Memorandum by Commissioner Kovács,
Commissioner for Taxation and Customs Union, European Commission
WHAT IS
THE EXACT
NATURE OF
VAT CAROUSEL FRAUD?
1. On domestic supplies, a supplier charges
VAT to his customer. His supplier pays this VAT to the Treasury.
A business customer can reclaim this VAT from the Treasury. It
is the final consumer who bears the VAT charge since he can not
reclaim the VAT from the Treasury.
2. However, the rules are different for
supplies to business clients in other Member States. In this case
the supplier does not charge VAT and the goods circulate VAT free.
3. The missing trader fraud in intra-community
trade (the so-called "MTIC fraud or carousel fraud")
works as follows.
4. A company (B) acquires goods in another
Member State without having to pay VAT to his supplier (A). Subsequently
it makes a domestic supply for which it charges VAT to his customer
(C). However, the company (B) does not pay the VAT to the Treasury
and disappears. The customer (C) claims a refund of the VAT paid
to the company (B). Consequently, the financial loss is for the
Treasury which has to refund VAT to the customer (C) which it
never collected from the supplier (B).
5. Subsequently, Company C may declare an
exempt intra-community supply to Company (A) and, in its turn,
(A) may make an exempt intra-community supply to (B) and the fraud
pattern resumes, thus explaining the term "Carousel fraud".
6. The main elements are the fact that has
been an intra-Community acquisition and a trader charging VAT
to his customer but not paying it to the Treasury and "going
missing".
7. This is a very simplistic description
of the fraud, which in reality is much more complex, involving
a series of transactions with intermediary companies (D) in order
to hide the fraudulent character of it.
ARE THERE
GAPS IN
LEGISLATION WHICH
ALLOW THIS
FORM OF
FRAUD?
8. The abolition of fiscal controls at the
time of implementation of the internal market (1993) has been
of an enormous benefit for European businesses. The free circulation
of goods within the Community has considerably reduced the administrative
burden and costs related to intra-community activities.
9. Nevertheless, the way the current European
VAT arrangements are designed are that intra-Community supplies
of goods between taxable persons established in different Member
States are exempt in the Member State of origin of the goods,
with taxation taking place in the Member State of destination.
In order to allow this system to operate, without frontier controls,
a system of automatic exchange of information specific to intra-Community
transactions was installed (the VAT Information Exchange System
or VIES). This information is exchanged between Member States
three months after the end of the quarter during which the transactions
took place.
10. The exchange of information via VIES
provides useful information to the fiscal authorities but is as
such not a totally adequate instrument for combating carousel
fraud, for which a quick intervention is crucial.
WHAT IMPACT
DOES THIS
FRAUD HAVE
ON THE
INTERNAL MARKET?
11. Although only a few Member States have
made estimates of carousel fraud available, it is obvious that
the problem is of worrying Proportions.
12. MTIC fraud deprives the State from considerable
income that should be used for the implementation of public services
at national level.
13. MTIC fraud also undermines the competitiveness
of legitimate traders. This is certainly the case in some specific
sectors which are most affected by MTIC fraud, like computer parts
and mobile phones sectors.
14. Goods which have been used for MTIC
fraud will end up on the market at a price which is lower than
normal (since the real benefit for the fraudsters consists of
the evaded VAT). As a consequence, fair competition is no longer
guaranteed in these sectors.
WHAT ARE
THE MEASURES
CURRENTLY APPLIED
TO COMBAT
THIS FRAUD
AND WHAT
ARE THEIR
WEAKNESSES?
15. The organisation of tax administrations
and the definition of their strategy for control, including specific
operational measures against MTIC fraud, fall within the competence
and responsibility of the Member States.
16. The Commission's role is to ensure a
more common and co-ordinated approach between Member States in
the fight against tax fraud. It is indeed clear that the free
circulation of goods and services within the internal market but
also the globalisation of trade makes it practically impossible
for a Member State to act individually against tax fraud.
17. Within this context, the Commission
firstly has to ensure that an appropriate legal framework is available
at Community level for efficient administrative cooperation between
Member States. The Commission, with its right of initiative, has
to propose new rules when necessary but it is up to the Council
to adopt them.
18. Secondly, the Commission coordinates
a lot of work at an administrative level. It organises, at regular
intervals, meetings and seminars bringing experts of the Member
States together in order to share their experiences and best practices.
This work has contributed significantly to reinforce Member States'
fight against MTIC fraud and to improve their control strategies.
