EU begins VAT fraud debate

Austrian and German requests to change VAT rules are set to be turned down by Brussels as the EU begins a debate on how to fight fiscal fraud.

Fiscal fraud totals up to €250bn a year and of that VAT fraud totals €60bn, according European commission estimates.

Trans-national trading in the EU is exempted from tax and VAT is paid only in the country where the final sale of goods takes place.

Fraud often involves importers buying tax-free goods from another EU state, then selling them with VAT added but without passing on the money to national authorities.

Berlin and Vienna have asked commission for the green light to generally apply “reverse charging” in a bid to beat cross border VAT fraud.

London has asked, and is set to get, limited reverse charging on cetain goods prone to fraud, mobile phones and computers chips.

The reverse charge mechanism allows VAT to be charged at the end point of supply, for businesses only.

The supplier does not pay the VAT, the customer does and then deducts a self-invoiced amount, when the goods or services are used for business purposes.

European commission legal experts are pointing to problems with general national applications requested by both Germany and Austria.

Speaking on Wednesday, taxation commissioner László Kovács suggested the measure could only be used for targeted, specific reasons.

He indicated that separate UK request for reverse charging on mobile phones and computer chips was much more likely to get the go ahead.

“Most probable answer of the legal services will be positive in the case of the UK request,” he said.

Kovács has published a policy paper to trigger debate on how the EU can do more to tackle VAT fraud.

He believes the issue of reverse charging across the EU needs to examined to see if would create additional problems.

“There is no sense to replace one system with another that can make the whole system more vulnerable to fraud,” he said.

Brussels is concerned that while national battles against fraud rage the EU is losing the war.

“It is increasingly obvious members states can not tackle fraud alone, we need an approach at the EU level,” he said.

Quick fixes include more monitoring mechanisms, information exchanges and access to databases.

But Kovács is seeking to push debate beyond “easy” administrative measures but to consider more “risky” root and branch reform.

“Our legislation is not adapted the evolution of the internal market where people and goods can travel freely. We find ourselves in different conditions since the 70s when our VAT system was established,” he argues.

Broad debate will begin at an Ecofin meeting of Europe’s finance ministers on June 7.

Changes, Kovács will argue, should avoid disproportionate administrative burdens, be neutral for all members states and avoid discrimination on operators.

One “drastic” option is taxing at country of origin not at points of consumption, as is the present case – an objective, Kovács notes, that was the original goal of VAT 30 years ago.

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