Examination of Witnesses (Questions 120
- 139)
WEDNESDAY 10 JANUARY 2007
COMMISSIONER KOVACS
AND MR
STEPHEN BILL
Q120 Lord Watson of Richmond:
Because this is such an enormous and dramatic figure, if I could
just ask one other question on it. Are you saying, therefore,
that if you take the totality of fraud within the area of the
European Union, the states of the European Union are being cheated,
so to speak, of €250 billion? It is not the institutions,
it is the Member States themselves.
Mr Kovacs: Yes.
Q121 Lord Watson of Richmond:
So when you say think of what else this money could be spent on,
schools, hospitals and so on, it is what the Member States would
have available to spend if this fraud could be stopped.
Mr Kovacs: Absolutely. When I used the plural
I meant the Community as a whole but certainly not the European
Commission or the Council.
Q122 Lord Kerr of Kinlochard:
There is no excuse for fraud, clearly. But to the extent that
these frauds exist inside a Member State and do not have a cross-border
dimension they are a function of a judgment by a Member State
about how heavy its indirect tax regime should be. I am not trying
to excuse the fraudster, but it is reasonable for a Member State
to make that judgment. One may think they are being a bit soft
but it is for them to say, is it not?
Mr Bill: I think what you are saying, in effect,
is that you never collect 100 per cent of any tax and, therefore,
what we are saying is, "This is what more you would collect
in an ideal world if you could collect 100 per cent", but
from what you are saying, if you turn it round the other way,
if you had all the resources available and a relatively honest
taxpayer base you could collect that amount of money, but it is
clear that you are not going to. These figures are all sorts of
tax losses which we extrapolate from the UK as well which is not
just tax evasion, it is tax avoidance as well.
Q123 Lord Watson of Richmond:
Just to come back to this big figure again, when after giving
us that figure you asked two questions, think what it could be
spent on if it was not lost, and your second question was what
can we do about it. The answer to what can we do about it is a
specifically EU answer. You talk about improving traditional instruments
particularly for the exchange of information between Member States
and you talk about the disparity between 20,000 exchanges of information
and 35 million people trading across borders and then you talk
about the VAT proposals. My question is this: the €250 billion
figure is a total figure across all Member States but have you
got any specific idea about what proportion of that figure is
related actually to trans-border trade, in other words what proportion
of that figure has an EU dimension to it?
Mr Kovacs: As far as carousel fraud is concerned
it is an EU dimension because—
Q124 Chairman:
Indeed, that is the way it works.
Mr Kovacs: It comes from the very nature of
intra-Community trade. You cannot expect carousel fraud inside
one Member State, it needs at least two Member States. Very often
the fraud involves a third country, a non-EU member country, in
order to disguise it from the authorities.
Q125 Lord Watson of Richmond:
Is carousel fraud the only kind of fraud that has an EU dimension
to it?
Mr Bill: No. We cannot give you the answer to
your question off the cuff but you could extrapolate it backwards.
If you took the UK's figures of the total VAT gap and saw what
per centage of that relates to carousel fraud and then applied
the same per centage to the €250 billion; under the sort
of extrapolations that we have done that would give you the sort
of answer you are looking for.
Q126 Lord Cobbold:
Different countries have different trade priorities.
Mr Bill: Yes, but we cannot factor that in because
we do not know that from the different countries because most
of them have not done the exercise.
Q127 Lord Kerr of Kinlochard:
What do you think of the figures that Eurocanet have produced,
or the Belgian Finance Ministry?
Mr Bill: We have no knowledge of where those
figures come from. We cannot justify them and we cannot substantiate
them.
Q128 Lord Cobbold:
Eurocanet is completely separate, has no relationship with the
EU?
Mr Bill: No relationship with the Commission
whatsoever.
Mr Kovacs: To be frank with you, I am not so
concerned about the exact figures because even if it is not €200
billion, just €100 billion, that is more than enough. I am
much more concerned how to tackle this issue and in what way we
can combat it successfully. That is my concern. I will tell you
that I use these figures simply to shock the audience because
I want them to understand that it is a very serious issue, a huge
loss of money which Member States could spend on much better purposes.
In order to involve them, to motivate them, I use these figures.
