15EU-Norway Agreement on value added tax
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Committee’s assessment |
Politically important |
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Cleared from scrutiny; further information requested |
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Document details |
(a) Proposal for a Council Decision on the signing of the Agreement between the EU and Norway on administrative cooperation, combating fraud and recovery of claims in the field of VAT; (b) Proposal for a Council Decision on the conclusion of the Agreement between the EU and Norway on administrative cooperation, combating fraud and recovery of claims in the field of VAT |
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Legal base |
Articles 113, 218(5) and 218(8) second paragraph TFEU; unanimity |
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Department |
Treasury |
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Document Numbers |
(a) (39175), 13774/17 + ADD 1, COM(17) 624; (b) (39174), 13773/17 + ADD 1, COM(17) 621 |
Summary and Committee’s conclusions
15.1Fraud involving value added tax, for example through fictitious transactions, is a significant problem for tax authorities across the EU. In 2016, the European Commission released figures for the EU-wide “VAT gap”,148 estimating that nearly €160 billion (£44.5 billion)149 in VAT revenues were lost in 2014. Although a framework is in place for cooperation between EU Member States to address VAT fraud (notably the Regulation on administrative cooperation and combating fraud in the field of value added tax150 and the Directive on mutual assistance for the recovery of claims relating to taxes and duties),151 the EU does not currently have administrative cooperation agreements with third countries specifically to address cross-border VAT fraud.152
15.2However, in May 2017, the European Commission concluded two years of negotiations with Norway on the first such agreement, and in October presented the results to the Council for signature and conclusion (ratification). The new treaty will largely have the same scope and structure as the mechanisms for cooperation in this area as currently in force between EU Member States, including Norwegian participation in Eurofisc, the EU’s mechanism for sharing information between tax authorities to combat organised VAT fraud.153
15.3In his Explanatory Memorandum on the final agreement, submitted in November 2017, the Financial Secretary to the Treasury (Mel Stride) supported conclusion of the Agreement, saying it “will facilitate the exchange of information and administrative co-operation to better control and counter VAT fraud”, which “is in the UK’s interest”.154 He made no mention of the possibility of using the Agreement as a template for UK-EU cooperation on VAT after Brexit, although the Council has stated (apparently in the context of the UK’s withdrawal) that the close nature of the cooperation with Norway in this area was linked to its membership of the European Economic Area and “will not constitute a precedent for future agreements in this area between the European Union and third countries”.155
15.4The Agreement must be signed and concluded by the Council, with both Decisions requiring a unanimous vote. In his initial Explanatory Memorandum, the Minister indicated that no timetable for this process had yet been set. However, it subsequently emerged that the Decision for signature would be put to the ECOFIN Council on 5 December 2017.
15.5We thank the Minister for his helpful overview of the contents of this new Agreement with Norway, and how it will facilitate the fight against VAT fraud. We consider that this new treaty between the EU and Norway is of political importance for two reasons: it is the first international agreement concluded by the EU on mutual assistance in the field of VAT, and it may form the template for a future UK-EU agreement on the same subject matter, following the UK’s withdrawal from the Union.
15.6The Minister’s initial Explanatory Memorandum did not provide a timetable for adoption of the legal acts, meaning that we had not yet considered the proposals by the time the Decision to sign the Agreement was approved by the Council on 5 December. We await further information from the Minister on the Government’s position during the vote, and the timetable for the adoption of the Decision concluding the Agreement.
15.7More importantly, it is extraordinary that the Minister has not referred to the potential value of this Agreement as a possible template for future UK-EU relations on mutual assistance in the field of value added tax. By default, unless there is a legal agreement to the contrary, by March 2019 the UK, as a “third country”, will have no formal structures in place for cooperation with the EU on tackling VAT fraud. Moreover, we have noted in the context of the VAT e-commerce package that such an Agreement would likely be a precondition for UK businesses to make use of the EU’s simplified VAT accounting mechanism if they sell goods to EU-based consumers post-Brexit.156 We are concerned, therefore, that the other Member States have already made clear that “this Agreement will not constitute a precedent for future agreements in this area between the European Union and third countries”.