19. Today Member States have a solid legal
instrument for administrative cooperation at their disposal, providing
the possibilities for a quick and efficient cooperation between
Member States. In practice, however, Member States do not fully
exploit the possibilities offered by these arrangements. In particular,
the level of exchange of information between member States is
not proportionate to the level of intra-community trade. Thus
whilst fraudsters take advantage of the existence of the single
market without internal border controls, national tax administrations
still act predominantly within a national context.
20. The Commission is of the opinion that
the fact that the existing administrative cooperation arrangements
are not used to their full extent is a major weakness in the fight
against MTIC fraud.
21. Finally, individual Member States can,
on the basis of Article 27 of the Sixth VAT Directive, be authorised
by the Council to introduce special measures to derogate from
the harmonised VAT rules in order to prevent certain types of
tax evasion or avoidance. In this way, specific problems in certain
Member States can be addressed in a relatively quick way, but
each derogation implicitly marks a deviation from the overall
objective of a common VAT system in the Internal Market. Therefore,
individual derogations are not a sustainable solution in the long-term.
ARE THE
MECHANISMS SUGGESTED
BY THE
COMMISSION TO
FIGHT THIS
FRAUD ADEQUATE?
22. As explained above, it is the competence
and responsibility of the Member States to set up and implement
an action programme against MTIC fraud.
23. However, it is the Commission's view
that combating MTIC fraud, which takes advantage of the benefits
of an internal market without border controls, requires efficient
cross-border cooperation between tax administrations. Strong and
rapid cooperation between Member States should be a key element
in the strategy developed at national level against MTIC fraud.
24. Considering the importance of tax fraud,
the Commission presented in May 2006 a Communication concerning
the need to develop a co-ordinated strategy to improve the fight
against fiscal fraud.
25. The objective of the communication is
to launch a wide debate with all stakeholders involved on a whole
range of pragmatic and realistic ideas that could be taken in
the short term and that will contribute to the improvement of
the current situation. However, since the protection of tax revenues
is a major aim of this communication, it is clear that Member
States are the first concerned.
26. A first package of measures aims at
improving and reinforcing administrative cooperation between Member
States. Today, we are still missing a real Community administrative
culture and in order to remedy it, there is a need for a strong
political commitment from Member States. In this context new instruments
such as databases where basic information is accessible to all
tax administrations are needed.
27. However, fiscal fraud does not stop
at the external border of the European Union. It is therefore
becoming increasingly important to develop the external aspects
of administrative cooperation. Today cooperation with third countries
takes place primarily under bilateral agreements. This approach
does not ensure the necessary effectiveness and it is time to
examine a move towards a more coordinated approach at Community
level.
28. The Communication also opens the debate
on the need to modify the Common VAT system, an issue that the
Commission is prepared to consider. Extending the use of the reverse
charge or taxing intra-Community supplies are possible options
in this respect.
29. It should be noted, however, that the
Commission is not suggesting in its communication one single and
global solution to the problem. Instead, it presents a number
of ideas for debate and hopes for a quick, positive and clear
response from the Member States through the Council that will
enable it to rapidly present an effective anti-fraud strategy
insisting on the complementary aspects of national and Community
actions to be developed.
ARE MEMBER
STATES, WITHIN
THE CONTEXT
OF THE
INTERNAL MARKET
AND THE
GLOBALISED ECONOMY,
CAPABLE OF
FIGHTING INDIVIDUALLY
AGAINST THIS
FRAUD OR
IS IT
RIGHT FOR
THE COMMISSION
TO BRING
FORWARD PROPOSALS
ON THEIR
BEHALF?
30. Tax fraud is a global phenomenon. Fraudsters
are ahead of many companies and of tax administrations in terms
of globalisation. In the context of the internal market, in particular,
fraudsters take advantage of the four freedoms to move their activities
very rapidly in order to escape from the reach of tax administrations
that remain organised at a national level.
31. This context makes it practically impossible
for a Member State to act individually against tax fraud.
32. It is therefore the role of the Commission
to stimulate a debate on a co-ordinated approach. The objective
of a co-ordinated approach is to increase the efficiency of the
efforts to be taken at national level against MTIC fraud.
DOES THE
ADOPTION OF
MEASURES TO
FIGHT VAT FRAUD
AT COMMUNITY
LEVEL UNDERMINE
MEMBER STATES'
CONTROL OVER
THE FUNCTIONING
OF NATIONAL
FISCAL SYSTEMS?
33. As already indicated before, the operation
of the tax systems is and should remain the competence of Member
States. The organisation of the tax administrations and defining
their strategy for control are of the competence and responsibility
of the Member States.
34. By presenting the Communication, it
was certainly not the Commission's intention to intervene in the
competences of the Member States. A co-ordinated approach at EU
level should provide to the Member States more efficient tools
to ensure the proper functioning of their national fiscal systems.
9 October 2006
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