VAT fraud - frequently asked questions
European Commission - MEMO/01/230 19/06/2001
Brussels, 19th June 2001
VAT fraud - frequently asked questions
(see also IP/01/857)
What information do we have on the current level of fraud or tax evasion (in VAT and other tax fields)?
By its very nature, it is difficult to put an exact figure on the size of the fraud problem. There are several national studies containing estimates on the size of fraud but all are very approximate and do not allow firm conclusions to be drawn. However, several recent national reports indicate that one particularly serious fraud problem exists in the VAT area. Essentially this fraud involves abuse of the exemption mechanism of the VAT system. During the first half of 1998 Member States detected around 250 cases of such fraud (called carousel or IC-acquisition fraud) involving a revenue loss of around €500 million (an average of about €2 million per case). A point of particular concern is that, according to the tax administrations of Member States, the amount of tax defrauded in individual cases is growing.
What is carousel fraud?
Carousel fraud 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 payment of VAT. 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 criminal organisations and involves considerable losses to exchequers.
How much do Member States co-operate at present in the VAT area?
Not enough. Member States mainly co-operate by providing information via the VIES system. Although the legislation in place enables them to make requests from each other for information in specific cases, in practice they seldom do so. The Commission in its report of January 2000 states that during the 1996-98 period only 2 % of the 1.5 million traders making intra-community supplies have been the object of a mutual assistance request. This is clearly insufficient. Another means by which Member States could co-operate is multilateral controls, that is to say real integrated audits organised by several Member States simultaneously, but these remain the exception. Despite the existence of a Community programme (Fiscalis) funding these controls, only 38 such controls have been organised for the whole of the EU during the 1998-2000 period. There are many reasons for this reluctance by Member States to co-operate more closely including the present inordinately centralised information exchange procedures, the absence of clear rules for co-operation in a number of areas, secrecy laws in some Member States, language barriers etc. The present proposal should go a long way to improving this situation.
What should be done to counter VAT fraud?
The Commission in a report of January 2000 (see IP/00/115) made recommendations to tackle VAT fraud by improving administrative co-operation, by devoting more resources to VAT controls and by using modern methods of risk assessment to ensure that control resources are focussed on areas where the risk of fraud is greatest. A Council Working Group in a report of June 2000, basing its conclusions on the Commission report, made recommendations to combat VAT fraud which can be grouped into 3 categories:
Legislative recommendations i.e. that laws which currently impede administrative co-operation should be amended. The recommended legislative changes are largely addressed in the present proposal.
Administrative and management changes by Member States such as the development of risk analysis techniques to improve control efficiency; re-appraising their policies, structures and allocation of human and technical resources for controlling the application of VAT; and recognising the opportunities provided by new technologies for improving controls.
Non-legislative Community action to improve information exchange between Member States. One particular focus of recommendations in this category is improving the VAT Information Exchange System (VIES). Examples of recommended improvements include allowing each Member State direct access to the VIES database of the other Member States subject to safeguards to prevent violation of commercial secrets and extending the scope of the VIES database which currently deals only with intra-Community transactions in goods to the provision of services.
The Commission will also, during the course of 2001, present a proposal for a Regulation of the Council and the European Parliament which will allow the Member States to receive assistance from the Commission in investigations into the most complex cases of fraud.
What is being done to follow up on the other recommendations in the Council report?
The Commission is actively pursuing the follow-up of the other recommendations in the VAT field. In particular:
What is VIES?
VIES (the VAT Information Exchange System) is a means of transmitting information relating to tax exempt intra-Community supplies between Member States' administrations. Under the transitional VAT system, all intra-community supplies between "taxable persons" (i.e. producers, traders and persons supplying services, including mining and agricultural activities and persons carrying out professional activities) are exempted from VAT at the point of origin, the tax being declared at destination by the receiving taxable person. The data transmitted is the value of the total intra-Community supplies made to each taxable person in each Member State. This database was created in 1992 to prevent fraud by enabling Member States to ensure the proper taxation of supplies of goods and services to their resident taxable persons.
What are the existing two legal bases for administrative co-operation in the VAT field and why are they inadequate?
The existing legal bases are Directive 77/799 concerning mutual assistance by the competent authorities of the Member States in the fields of direct and indirect taxation and Regulation No 218/92 on administrative co-operation in the field of indirect taxation (VAT).
The Directive creates a legal base for the exchange of information between Member States. However, the removal as from 1 January 1993 of tax borders between Member States necessitated the strengthening of administrative co-operation. Regulation No 218/92/EEC was therefore adopted to supplement the 1977 Directive and to put in place a strengthened system of information exchange for intra-Community supplies and acquisitions of goods. The main innovation of the 1992 Regulation was provision for the VIES electronic data base with automatic communication to all the other Member States of the total value of all intra-Community supplies to taxable persons identified in those Member States, together with the relevant VAT identification numbers.
However, the scope of the Regulation does not extend to all the transactions that could give rise to fraud. It relates only to intra-Community supplies and acquisitions and not, for instance, to domestic supplies or services. Since most VAT-fraud schemes concern a combination both intra-Community and domestic transactions, the tax authorities are obliged to make use of other legal instruments to tackle such schemes.
For these reasons, Member States mainly use Directive 77/799/EEC as a legal base for co-operation in VAT fraud matters. However, the Directive is too weak a framework in that the co-operation which it provides for is too centralised, it is not sufficiently intensive and there are no clear rules in a whole host of areas (notably in regard to the presence of foreign officials during controls, the possibility of organising multilateral controls and the use to which information communication by another Member State can be put).
The report presented by the Commission on 28 January on VAT Fraud (see above) and the discussions by the Council's ad hoc group on tax fraud both stressed that if the present transitional VAT system is to be maintained there must be a commitment to strengthen control and administrative co-operation.