Examination of Witnesses (Questions 140
- 159)
WEDNESDAY 10 JANUARY 2007
COMMISSIONER KOVACS
AND MR
STEPHEN BILL
Q140 Lord Cobbold:
You cannot amend those.
Mr Bill: They certainly cannot be accommodated
under Article 27, it would require a full amendment of the Directive
which would require us firstly to believe that it is right to
make that proposal, and those discussions are still going on and
we are investigating as to whether or not there are substantial
cross-border effects, whether there would be concerns for the
internal market if we made such a proposal, in which case we would
have no justification for making it.
Mr Kovacs: It is clear that the ambitious solution
would be to change the VAT legislation either in one way, the
way of the reverse charge, or in the opposite way, the origin
system, the modified origin system, but the more realistic solution
would be to improve the traditional methods even though there
is some speculation as to how to identify the invoices, for instance.
For carousel fraud you need fake invoices. I have been approached
by some experts who have suggested different kinds of methods
to identify the invoices and I have requested them to put it in
a paper and we can examine it carefully with the experts on tax,
but that has not shown up, I am still expecting some answers to
come.
Q141 Lord Kerr of Kinlochard:
Can I pursue the second course? If one were to go for an origin
system, as the Commission originally proposed (and it was wicked
men like me in Coreper who defeated the Commission's original
proposals) this particular form of fraud, Missing Trader Fraud,
would be eliminated, would it not?
Mr Kovacs: Yes.
Q142 Lord Kerr of Kinlochard:
As I recall the arguments made by wicked men like me we were opposed
principally because of the complexity of the clearing house arrangement.
It seemed very elaborate and it would have created the possibility
for other kinds of fraud or abuse. I think I have understood what
you mean by a modified form at which the rate of VAT would be
charged on the goods, but would you not still be left with the
requirement for a clearing house?
Mr Bill: No. This gets rather technical. The
idea that we have put on the table is designed to avoid the two
traps which you fall into with the origin system. The origin system
applies tax at the rate applicable in the country of origin and
it is collected in the country of origin, but the money is never
due to go to the country of origin because VAT is a tax on consumption
and the goods are going to go to another country to be consumed.
Therefore, the money has to be transferred to the country of consumption,
that is why you need a clearing mechanism, and you have the problem
that unless you approximate the tax rates then you will have lots
of distortions in purchasing patterns and so forth. The idea that
we have now come up with is to say that instead of using the tax
rate and collecting the tax in the country of origin, you would
use the tax rate and collect the tax in the country of destination.
So the tax would not be collected in the country of origin, therefore
you do not need a clearing mechanism and you would not have the
pressures leading towards harmonisation of tax rates because you
would still be retaining tax sovereignty. The tax rate which would
be applicable and the tax which would be collected would be that
of the country of consumption, so there would not be the same
pressure. The problem that you do have, of course, is that you
would then create a requirement for a lot more people to register
in another country than where they are established because if
they are just sending goods to another country they would then
be liable for the tax in that other country at the rate applicable
in that country. That is where we come to the solution which we
did not have in the 1980s where we have the kernel of a solution.
This is the proposal we have on the table now for a VAT one-stop-shop
where you could register and account for all your liabilities
in other Member States in your country of origin. So we would
extend the idea of the VAT one-stop-shop so that a UK trader would
be able to make all his tax declarations for all his liabilities
in other Member States in the UK on-line in his own language and
then he would make a single payment. He would do the clearing,
if you like, he would pay to the country of consumption, so we
do not have to have a clearing mechanism and we do not have the
threat which the origin system posed.
Q143 Lord Kerr of Kinlochard:
Thank you, that is very interesting. I did not understand your
option 2b but I now do. However, it appears to be slightly academic
because you, Commissioner, in your communication are clear that
this is something to be considered but that action now should
be in the area of improved co-operation, information exchange
between Member States and so on, and I get the impression that
the Member States agree with you about that and do not see the
disruption of a move to the origin system, even this more sophisticated
form of origin system, as being something to be undertaken in
a hurry. It looks as if we are, at least for the foreseeable future,
the next few years, stuck with the destination system and our
efforts should be principally directed to improving information
exchange and co-operation. Do I capture your view correctly?
