'Scandalous' lack of political will to tackle VAT fraud
by Bart Staes
12 July 2011
Conservative estimates put the cost of VAT carousel fraud in Europe at €80-100bn, but not enough is being done to tackle the crime
We know that VAT carousel fraud is a major problem within the European Union, with conservative estimates placing the annual cost of this fraud at €80-100bn. This is an enormous and avoidable loss of public revenue, all the more so at a time of major fiscal difficulties and dramatic impacts for citizens across Europe. And VAT carousel fraud is just one aspect of the wider problem of organised fiscal fraud, which is estimated to cost the EU €200-250bn a year.
The removal of internal administrative borders and the failure to introduce an effective system of fiscal control within the EU has created massive opportunities for fraud. The absence of any EU-level co-ordination of VAT rates and the deficient systematic co-operation and information exchange are two major issues that have facilitated this fraud. They make it more difficult for authorities to effectively tackle cases.
Another major shortcoming is the absurd absence of any formal or official definition of this particular form of fraud within the EU. A clear and uniform European definition of VAT carousels is absolutely necessary and a crucial step towards addressing the problem and allowing for better enforcement. A comparative European, including the authorities of 25 member states, shows that there are almost no coinciding formulations of the coordinated directive on VAT. Eurofisc - a new initiative, providing for voluntary fiscal co-operation between member states - has so far failed to emerge as a meaningful platform for co-operation. Despite an annual reporting requirement, the deliberations of Eurofisc remain secret. Transparency on Eurofisc is a necessary step to improving its effectiveness.
There are five elements which specifically contributed to the emergence of the phenomenon of VAT carousel fraud: the grey or parallel trade, the increased national fight against tax fraud, the different VAT rates in member states, the intrinsic weaknesses of the VAT system, the disappearance of customs formalities within the EU and the easing of customs control from 1993. The confusing circulation of goods, often involving multiple border crossings, makes it extremely difficult for national fiscal and judicial authorities to monitor, given the absence of proper fiscal coordination.
At present, the sectors most sensitive or exposed to VAT carousel fraud are: mobile phones, computer chips, microprocessors, hi-fi equipment, perfume, new and used vehicles, precious metals, construction, waste and emissions allowances under the EU's emissions trading scheme. The lack of political will to agree and implement these readymade solutions is scandalous, all the more so against the current background of fiscal difficulties and damaging, pro-cyclical austerity measures. The failure to plug this revenue drain hole is clearly exacerbating the situation of those, who are suffering the most from excessive austerity measures."
Recent research on VAT carousels underlines the extent of fraud and points to readymade solutions, as well as the lack of political impetus to implement these solutions. There are a number of straightforward legislative steps that could be taken to prevent fraud. An obvious solution to the carousels is a general application of the system of the "reverse charge" of the VAT to the VAT return - to be submitted periodically. This solution, which of course only applies to VAT taxpayers, is already applicable for some sectors in some member states – although, often temporarily.
In the system of reverse charge, the VAT is shifted from the supplier to the customer. The supplier does not charge any VAT, but shifts the tax to the contractor, customer of the goods or services. The supplier is not allowed to mention either the amount or the rate on the invoice, only the taxable amount of the goods or services. The supplier then mentions the value in his VAT return.
The buyer also submits this value in his return and calculates the VAT due in the same declaration. It is then deductible for him to the extent that it is related to professional activities. This eliminates two problems at once: the VAT amount is no longer on the invoice, which prevents theft; and the VAT amount, not yet received but due to be paid, no longer burdens the financial resources. Digital monitoring of VAT returns makes life much easier for national tax authorities.
Uniform and simultaneous European introduction of the reverse charge will not completely eliminate VAT fraud, but would effectively tackle the problem of carousels. This was most recently demonstrated by the measures taken to address the problem of carousel fraud in EU emissions allowances, in 2009. Immediate action - including the suspending of trading, temporary exemption from VAT and, finally, the introduction of reverse charge for EU emissions allowances in 16 member states successfully contained the problem. The episode demonstrated that it is perfectly possible to implement the system of reverse charge in the member states within six months. It only requires political will.
Last year, European finance ministers missed a unique opportunity to coordinate the struggle against the VAT carousels. In March 2010, they decided to revise the VAT Directive of 2006. The original proposal suggested an application of the reverse charge to a list of goods and services of five fraud-sensitive sectors – including products like mobile phones, microprocessors, computer chips, perfume, precious metals, art, collectable objects, antiques and the trade in emissions allowances. Ultimately, the reverse charge was only applied to the trade in emissions allowances. This highlighted that political will is still lacking when it comes to taking the necessary steps to address this problem.