15.8Upon withdrawal from the Union, the UK will, in principle, cease to participate in the system of exchange of information that underpins the EU’s efforts to tackle VAT fraud. It is unclear whether the Government envisages that the temporary post-Brexit “implementation period”,157 should one be agreed, would preserve all of HM Revenue and Customs’ EU-level rights and obligations in this regard for the full duration of the “implementation period”.
15.9It is also clear that, despite the close economic relationship between the EU and Norway, this new Agreement will not obviate the existing requirement for checks of Norwegian goods presented at the EU border to ensure VAT is collected.158 This will also be the default position of UK goods exported to the EU after Brexit, including at the Irish border, unless an agreement to the contrary is reached before March 2019, or before the end of any implementation/transitional period immediately following. We will return to this subject in more detail in our separate Report on the Commission proposals for a EU Single VAT Area.159
15.10Given the above, we would like the Minister to clarify the following matters:
- What assessment has the Government made of the value to the UK of the cooperation and recovery mechanisms established by Regulation 904/2010 and Directive 2010/24/EU? What is the potential impact of ceasing to be part of those systems post-Brexit, including Eurofisc?
- Is the Government considering whether the EU-Norway Agreement is a possible template for a future UK-EU Agreement on tackling VAT fraud, in view of its position that “administrative co-operation and the exchange of information are still considered to be one of the most effective tools for fighting cross-border VAT fraud”?
- What is the Government’s assessment in this regard of the Council statement that the EU-Norway Agreement does not set a precedent for future agreements with other “third countries” such as the UK post-Brexit? Did it consent to the inclusion of this statement in the Council minutes?
- Does the Government envisage that the UK will remain bound by Council Regulation 904/2010 and Directive 2010/24/EU during its proposed post-Brexit “implementation period”?
- What is the status of the Commission’s talks with other international partners on VAT, including Russia, Canada, China and Turkey? With which non-EU countries does the UK already exchange information with respect to VAT on a bilateral basis?
15.11As our questions do not relate to the substance of the EU-Norway Agreement as such, we are content to clear the draft Council Decisions from scrutiny and make this Report to the House. We ask the Minister to keep us informed of progress towards the adoption of the concluding Decision, as well as on discussions with Norway about its financial contribution under the Agreement (as the methodology and size of that arrangement are plainly of relevance to the UK if it would seek to negotiate a similar Agreement with the EU post-Brexit).
Full details of the documents
(a) Proposal for a Council Decision on the signing, on behalf of the European Union, of the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, combating fraud and recovery of claims in the field of Value Added Tax: (39175), 13774/17 + ADD 1, COM(17) 624; (b) Proposal for a Council Decision on the conclusion, on behalf of the European Union, of the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, combating fraud and recovery of claims in the field of Value Added Tax: (39174), 13773/17 + ADD 1, COM(17) 621.
