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VAT: Commission calls on Member States to step up co-operation to fight fraud

Commission Européenne - IP/04/523   22/04/2004

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IP/04/523

Brussels, 22 April 2004

VAT: Commission calls on Member States to step up co-operation to fight fraud

The European Commission has presented a report on the use of EU-wide co-operation in combating fraud in the field of Value-Added Tax (VAT). Though the exact amount of money involved in VAT fraud is difficult to quantify, some Member States have estimated their losses at up to 10% of net VAT receipts. There have been some major improvements in co-operation in this area in recent years, with the adoption of strengthened EU legislation (see IP/03/1350), the redesign of national control arrangements as a result of information-sharing on best practices, and improvements in the level and quality of mutual assistance between tax administrations. However, the Commission's report recommends that Member States take further steps to intensify administrative co-operation such as improving the exchange of information, increasing the human resources allocated to this work and removing remaining legal barriers (e.g. legislation on secrecy) to the fight against VAT fraud. The Commission notes that certain national authorities have recently suggested amending the VAT system itself in order to tackle the problem of VAT fraud but concludes that all the suggestions for change would have disadvantages that would outweigh their potential benefits.

"Our report highlights the important progress that has been made over the past three years in tackling the problem of VAT fraud" commented Taxation and Internal Market Commissioner Frits Bolkestein. "Fraud can be combated effectively without making drastic changes to the VAT system as long as Member States continue both to co-operate with each other and to make improvements to their individual national control arrangements."

The report notes that the exact level of VAT fraud is difficult to quantify but that it is certain that the amounts at risk are considerable. Some Member States have estimated losses as up to 10% of net VAT receipts. VAT fraud has therefore become a real concern in many Member States.

In addition to the loss of essential national revenue, this fraud jeopardises legitimate trade in certain economic sectors and distorts competition to the benefit of dishonest traders.

There have been major improvements at EU and national level since the Commission's previous report on administrative co-operation in the field of VAT (see IP/00/115):

  • in October 2003, the EU's Council of Ministers adopted, Council Regulation 1798/2003/EC (see IP/03/1350) which lays down clearer and more binding rules governing the exchange of information, provides for more direct contact between national anti-fraud agencies, and facilitates more extensive exchange of information

  • in October 2002, the Council adopted the "Fiscalis 2003-2007" programme (see IP/02/1550), which provides funding for greater day-to-day cooperation between tax administrations

  • Member States have, for their part, made important progress towards more modern and effective VAT controls, and they are beginning to integrate administrative cooperation into their day-to-day control practices. Several Member States have implemented strategies to deal with traders who go missing without paying VAT and have reinforced controls following information sharing on best practices in this field.

Some national authorities, professionals and academics have proposed that there should be a fundamental reform of the VAT system itself, effectively involving the charging of VAT by the supplier on cross-border intra-community business-to-business (B2B) transactions or the suspension of VAT on domestic B2B transactions. However, the Commission's view is that the political will is missing to move to a system of taxation in the Member State of origin while other suggestions made have disadvantages that outweigh the potential benefits such as the possibility that they might generate new opportunities for fraud or create administrative burdens for genuine traders.

The report concludes that fraud can be fought effectively within the current VAT system, provided efforts continue to strengthen administrative cooperation and make national control systems more effective. It therefore recommends that Member States:

  • make more intensive use of administrative cooperation arrangements

  • make greater use of multilateral controls

  • remove the remaining legal barriers (such as legislation on secrecy) to the exchange of information

  • adopt as quickly as possible a national plan to reduce the average response time to mutual assistance requests.

  • rapidly allocate additional resources to mutual assistance and decentralise mutual assistance so that this work does not overload the system

  • continue efforts to make tax control more efficient and modern, mainly by speedily implementing electronic audit procedures.

  • Implement best practices to combat carousel fraud, and in particular set up national fraud departments to exchange information with other Member States.

Background on VAT fraud

Under the transitional VAT arrangements introduced on 1 January 1993, sales of goods by taxable persons established in one Member States to traders registered for VAT in other Member States are exempt from VAT. Tax is payable by the purchasers in their own country, and the revenue generated goes to the country of final consumption. However, since goods circulate between Member States without being taxed, this system may encourage fraud, unless national tax authorities cooperate fully with one another. Member States are, for example, no longer able to obtain information about the flow of goods into their territory by the use of traditional customs controls at their frontiers.

The yearly value of these goods circulating within the Community without VAT (because it is due in the country of consumption) is now more than 1 500 000 millions of euros.

A particular concern is carousel fraud, which is the carrying out of repeated (cross border) purchase and sales transactions within a rapidly changing group of companies. The cross-border dimension means that VAT is not paid in the country of origin but the company in the country of destination disappears without fulfilling their obligation to pay VAT (the "missing trader" phenomenon). Usually an extensive and complicated chain of transactions in several countries is used to cover up what is actually happening. Carousel fraud is often perpetrated by criminals and involves considerable losses to Member States' exchequers.

The Commission is required to draw up regular reports on the operation of EU-wide administrative co-operation to combat VAT fraud.

The full text of the report is available on the Europa website at:

http://ec.europa.eu/taxation_customs/whatsnew.htm


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