Mr Kovacs: Absolutely. The problem is that it
is not my view but the view of the Member States. It would be
much easier to convince me to change the VAT legislation. The
difference between the different models as I see it is improving
the traditional methods, the application of the traditional instruments,
is not very innovative and is not particularly promising but it
is easy to come to a common understanding and even unanimity.
I think even at the June ECOFIN they would get unanimous support
for that because these are the methods that have already been
used by the Member States, they are nothing new. If we could find
some good methods on the identification of the invoices, I do
not think any Member State would oppose that. The problem is changing
the VAT legislation, either in the direction of the origin system
or in the direction of the reverse charge model, is more innovative
but more risky and it would be far more difficult to reach unanimous
agreement on either of those two.
Q144 Chairman:
You said, I believe, however, that the proposal to crack the new
origin system was on the table. If it is on the table, has it
been received with any favour?
Mr Bill: It is not a proposal, it is an idea.
Q145 Chairman:
How is it going down here? Has it been received with any favour
anywhere?
Mr Bill: We have not yet had the full discussion
on it.
Mr Kovacs: April will be the first time there
is a full discussion.
Q146 Lord Cobbold:
Would it be helpful if it was in our report?
Mr Kovacs: What I am expecting from the April
exchange of views is that the ministers will express their views
and after that we can come together with the German Presidency
and with the experts on tax and find some balance on what to do.
If we see that there is some considerable support for changing
the VAT system in either of the two directions, in that case we
can start to elaborate it more precisely. If we see that there
is a strong reluctance to change the VAT system, in that we case
we have to focus on the traditional matters and come to a final
solution at the June ECOFIN.
Q147 Lord Kerr of Kinlochard:
Can I ask about one area where I was not quite sure that I fully
understood the communication? "Joint and several liability"
would increase the number of people with an interest in stopping
a fraud because they might be among those penalised if it were
detected. You say in the communication that you could envisage
the possibility of strengthening the principle, it has been the
subject of lively discussions, but any such initiative would have
to remain within the parameters of the Court of Justice ruling.
That leaves me wondering whether you are saying anything in effect,
because the Court of Justice appeared to take a pretty strong
view. How do you steer between Scylla and Charybdis here? If "joint
and several liability" would need to remain onside with the
Court, how would it remain effective against a fraudster?
Mr Bill: Firstly, joint and several liability
is permitted under the Directive now, that is clear. There is
a provision in the Directive which says you can apply provision
of joint and several liability. What the Court has said is that
when Member States do apply this provision it must respect certain
principles of proportionality and certainty so that taxpayers
are not taken unawares and it is not the innocent taxpayer that
ends up taking the debt if the government is defrauded. The government
cannot pass, if you like, its losses on to innocent taxpayers.
Q148 Lord Kerr of Kinlochard:
If you have to rule out that possibility, does that leave much
else?
Mr Bill: There are two ways we can approach
this. One is that we can revisit the legal provisions but, as
you are quite rightly pointing out, this may not be particularly
helpful because even if we amend the Sixth Directive, again the
Sixth Directive has to respect the basic principles of Community
law. Someone could then take the provisions of the Sixth Directive
to the Court and have them thrown out, that is possible. What
we have to do is to look at this very carefully, and we do not
know the answer yet. It is one of these areas which we are now
talking about with the Member States, the idea of co-ordination
of action. This means we sit down together with the Member States
and look at areas and say, "How is it best that Member States
can act whilst keeping within the framework which the Court of
Justice has established? We have the framework established by
the Court of Justice, we now have to look to see how we can implement
that". One of the ways we might be able to do that is by
sitting down with the Member States and drawing up a framework,
which could be in the form of a Commission recommendation or whatever,
as to how to apply joint and several liability provisions whilst
respecting the provisions of the Court. It may be that you could
apply the joint and several liability provisions in intra-Community
transactions by linking them to the fact that you have to establish
if the goods have left the country and you have to establish that
you have supplied them to someone in another country who has a
tax registration and you have checked that number, and so forth.
So you could envisage a reference of framework where you say,
"If you do not respect these conditions as a supplier you
could be liable to joint and several liability provisions".