Even if it is €100 billion or €300 billion, which is
a much higher figure, it does not make much difference, it is
important that we have to combat it because we are losing money.
Chairman: Thank you very much. We will
give up on the figures. We just wanted to ask because we saw Eurocanet
this morning and we only have estimates, other people only have
estimates, and I wondered if there was a magic number anywhere.
As you have all made quite clear there is not, if I may I will
turn our attention to what you do about combating carousel fraud.
Q129 Lord Cobbold:
Where do your figures come from if they do not come from Eurocanet?
Is it just information from Member States?
Mr Bill: They are an extrapolation of the figures
that are available to us from the limited number of Member States
who have made figures available to us.
Q130 Lord Cobbold:
Extrapolation is the key word?
Mr Bill: Extrapolation is the key word. I would
emphasise once again that it is an extrapolation of global tax
losses which includes avoidance, bankruptcies, fraud.
Q131 Chairman:
Some of which combine.
Mr Bill: Yes. It is difficult to distinguish.
It is impossible to distinguish.
Mr Kovacs: It is even more complicated than
another evil in the other half of my portfolio, which is fake
goods, counterfeiting. I am so lucky that I have one evil in both
parts of my portfolio! The estimated figure is €500 billion
of fake goods in circulation in the market but, of course, that
is also an estimation because what we know are the transactions
which the customs officials finally catch.
Chairman: Lord Cobbold, perhaps you would
like to ask about ECOFIN.
Lord Cobbold: Do you support the United
Kingdom's efforts in the request for a derogation that the UK
made to ECOFIN, which has been rejected up until now although
it is perhaps closer to being agreed, and do you think it is something
that the UK is just doing to protect its own interests or is it
something that could be applied generally in helping to eradicate
this form of fraud?
Q132 Chairman:
If I may expand that question a little. In your statement you
were disposed to wait to consider reverse charging until later
in the year but the United Kingdom was looking for a very specific
derogation on two sets of goods. Do you, as it were, consider
that separately or are you trying to row it in with the rest of
the consideration?
Mr Kovacs: There were three requests for derogation
more or less at the same time: one from Germany, another one from
Austria and the third one from the United Kingdom. The German
and the Austrian requests were rather similar in that they wanted
to apply the reverse charge model on a general basis which was
beyond the scope of derogations permitted under the VAT Directive
so the Commission refused their request. The UK request was different
because the scope was limited, it was much better targeted because
there were only two kinds of products on which the UK wanted to
get this derogation, computer chips and mobile phones, so these
two articles, and we said yes. Considering that we said yes, the
Germans and Austrians were not very happy that we said no to them
and yes to the United Kingdom. It was France at ECOFIN that finally
objected. I do not know whether there are any new developments
because I heard the French may have softened their position, but
I do not know.
Mr Bill: No. We understand the
position is still blocked in Council.
Q133 Chairman:
They apparently softened their position and then hardened it again.
Mr Bill: Apparently.
Q134 Chairman:
I think "apparently" as well.
Mr Kovacs: It was not even officially brought
to the ECOFIN Council. It was not raised because the UK delegation
learned from the French through a bilateral consultation that
the French would raise a veto, so they did not raise it. It was
on the agenda but it was not discussed because of this negative
position from France. I know the argument, not from the French
but from the UK delegation, was that the French believe and argue
that if the UK closes the door on the fraudsters then they will
go to France and operate there. That was France's argument. The
Commission suggested continuing the bilateral talks and I offered
to the UK if the Commission could be of any help we are ready
to intervene and we are now in a wait and see attitude.
Q135 Lord Cobbold:
That is the problem with derogations, on an individual nation
basis you are always going to have other nations who object. How
do you move from A to B?
