VAT fraud costs EU taxpayers around €50 billion each year. But now the Commission is clamping down on this racket with an ambitious, if complex, overhaul of the European system. EURACTIV France reports.

The European Commission has finally presented its plan for a complete revamp of the EU’s most important tax: VAT. First introduced in France in the 1950s, VAT brings EU countries €1,000 billion each year, but it is also highly susceptible to fraud: €170 billion go uncollected each year, €50 billion of which is lost as a result of missing trader intra-community fraud (MTIC, or VAT fraud), according to the Commission.

“This is public money that has not been invested in schools, hospitals or roads,” said Pierre Moscovici, EU Commissioner for Economic and Financial Affairs, on Thursday (7 April).

In 2009, a particularly quick episode of MTIC fraud on the carbon market deprived member states of almost €10 billion in just a few months.

“Fraud amounts to the theft of European citizens’ money, it can no longer be tolerated,” Moscovici added. He presented the VAT measures as part of a bigger package of fiscal reforms, which include a number of measures to fight tax evasion and avoidance by corporations.

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Tackling VAT fraud is less a question of making up lost revenue than of putting a stop to brazen theft: states reimburse the VAT on often fictitious transactions to companies created solely for the purposes of fraud.

The crux of this reform will consist of the abolition of the EU’s internal borders for VAT. “We have to treat international operations as we would the domestic market: a transaction between Brussels and Madrid will be treated the same as one between Brussels and Antwerp,” the Commissioner said.

Under the new system, the country of origin will collect VAT from the exporting company, before transferring it to the country where the final sale is made.

Huge data sharing operation

In the long term, the EU wants to create a dedicated portal to track companies’ VAT accounts in real time. The Commission will produce a proposal to this effect in 2017, but until then, it has committed to encouraging member states to share more information.

The extent of the problem that VAT fraud represents was highlighted by the Court of Auditors earlier this year.

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“The system could work, and limit VAT fraud, if adequate technology is put in place to share such an enormous volume of information,” said Richard Ainsworth, the director of Boston University’s tax programme and an expert in MTIC fraud.

But for Mike Cheetham, a fraud expert in Dubai, “this system could end up being a minefield, because accounting rules are very different from one country to another”.

The idea of a one-stop shop for businesses, which would allow them to pay VAT in a single country, rather than several, could be a tempting one.

Variable VAT rates

The Commission also plans to relax the rules concerning VAT rates, which are highly varied but very rigid. Countries may currently choose to apply reduced rates on a narrow list of products, but in future, member states will have more freedom to fix their own VAT rates, depending on their own priorities.

The United Kingdom insists on applying a 0% VAT rate to tampons and other women’s sanitary products, and France wants to reduce the tax on digital publishing to the same levels enjoyed by paper publications.

Questions over the calendar

The current VAT system was introduced as a temporary measure in 1993, as the borders within the internal market were being abolished. As with all matters relating to taxation, the new system will have to be accepted unanimously by all 28 member states before it can enter into force.

But the Czech Republic advocates a different kind of reform, known as the reverse charge system, whereby the recipient of a service provided by a company in another member state is liable to pay the VAT, not the provider. This proposal has already met with opposition.

A former VAT fraudster, who stays up to date with developments in the area, told EURACTIV that the new system should be effective in combatting fraud. “But it will take years to be fully implemented, so the fraudsters still have some good times ahead,” he said.