Examination of Witnesses (Questions 113
- 119)
WEDNESDAY 10 JANUARY 2007
COMMISSIONER KOVACS
AND MR
STEPHEN BILL
Q113 Chairman:
Good morning, Commissioner Kovacs.
Mr Kovacs: Welcome to the Berlaymont, the headquarters
of the European Commission. I understand that Stephen Bill, who
is the head of my Cabinet, has already discouraged you from asking
very, very technical questions. In general terms Commissioners
are politicians who are dealing with the political direction of
the portfolio concerned, so I am dealing with the priorities of
tax policy and also the Customs Union. My philosophy is to improve
with tax measures, with the reform of the tax system, the work
or the functioning of the internal market, the Single Market.
That is my point of departure because I do believe competitiveness
is one of the major aims we have to achieve as the global competition
is the first in the row of the global challenges the European
Union and the Community are facing. Competitiveness is extremely
important. We are very proud of the Single Market and I very often
refer to the fact that when I was twice the Foreign Minister of
Hungary, my country, and I argued for the accession of Hungary
to the European Union I always referred to the Single Market as
one of the major achievements. At that time it had less than 400
million consumers and now it has nearly 500 million consumers,
half a billion, after the accession of Romania and Bulgaria. It
is quite obvious that from the point of view of competitiveness,
to work and do business in such a huge market, a competitive Single
Market, it is a great advantage, a great asset. When I started
my current work, which was completely new for me because I had
never been a tax professional, I spent most of my life in foreign
politics, I realised there were so many tax induced barriers to
the Single Market which came from the fact that there were 25,
now 27, different tax systems working in parallel. That results
in an enormous sum of compliance costs, administrative burdens,
sometimes a lack of transparency, and all of those are somehow
barriers to the internal market, the Single Market. That is my
background. Today I was reading the questions and I said to my
Head of Cabinet it is not my level, it is mostly at his level,
who spent some 20 or 30 years in the Tax Directorate General—
Mr Bill: Twenty.
Mr Kovacs:—or the prominent experts of
DG Tax who have been dealing with these issues for some 20 or
30 years. I agreed with Steve that to make this opportunity useful
for you I would make a general statement on the political priorities
as far as tax fraud is concerned and as far as the technical details,
the concrete questions, are concerned Steve and maybe I will try
to answer them.
Q114 Chairman:
That would be very useful.
Mr Kovacs: Is that acceptable for you?
Q115 Chairman:
It would be very useful to know where the political priorities
are, where we have got to and what happens next.
Mr Kovacs: Good. First of all, I have to underline
that tax fraud is a very serious concern for the Community as
a whole and, consequently, for the Commission. At a Community
level the estimated annual loss that we suffer is between €200
billion and €250 billion. Bearing in mind that we spend €50
billion a year for the Common Agricultural Policy, which is also
a major concern for a number of countries, it is quite understandable
that losing such an enormous sum of money which we could spend
on social programmes, on education, public health, on a number
of other issues, is an evil which we have to combat. That is the
point of departure. The question is how can we do that because
the Member States have been combating tax fraud for quite a long
time without any major success. The estimated sum of money which
we are losing is increasing. Last June the Commission tabled a
communication to the ECOFIN Council of Ministers of Finance in
which the Commission outlined certain options. It was the first
step in developing a common strategy because it was obvious that
Member States are not able to successfully combat tax fraud on
an individual basis. Last June we tabled this communication and
the first option which was proposed in the document was to improve
the traditional instruments and use them more extensively. First
of all to improve the national control in the Member States and,
second, to speed up the exchange of information because that is
one of the weak points of the current system, that the VAT Information
Exchange System goes very, very slowly, it takes two or three
months sometimes to exchange information. I can also mention the
very small proportion of information which has been exchanged
in comparison with the number of traders. There are some 35 million
traders who are involved in intra-Community trade and are involved
in billions of transactions, while in 2005, which is the last
year for which we have statistics, there were 26,000 information
exchanges, a very small number in comparison with the billions
of transactions and millions of traders. The Commission concluded
that one option could be to improve these traditional methods,
to speed up the exchange of information, to make them more extensive.
The second option was to change the VAT legislation which is certainly
more complicated. You know that we need unanimity on all major
tax policy issues and after the two years I have been in office
I have learned how difficult it is, not on such complicated issues
but on much more simple issues like, for instance, the application
of reduced rates on labour intensive services which we wanted
to solve during the UK Presidency and failed, then we continued
during the Austrian Presidency and finally succeeded but the discussions
we had were a nightmare, particularly with some Member States
who were very reluctant to agree. Quite recently, when we wanted
to revalorise the Minimum Excise Duty rate on alcohol and alcoholic
beverages with different compromise solutions, we had reached
a point where 24 of the 25 Member States agreed but then the Czech
Republic said no. That was difficult to understand because the
current level that applies in the Czech Republic is higher than
the suggested increase in the Minimum Excise Duty rate, so the
increase would not have been reflected in the price of beer in
the Czech Republic. For them it was a matter of principle that
as there is no positive Excise Duty rate on wine they were not
prepared to accept an increase in the minimum rate on beer. We
explained to them that the current system was approved in the
early 1990s and, whether we find it fair or not, in order to change
it, to introduce some positive rate on wine for instance, it would
need unanimity. Bearing in mind there are more than 10 countries
that are super-powers in wine producing and wine consumption there
was no chance to introduce a positive rate. I think the advantage
of these traditional methods to improve national control, to improve
the exchange of information, is they would be easy. It would be
easy to reach unanimity because there is nothing new in that.