Mr Bill: It is very rare that a Member State
objects to an Article 27 derogation because by definition an Article
27 derogation is very targeted and proportional. It is our responsibility
to ensure that normally Article 27 derogations go through more
or less on the nod because they would have no effect on any other
country. By definition that is the scope of Article 27. If it
goes beyond that, and we have reasons to fear that this may interfere
with the functioning of the internal market or be a big deviation
from the normal VAT system, we would not make a recommendation,
and that is why we did not make a recommendation or proposal to
the Council in respect of the German and the Austrian requests
because they went far beyond what we considered should be the
scope of Article 27. After discussion with the UK authorities
we considered that what the UK wanted was sufficiently narrow
and sufficiently targeted that it fell within the scope of Article
27 and would not have any other effects. Of course, being a fiscal
matter and the final decision having to be made in the Council,
it is not the Commission that makes the final decision it is the
Council by unanimity, and on this occasion our judgment call was
not quite correct because not all Member States agreed with what
we were saying that this was proportionate and would not have
cross-border effects. At least one Member State felt that it goes
beyond what could possibly be acceptable under Article 27.
Q136 Chairman:
What do the UK, do now? Is it likely to go on or get swept up
with the Germans and the Austrians who want something more far-reaching?
Mr Bill: Sorry, can I just finish the logic
of what I was saying. What we said to the Germans and the Austrians,
and what the Commissioner was talking about in his opening statement,
was that if we want to satisfy the Germans and the Austrians,
which is to enable Member States to have a derogation from the
general VAT system to apply a reverse charge to a substantial
amount of their internal turnover, this would require an amendment
to the text of the main VAT Directive itself, not a derogation
from the main rules but an amendment to the rules permitting those
Member States, if they wish, so to derogate. That is what is under
discussion now as to whether or not the Commission should make
a proposal to permit Member States to make this derogation. The
UK's situation is still separate. It is still a specific request
under Article 27. As the Commissioner said, this is now really
in the hands of the UK and those Member States who need to be
persuaded. It is still on the table of the Council and negotiations
will continue. The answer to your question is you have to continue
to try to negotiate and persuade those who are not convinced that
this will not do them any harm.
Mr Kovacs: At this time there is only one country
that is opposed and that is France, but it has happened during
the two years I have been in office that once a Member State that
opposes a concrete proposal is convinced or persuaded then next
time it is another Member State that says no.
Chairman: I share your view. Lord Cobbold,
do you want to ask about the general position on reverse charging?
Q137 Lord Cobbold:
It follows from what I was asking earlier. How should we proceed?
What is the solution to this problem? Is the reverse charging
on a general basis the right way forward? You mentioned two options
and I just wondered what your preference is.
Mr Kovacs: I could give a much more precise
answer after the informal ECOFIN, the exchange at the informal
ECOFIN, and the even more informal lunch when it will be discussed
at the level of the ministers for the first time. The problem
is that in the meeting room it has been only Germany and Austria,
not even the UK, I do not think the UK intervened—
Mr Bill: No. The UK has come out against the
generalised reverse charge supporting a specific and targeted
one but it has not been supporting the generalised one.
Mr Kovacs: The other ministers kept silent.
We do not really know. In the corridor they express their views
and their concerns that this reverse charge model could have some
other risk so we should be careful in saying yes to it. That was
the reason why I encouraged Minister Steinbruck to put it on the
agenda of the informal ECOFIN to have a clear picture, to go around
the table. That was what we did with some other proposals during
the Austrian Presidency, we somehow provoked the Member States
to say yes or no and to express their views at the level of the
ministers, not at the expert level. After this April exchange
of views we will have a much clearer picture as to whether there
is any chance because there will be no sense in tabling an official
proposal of the Commission and having some 15 countries against
it.
Mr Bill: I think it is true to say that certainly
at Working Group level more Member States have expressed concern
about the generalised reverse charge than a specific targeted
derogation under Article 27, such as the UK is requesting. We
do not know but one of the fears of the French and one or two
others may be that the specific derogation that the UK is requesting
may be the thin end of the wedge opening the door to further reverse
charge derogations, including a generalised one, which they fear
more. If you wanted an educated guess as to which you are more
likely to get, I would say that you are much more likely to get
a targeted derogation under Article 27 than a generalised reverse
charge because there are far more Member States who have expressed
concerns about the generalised reverse charge than they have about
the specific one.
Q138 Chairman:
Including us.
Mr Bill: Including yourselves, yes. The position
you are in is probably the more sustainable one with a request
under Article 27.
Q139 Lord Cobbold:
So despite the variations it might get rid of a lot of the problem?
Mr Kovacs: No, because it does not get rid of
the German and the Austrian problem because the German and Austrian—
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