Background
15.12Fraud involving value added tax, for example through fictitious transactions, is a significant problem for tax authorities across the EU. In 2016, the European Commission released figures for the EU-wide “VAT gap”,160 estimating that nearly €160 billion (£44.5 billion) in VAT revenues were lost in 2014. €50 billion of that amount was likely to have been caused by fraud.161 In the UK, the estimated VAT gap that year totalled €14.3 billion (£12.7 billion), as a result of fraud, insolvencies, administrative errors, and tax avoidance measures.162
15.13At EU-level, Council Regulation 904/2010163 and Council Directive 2010/24/EU164 set down the current legal framework for cooperation between the Member States on preventing VAT fraud and recovery of VAT evaded. Among other things, this legislation:
- established the mechanisms for exchange of information between national tax authorities (both automatically and on request);
- granted authorities access to data on intra-EU operators and transactions stored in national databases via a secured electronic platform called VIES (the VAT Information Exchange System);
- gave national officials of Member States the opportunity to participate in administrative enquires in other Member States; and
- created Eurofisc, an instrument for multilateral exchange of information for the early detection of scheme of tax frauds, including a VAT observatory where Member States exchange best practices and information on fraud trends.165
15.14The mechanisms created by the 2010 legislation applies only to EU Member States. However, VAT fraud is also perpetrated by exploiting weaknesses in the control of transactions involving companies located in third (i.e. non-EU) countries.166 Although the EU has an agreement with Switzerland to counter fraud and all other illegal activities affecting their financial interests,167 it currently has no administrative cooperation agreements with third countries specifically to address cross-border VAT fraud.168
15.15In December 2012, at the request of the European Council,169 the European Commission published an Action Plan on tax fraud and evasion which confirmed its intention to negotiate mutual assistance agreements on VAT with non-EU countries.170
The Government’s position
15.16Initially, the Government expressed concerns that the Commission’s proposals for agreements with non-EU countries on VAT fraud could lead to duplications. However, a subsequent survey established that very few EU countries had VAT administrative co-operation or information exchange agreements with third countries.171 This also reflected the UK’s situation, as the Government had only begun including VAT provisions in its model text for bilateral taxation treaties in 2008. In January 2015, the then Financial Secretary to the Treasury told our predecessors:
“As Tax Treaty negotiations are usually resource intensive, slow and lengthy affairs, it could be another twenty or thirty years before the UK is able to put in place a comprehensive set of bilateral VAT information exchange arrangements with all its trading partners.”172
15.17Given the estimated scale of VAT evasion involving third countries, the Financial Secretary noted that “administrative co-operation and the exchange of information are still considered to be one of the most effective tools for fighting cross-border VAT fraud”, adding that it would be “preferable that Member States have access to a legal gateway enabling them to share VAT information with their near neighbours or trading partners”.
15.18The Minister added that the EU’s agreement with Switzerland on the protection of their financial interests, in contrast to the UK’s unsuccessful attempts to negotiate a bilateral Anglo-Swiss anti-fraud treaty, “demonstrated that negotiating an EU wide agreement is more likely to succeed”.
The EU-Norway Agreement
15.19In February 2014, the Commission formally asked the Council for authorisation to start negotiations with Norway on administrative cooperation in the area of VAT fraud, given its level of economic integration with the EU and a history of close cooperation with the Union on tax evasion.173 The Commission also noted it had started exploratory talks with Russia,174 Canada, Turkey and China.175 EU Finance Ministers authorised the Commission to begin negotiations with Oslo in December 2014.176
15.20After the mandate was granted, the then-Financial Secretary to the Treasury, David Gauke, informed our predecessors that the Government believed it be “efficient and effective for the Commission to negotiate a multilateral framework agreement with Norway on our behalf”.177 The negotiations were conducted from summer 2015 to spring 2017, with the Member States’ representatives in the Council’s Working Party on Tax Questions being kept informed of progress. The Agreement was initialled in May 2017.178
15.21In October 2017, the European Commission submitted the Agreement for signature and conclusion (ratification) by the Council. EU-Norway cooperation on VAT fraud will largely follow the same structure of the cooperation in this field as currently in force between EU Member States. This is laid down in Council Regulation 904/2010 and Directive 2010/24/EU, including automatic exchange of information and (limited) Norwegian participation in Eurofisc.179 However, Norway will not be given access to the Member States’ national VAT databases, nor the EU’s VAT Information Exchange System (VIES) on intra-EU supplies.180
15.22The Agreement also provides for a Joint Committee composed of the European Commission and Norway, operating under unanimity. The Committee will cover such areas as the amendment of forms for the submission of information; the categories for automatic information exchange; and the terms of Norway’s financial contribution to the running of the system.
