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IP/06/697

Brussels, 31 May 2006

Taxation: European Commission suggests the need for a coherent European strategy to combat tax fraud

The European Commission has adopted a communication whose aim is to launch a debate with all parties concerned on a European strategy to combat tax fraud. It notes that tax fraud is a growing problem and that the Member States cannot act effectively in isolation. It proposes a new Community approach to administrative cooperation with third countries and is prepared to engage in a broad discussion on the need to modify VAT systems. Regarding cooperation between Member States, it proposes strengthening the provisions in force for indirect taxation (VAT and excise duties) and reforming Community legislation on direct taxation and assistance in the recovery of taxes.

"I firmly believe that it is time to consider new ways of combating tax fraud more effectively. Tax fraud has become a major cause for concern" said László Kovács, the Member of the Commission responsible for taxation. "I call on all parties concerned to give serious consideration to this problem so that we can develop an effective anti-fraud strategy, without increasing the burden on the tax-payer. This new strategy should propose coordinated measures, including innovative methods adapted to a globalised economy".

The Commission's main proposals

Improving administrative cooperation between Member States

The Commission believes that tax fraud will be more effectively combated by:

  • more efficient cooperation mechanisms: the absence of a Community administrative culture is an obstacle to the fight against fraud;
  • strengthening of current legislation regarding cooperation in the field of direct taxation and assistance in the recovery of taxes;
  • improved risk management which would allow countries to be rapidly informed of the potential risks that particular companies may represent, especially when they start operating on their territory for the first time;
  • the creation of a permanent Forum for administrative cooperation at Community level for all direct and indirect taxes.

New Community approach to cooperation with third countries

Tax fraud does not stop at the EU's external borders.

The Commission proposes a Community approach to cooperation with third countries. Current cooperation mechanisms are based on bilateral arrangements between countries, which give rise to different situations that are exploited by fraudsters.

The Commission also proposes to include tax cooperation clauses under the economic partnership agreements that the Union concludes with its partners.

Modifying the current VAT system

The Commission opens the debate on the possibility of strengthening the principle of joint and several liability for the payment of tax with due regard for the principles of proportionality and legal certainty.

The Commission is also prepared to consider extending the reverse charge mechanism (see MEMO/06/221) to domestic transactions in a Member State. However, it stipulates that any change to the VAT system must reduce considerably the possibilities for fraud, exclude new risks and above all generate no disproportionate administrative burden for companies, especially those with a clean record, or the authorities, and ensure tax neutrality and non-discriminatory treatment of operators.

Other avenues to explore

The Commission also proposes discussing more specific measures such as:

  • increasing tax declaration obligations for companies considered to represent a risk;
  • reducing these obligations for companies which obtain an authorisation by entering into a partnership with the tax authorities;
  • the use of standardised, high-performance IT tools for the rapid exchange of information.

As well as new ways of exchanging information, such as sharing common databases.

Background

In general, the economic literature considers that tax fraud accounts for approximately 2 to 2.5% of GDP, i.e. between € 200 and 250 billion. VAT carousel fraud (see MEMO/06/221) is one of the biggest problems but smuggling and counterfeiting of alcohol and tobacco (excise duty fraud) and fraud in the field of direct taxation are equally serious.

The free movement of goods, services, persons and capital within the internal market since 1993 has made it increasingly difficult for the Member States to fight tax fraud in isolation.

The Commission notes that current cooperation mechanisms are either under-used by the Member States (VAT and excise) or inadequate (direct taxation and assistance in the recovery of taxes).
Further information on the strategy to improve anti-fraud measures can be found at:

http://ec.europa.eu/taxation_customs/taxation/tax_cooperation/reports/index_en.htm


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