The second option to change the VAT legislation is much more difficult
because option 2a would be to apply the origin system, not in
the original form but in a modified form. In the original form
it would mean the goods would be taxed in the country of origin
and at the rate applicable in that country which would be impossible
to apply because that would need much deeper harmonisation of
the VAT rates, which is impossible because most of the Member
States consider setting the VAT rate as a basic question of tax
sovereignty. What we could do is have a modified version of the
origin system to tax the goods in the country of destination at
the VAT rate applicable there. Even this would be a very long
ride to achieve. Option 2b would be the reverse charge model which
is championed mostly by Germany and Austria and, as I understand,
in the UK there is sympathy for at least a limited scope of use
of the reverse charge model to apply it in the framework of a
derogation from the VAT Directive. Concerning the reverse charge
model, the problem is that there are many Member States that have
very serious concerns because they claim that the reverse charge
model may be applied successfully against the carousel fraud,
VAT fraud, but may open the door for some other kinds of tax fraud.
The current situation is that if we put it on the agenda of an
ECOFIN meeting there will be more than one country that would
say no. Yesterday when we were in Berlin we had the traditional
meeting between the government of the incoming Presidency and
the Commission, and we had the plenary with Angela Merkel and
President Barroso. We also had bilateral meetings between the
Commissioners and members of the German Government who are responsible
for the various portfolios and I had the chance to meet and exchange
views with Minister Steinbruck, the Minister of Finance in Germany.
We finally agreed that in the April informal ECOFIN meeting we
will put it on the agenda or, to be more precise, we will not
put it on the agenda but on the menu card at the lunch of the
informal ECOFIN to discuss it in the framework of a first reading
to try to find out the reaction of the Member States. At the moment
we have not discussed it at the level of the ministers. It is
my experience that even if you discuss something 100 times at
the expert level, the picture can be very different at the level
of the ministers because they have some political considerations
which the experts could not and should not have. We agreed that
will be the first test, what the reaction will be to this proposal
of the reverse charge model, and then we will see how to proceed.
Minister Steinbruck was rather optimistic because they are very
interested in introducing this system and they want to introduce
it as an option, that if a Member State wants to apply it it should
be allowed to do it on an optional basis. The problem is that
would somehow go against the logic of the whole VAT system which
is universal because in that case it would be much more fragmented.
Minister Steinbruck expressed his hope that if there is a positive
reaction in April then in June when we have the last formal ECOFIN
meeting during the German Presidency, the April informal meeting
will pave the way for a concrete decision, which I do not believe,
I think it will be too early. Maybe in June we will have a clearer
picture but nothing more than that. That is the case as far as
the anti-tax fraud strategy is concerned. That is the political
framework from my view.
Q116 Chairman:
Thank you very much indeed, Commissioner Kovacs, that is most
helpful. We have a number of questions and different people will
ask different bits but, please, either you or Mr Bill answer whichever
suits you best. The one I would like to pick up out of your statement—there
is much in your statement I would like to pick up—is we
are having some trouble with figures because we have some figures
for carousel fraud, which is what we are actually looking at.
Your figure of €200 billion to €250 billion is an all-fraud
figure, is it, fraud of any sort?
Mr Kovacs: It is all fraud, all tax fraud at
a Community level.
Q117 Chairman:
It is an extrapolated figure because you cannot really survey
fraud.
Mr Kovacs: Yes. You cannot estimate precisely
the amount of fraud, you can make some estimates. The figures
you have are either on the carousel fraud specifically and at
the UK level which should be around €6 billion or €7
billion, if I am right.
Q118 Chairman:
We owned up in the Autumn Statement to some figure between £3.7
billion and £4.5 billion. I do not doubt that there is an
update on that. Within that global figure of €200 billion
to €250 billion, has any estimate been made by your committee
on how much of that might be carousel fraud, or have you not done
that?
Mr Kovacs: The reason why we do not have any
more precise figures is very, very few countries publish any figures.
The UK is one of the exceptions, and Germany is the other one,
but I do not think there are more than three or four countries
that publish figures.
Mr Bill: The German figures are more global
than the UK figures where the UK tries to break it down into the
different sources of losses. What we have tried to do is to extrapolate
from the few Member State figures that we have, taking into account
the relevant turnovers of different Member States, to see what
the order of overall fraud could be across the Community.
Q119 Chairman:
This is all sorts of fraud, income tax fraud, any fraud?
Mr Bill: Yes, but it is an art more than a science.
Chairman: I am sure. Thank you.
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