Q149 Lord Kerr of Kinlochard:
I think that is a very good idea. Would the Court be prepared
to go down this route?
Mr Bill: What the traders have said to us in
respect of joint and several liability is, "Yes, we understand
joint and several liability but you have to be fair with us. We
have to know when we are liable". If you put down clear rules
which say, "If you do not respect these rules then you, as
the supplier, could be liable", that is fair, but if you
say, "If your customer disappears without paying the tax
you are liable",—
Q150 Lord Watson of Richmond:
"We are coming after you"!
Mr Bill:—and you have no control and no
conditions to fulfil, that is unfair and that is where the Court
is. I think we can construct something which would meet the test
provided by the Court specifically in the area of intra-Community
trade because there are certain conditions that you have to respect
in order to be able to make this intra-Community supply without
tax, which is the cause of the problem.
Q151 Lord Kerr of Kinlochard:
That strikes me as a very promising way of doing it. Does that
fall into the category, Commissioner, of the sort of thing that
you feel might, if the discussion in April goes well, be possible
in June?
Mr Kovacs: Yes.
Q152 Lord Kerr of Kinlochard:
This is an administrative refinement of procedure. If the Court
gave a positive avis, is it something the Member States
would be prepared to accept now, in your view?
Mr Kovacs: Yes.
Lord Cobbold: It would mean more bureaucracy
for business, more regulation, more paperwork.
Q153 Lord Kerr of Kinlochard:
But less carousel fraud.
Mr Bill: Possibly less risk for business as
well.
Q154 Lord Watson of Richmond:
That is what I find so interesting, that they came back to you
and said, "You have got to play fair with us". If there
is a reduction of risk, exposure on their side, that is the carrot,
is it not?
Mr Bill: Yes. What we are doing on this is we
are talking to business because honest business wants to help
as well.
Q155 Chairman:
Yes, I think they do.
Mr Bill: But they want to help in a way which
is not disproportionate to them. What we have in mind is to have
a conference in March with trade and all interested parties as
part of the consultation process leading up to the April and then
the June ECOFINs so that we, the Commission, can at least have
an idea of how trade will react.
Q156 Lord Watson of Richmond:
Can I ask a couple of further questions. It is almost a cultural
issue really. Right at the beginning, Commissioner, you drew attention
to this discrepancy between the 35 million traders, the billions
of transactions and, I think, 20,000 exchanges of information.
What do you really believe is the reason for that discrepancy?
Is it avoidance? Is it indolence? Is it a cultural thing? What
is it?
Mr Kovacs: It is a lack of trust, a lack of
confidence that it will be successful. That is my assumption.
Q157 Lord Watson of Richmond:
Is it worth it?
Mr Kovacs: They do not believe that it helps.
Probably the other reason is that the exchange of information
is very, very slow, extremely slow. When I first heard from some
tax officials in the country that I know best that it can take
two or three months to get access to the information I did not
want to believe that and most of the business people do not have
time to wait for that.
Q158 Lord Watson of Richmond:
I think that is absolutely it, you have hit the nail on the head.
Your communication basically said that once you have got feedback
from the other institutions and the Council and the European Parliament
and, indeed, other business groups and so on, you will launch
a targeted action programme to combat fiscal fraud. What I have
not quite picked up yet is what the timetable of this is and the
degree of urgency that you associate with this. Is this just a
general proposition or is it something that you are going to drive
for against a certain timetable?
Mr Kovacs: The whole tax fraud issue is so general
and complicated—
Q159 Lord Watson of Richmond:
It is huge.
Mr Kovacs: It is very different in nature from
those issues where there is a very concrete situation, a very
concrete proposal and we can table it to the Council, to the Parliament,
to the Economic and Social Committee, which has the right to form
an opinion. It is different in the case of tax fraud. We want
some general remarks, some general orientation, at the April ECOFIN.
It is my expectation that we will receive some general orientation
as to which way to proceed. If we see some strong reluctance to
changing the VAT legislation I would not say we would give it
up forever but we will put it aside, at least for the time being,
and try to focus on the improvement of the traditional administrative
matters to make some progress. I would not like to just wait and
see and let another two or three years go by.
| 
