charging.

"The question of the reverse charge, which helps to prevent carousel fraud is something important to us," said one German diplomat.

Article reports that the Austrian Government, holder of the Presidency of the EU until 30 June 2006 expected EU Ministers to seal a deal later in the year on a package of value-added tax (VAT) reforms, despite perceived setbacks at the Ecofin Council on 7 June 2006.