15.23The Financial Secretary to the Treasury (Mel Stride) submitted an Explanatory Memorandum on the proposed Agreement on 16 November 2017.181 He states that the Government “supports changes which will facilitate the exchange of information and administrative co-operation to better control and counter VAT fraud”, as “an extension of existing intra-EU rules and tools to provide a legal means to co-operate with neighbours and close trading partners is in the UK’s interest”. With respect to the bilateral relationship between the UK and Norway, he adds that both countries “can currently ask for assistance of each other in the recovery of VAT debts under separate agreements”, but that this new EU-wide Agreement “goes wider than this”.
15.24He reiterates the Government’s position that the negotiating of agreements on administrative cooperation in the field of VAT is “likely to be more efficient” at EU-level, because negotiating “can be slow and take up significant resources”.
15.25The Minister made no mention in his Memorandum of the possible value of this new Agreement as a template for UK-EU relations on VAT cooperation after Brexit. The Council, however, has stated publicly that the close nature of the cooperation with Norway in this area was linked to its membership of the European Economic Area and “will not constitute a precedent for future agreements in this area between the European Union and third countries”:182
“The Council recognises that the European Union and the Kingdom of Norway are neighbours, dynamic trade partners and are also parties to the Agreement on the European Economic Area, which aims to promote a continuous and balanced strengthening of trade and economic relations between the Contracting Parties.
Due to these close relations, the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, combating fraud and recovery of claims in the field of value added tax must be regarded as specific and hence the Council declares that this Agreement will not constitute a precedent for future agreements in this area between the European Union and third countries.
In particular, in any possible future agreement concerning exchange of targeted information through the Eurofisc network established under Chapter X of Council Regulation (EU) No. 904/2010 should be limited to what is strictly necessary and possible to combat cross-border fraud between the Union and the third country.”183
15.26It seems reasonable to conclude that this statement was appended to signal the position of the other Member States that the UK, once a third country vis-à-vis the EU, cannot necessarily rely on enjoying a similarly close relationship with the EU as Norway on mutual assistance in VAT matters under this new Agreement, in particular as regards participation in Eurofisc.
15.27To enter into force, the Agreement must be signed and concluded (ratified) by the Council, with both requiring a unanimous vote. In November, the Minister told us that no timetable for this had yet been set. It subsequently emerged that the Decision for signature was to be adopted on 5 December, before the Committee had had a chance to scrutinise the contents of the Agreement or its implications in the context of Brexit.
15.28Adoption of the Council Decision authorising conclusion of the Agreement is yet to take place. The Agreement does not provide for provisional application; it will enter into force on the first day of the second month following its ratification by both parties.
Our assessment
15.29We consider that this new treaty between the EU and Norway is of political importance for two reasons: it is the first international agreement concluded by the EU on mutual assistance in the field of VAT, and it may form the template for a future UK-EU agreement on the same subject matter, following our withdrawal from the Union. We have also taken note of the fact that the Government’s view that the EU collectively is more efficient at negotiating these types of Agreement on mutual assistance than countries individually.
15.30Upon the UK’s withdrawal from the EU, both Council Regulation 904/2010, Directive 2014/24/EU and the EU-Norway Agreement (should it have entered into force by that stage) will, in principle, cease to apply to the UK. It is unclear whether the Government envisages that the post-Brexit “implementation period”, during which the UK would operate within “the existing structure of EU rules and regulation”,184 would retain HMRC’s rights and obligations regardingthe aforementioned legislation, or the benefits of the Agreement with Norway, for its duration. We await more information from the Government on its proposals for the interim arrangement, as well as the outcome of the European Council’s preparatory work on the “framework for the future relationship and on possible transitional arrangements”.185
15.31However, either in March 2019 or after the end of a possible “implementation period”, HM Revenue and Customs will, by default, lose the rights granted to Member State tax authorities. In particular, HMRC will no longer have a legal right to request data from other Member States on potential VAT fraud, and cease to participate in Eurofisc. The Government has not specified in detail what type of partnership it wishes to have with the EU on VAT-related matters after any interim arrangement ends.
15.32In light of this, we have asked the Minister a number of questions about the relevance of the EU-Norway Agreement in the context of the UK’s withdrawal. We may return to this topic once we have received his reply.
