Brussels, 22 February 2008
VAT fraud: The European Commission presents possible far-reaching measures on VAT to better combat fraud
The European Commission has adopted today a Communication on possible far-reaching measures to combat VAT fraud. The measures in question are the introduction of taxation for intra-Community supplies and the introduction of a generalised reverse charge. Both systems have the potential to considerably reduce the phenomenon of 'missing trader' (MTIC) fraud. However, both also pose potential problems that would need to be examined further before either system could be agreed. The taxation of intra-Community supplies of goods could create competitive cash flow disadvantages for businesses trading in the internal market and would require the re-allocation of VAT revenues between Member States. As regards the possible introduction of a generalised reverse charge system for domestic transactions, the Commission insists that this could only work effectively if it was applied uniformly across all Member States and it should not be made available as an optional system. However, given the dearth of experience with such a generalised system, the Commission is not opposed to a pilot project being launched by a willing Member State, provided that certain conditions are met.
László Kovács, Commissioner for Taxation and Customs, said: "The system of taxing intra-Community supplies and a generalised reverse charge system both present advantages in the fight against MTIC fraud. However, the lack of empirical data and the need to preserve national budgets from other, new types of fraud oblige us to be very cautious in proposing changes to the current VAT system. Before continuing work in this area, political steering is needed to ensure that Member States are prepared to accept the consequences of any radical change."
A Missing trader fraud is where a taxable person, having made an intra-Community acquisition on which VAT has not been charged makes a subsequent domestic supply on which he charges VAT and then disappears without having paid that VAT to the Treasury.
Taxation of intra-Community supplies of goods
Under this concept, intra-Community supplies would be taxed in the Member State of origin at the rate of 15%. Where the Member State of arrival applies a rate of more than 15%, the purchaser in the latter Member State would have to pay that additional VAT directly to that Member State. Likewise, where the Member State of arrival applies a rate lower than 15% (due to the application of certain reduced VAT rates or the zero rate in certain Member States), the Member State of arrival will allow credit to the taxable person who is making the intra-Community acquisition.
Taxation of intra-Community supplies appears to provide an adequate solution to the problem of Missing Trader Intra-Community (MTIC) fraud. However, it by no means solves other types of fraud. Furthermore, it would potentially cause cash-flow difficulties for traders, in particular for SMEs, which would have to pre-finance the VAT in transactions where they currently do not pay VAT.
According to the Commission, the trickiest issue with this option would be to define a clearing system of the VAT revenues between the Member States. Member States of origin will have to collect VAT (applied at a rate of 15%) and transfer it to the Member States of arrival. As a result, the Commission has calculated that on average, 10% of Member States' VAT receipts would depend on transfers made by other Member States.
Before further analysing how a clearing system could function, the Commission is seeking political guidance from the ECOFIN Council to determine whether taxing Intra-Community supplies in the Member State of origin is a viable option to be considered.
If Member States are unwilling to agree that their VAT receipts could be dependent on other Member States, the Commission sees the only alternative to be taxation of intra-Community supplies at destination. This alternative would allow for taxation at the appropriate rate in the Member State of arrival - a common rate of 15% for intra-Community supplies would not be necessary. In addition, there would be lower costs both for taxable persons and for tax administrations. However, such an alternative would require setting-up a real One-Stop Scheme.
Generalised reverse charge system
Under a generalised reverse charge system, the VAT system that is currently applicable to Intra-Community supplies would also apply to domestic transactions. This means that VAT would not be charged by the seller to the customer if the latter was another taxable person. Instead, the customer (rather than the vendor) would be responsible for paying the VAT to the Treasury .
The Commission is of the opinion that such system would substantially reduce MTIC fraud. However, it is concerned that this reverse charge system may negatively affect Member States’ revenues, due to other new types of fraud such as untaxed consumption and the misuse of VAT identification numbers. In order to combat these new types of fraud, a number of new measures would need to accompany the reverse charge system, and these could complicate the system and create new, but not insurmountable, burdens for businesses and tax administrations.
The Commission takes the view that a general reverse charge should either be introduced on a mandatory basis in the whole EU or be entirely disregarded as a concept. It would not be acceptable to have an optional reverse charge system for Member States , as this would lead to considerable burdens on companies trading in several Member States.
In view of all the points outlined above, and the lack of empirical data on the impact of a generalised reverse charge system, the Commission considers it worthwhile to launch a pilot project in one Member State in order to test the impact of such as system, on condition that strict criteria are fulfilled.
Further information on the Communication can be found at:
 Missing Trader Intra-Community Fraud (MTIC) also commonly called carrousel fraud.
 The “one stop” scheme would enable traders to fulfil their registration and declaration obligations in their home Member State, including for services provided in other Member States where they are not established. The payment would be made directly by the taxable person to the Member State of consumption.