Bart Staes MEP is the European Parliament opinion rapporteur on the future of VAT and a member of the Group of the Greens/European Free Alliance
We know that VAT carousel fraud is a major problem within the European Union, with conservative estimates placing the annual cost of this fraud at €80-100bn. This is an enormous and avoidable loss of public revenue, all the more so at a time of major fiscal difficulties and dramatic impacts for citizens across Europe. And VAT carousel fraud is just one aspect of the wider problem of organised fiscal fraud, which is estimated to cost the EU €200-250bn a year.
The removal of internal administrative borders and the failure to introduce an effective system of fiscal control within the EU has created massive opportunities for fraud. The absence of any EU-level co-ordination of VAT rates and the deficient systematic co-operation and information exchange are two major issues that have facilitated this fraud. They make it more difficult for authorities to effectively tackle cases.
Another major shortcoming is the absurd absence of any formal or official definition of this particular form of fraud within the EU. A clear and uniform European definition of VAT carousels is absolutely necessary and a crucial step towards addressing the problem and allowing for better enforcement. A comparative European, including the authorities of 25 member states, shows that there are almost no coinciding formulations of the coordinated directive on VAT. Eurofisc - a new initiative, providing for voluntary fiscal co-operation between member states - has so far failed to emerge as a meaningful platform for co-operation. Despite an annual reporting requirement, the deliberations of Eurofisc remain secret. Transparency on Eurofisc is a necessary step to improving its effectiveness.
There are five elements which specifically contributed to the emergence of the phenomenon of VAT carousel fraud: the grey or parallel trade, the increased national fight against tax fraud, the different VAT rates in member states, the intrinsic weaknesses of the VAT system, the disappearance of customs formalities within the EU and the easing of customs control from 1993. The confusing circulation of goods, often involving multiple border crossings, makes it extremely difficult for national fiscal and judicial authorities to monitor, given the absence of proper fiscal coordination.
At present, the sectors most sensitive or exposed to VAT carousel fraud are: mobile phones, computer chips, microprocessors, hi-fi equipment, perfume, new and used vehicles, precious metals, construction, waste and emissions allowances under the EU's emissions trading scheme. The lack of political will to agree and implement these readymade solutions is scandalous, all the more so against the current background of fiscal difficulties and damaging, pro-cyclical austerity measures. The failure to plug this revenue drain hole is clearly exacerbating the situation of those, who are suffering the most from excessive austerity measures."
Recent research on VAT carousels underlines the extent of fraud and points to readymade solutions, as well as the lack of political impetus to implement these solutions. There are a number of straightforward legislative steps that could be taken to prevent fraud. An obvious solution to the carousels is a general application of the system of the "reverse charge" of the VAT to the VAT return - to be submitted periodically. This solution, which of course only applies to VAT taxpayers, is already applicable for some sectors in some member states – although, often temporarily.
In the system of reverse charge, the VAT is shifted from the supplier to the customer. The supplier does not charge any VAT, but shifts the tax to the contractor, customer of the goods or services. The supplier is not allowed to mention either the amount or the rate on the invoice, only the taxable amount of the goods or services. The supplier then mentions the value in his VAT return.
The buyer also submits this value in his return and calculates the VAT due in the same declaration. It is then deductible for him to the extent that it is related to professional activities. This eliminates two problems at once: the VAT amount is no longer on the invoice, which prevents theft; and the VAT amount, not yet received but due to be paid, no longer burdens the financial resources. Digital monitoring of VAT returns makes life much easier for national tax authorities.
Uniform and simultaneous European introduction of the reverse charge will not completely eliminate VAT fraud, but would effectively tackle the problem of carousels. This was most recently demonstrated by the measures taken to address the problem of carousel fraud in EU emissions allowances, in 2009. Immediate action - including the suspending of trading, temporary exemption from VAT and, finally, the introduction of reverse charge for EU emissions allowances in 16 member states successfully contained the problem. The episode demonstrated that it is perfectly possible to implement the system of reverse charge in the member states within six months. It only requires political will.
Last year, European finance ministers missed a unique opportunity to coordinate the struggle against the VAT carousels. In March 2010, they decided to revise the VAT Directive of 2006. The original proposal suggested an application of the reverse charge to a list of goods and services of five fraud-sensitive sectors – including products like mobile phones, microprocessors, computer chips, perfume, precious metals, art, collectable objects, antiques and the trade in emissions allowances. Ultimately, the reverse charge was only applied to the trade in emissions allowances. This highlighted that political will is still lacking when it comes to taking the necessary steps to address this problem.
Bart Staes MEP is the European Parliament opinion rapporteur on the future of VAT and a member of the Group of the Greens/European Free Alliance
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