Previous Committee Reports
None.
148 The VAT gap is the difference between the expected VAT revenue and the VAT actually collected by tax authorities.
149 €1 = £0.91973 or £1 = €1.08728 as at 1 September 2017.
153 The European Commission will also shortly issue a proposal to revise the operation of Eurofisc.
154 Explanatory Memorandum submitted by HM Treasury (16 November 2017).
155 See Council document 14703/17, p. 3.
156 The Mini One Stop Shop (MOSS) for VAT, which is due to be extended to the sale of certain goods by non-EU firms into the EU from 2021. See our Report of [date] for more information.
158 See European Commission, “Norway—Cross-border VAT“ (accessed 20 November 2017).
159 See Commission document COM(2017) 569.
160 The VAT gap is the difference between the expected VAT revenue and the VAT actually collected by tax authorities.
161 European Commission, “Study and Reports on the VAT Gap in the EU-28 Member States: 2016 Final Report“ (23 August 2016).
162 Idem, p. 50.
163 Council Regulation (EU) No 904/2010 on administrative cooperation and combating fraud in the field of value added tax.
164 Council Directive 2010/24/EU concerning mutual assistance for the recovery of claims relating to taxes, duties and other measures.
165 The European Commission will shortly table a legislative proposal for reform of Regulation 904/2010, including the operation of Eurofisc. However, the proposed changes are not expected to enter into force before March 2019. The Committee will assess the implications of this proposal separately in a forthcoming Report.
166 For example, goods imported from a non-EU country are declared as being in transit when they arrive in the EU. This means that they are not subject to VAT in the Member State of importation, but in the Member State of destination. In many cases, however, there is no such country of destination and the goods disappear without any VAT having been paid. HM Revenue and Customs is currently discussing the scale of such fraud in the UK linked to imports of Chinese textiles and footwear with the European Commission.
167 The EU-Switzerland Cooperation Agreement to combat fraud and any other illegal activity to the detriment of their financial interests. The Agreement has been applied in the EU since 8 April 2009.
168 European Commission, “Questions and Answers: Cooperating against VAT Fraud“ (6 February 2014).
169 European Council conclusions, 1–2 March 2012.
170 See COM(2012) 722 (6 December 2012). Cleared from scrutiny by the previous Committee on 18 March 2015.
171 See SWD(2014) 39 (12 February 2014): “The very few Member States (BE, FR, SE and UK) that had an exchange of information with third countries, could not provide exact figures on the number of such exchanges.”
172 Letter from David Gauke to Sir William Cash on “VAT Administrative cooperation with Norway” (8 January 2015).
173 Although Norway has a system of VAT like the EU’s, it is not subject to the VAT Directive as taxation is not included in the EEA Agreement. Any sale from a Norwegian business to a customer in the EU is considered an export from Norway, liable for import vat when it enters EU territory (and vice versa). At present, administrative cooperation with Norway on VAT matters is ad hoc and not institutionalised.
174 The Commission in February 2014 also requested a formal mandate to negotiate a VAT agreement with Russia. However, the mandate does not appear to have been discussed since May 2014 and has not been approved by the Council.
175 European Commission, “Tackling tax fraud: Commission proposes stronger cooperation with non-EU countries on VAT“ (6 February 2014).
176 See the outcome of the ECOFIN Council meeting of 9 December 2014. The negotiating directives remain classified.
177 See footnote 15.13 for more information on Eurofisc.
179 Norway will not have full access to the Eurofisc early warning system and cannot act as a Eurofisc co-ordinator or chair, neither will Norway be able to vote in Eurofisc decision making.
180 As VIES allows Member States to access information regarding intra-EU transactions, and it was not considered relevant in the context of the EU-Norway Agreement.
181 Explanatory Memorandum submitted by HM Treasury (16 November 2017).
182 See Council document 14703/17, p. 3.
183 See Council document 14703/17, p. 3.
185 European Council conclusions, 20 October 2017.
11 December 2017