EU proposing major overhaul of VAT to combat tax fraud

The EU is proposing a major overhaul of European VAT rules to combat tax fraud which is reported to cost the bloc €50 billion annually (although Europol, the EU crime agency, estimates that the figure could be double this).

The isting EU VAT rules were introduced in 1993 at the time of the creation of the single market, and were intended to be a temporary fix until such time as rates could be harmonised across member states – a project now long abandoned. However, the result is a hotchpotch of differing rules and provisions, with the need to make any meaningful reform complicated because all changes at a European level need unanimous approval, which is very difficult to achieve in reality. This leaves the existing VAT system open to abuse and fraud.

EU Commissioner for taxation, Pierre Moscovici said “VAT rules are a quarter of a century old and no longer fit for purpose. Fraud today is not something citizens can accept any more, particularly when it finances organised crime and terrorism”.

The new rules will have two broad objectives – to prevent fraud and to simplify the lives of companies in the EU, with Moscovici estimating EU companies will save up to €1 bn. a year in administrative costs with the new rules.

One practice that the EU in particular wants to target is the scam known as the “missing trader fraud”, which involves cross-border sales of high value portable products such as mobile phones, computer chips and even credits on carbon dioxide emissions.

The fraud enables a trder to buy goods from a supplier in one country, VAT-free, and then sell those goods at full price, including the VAT in another country. The trader then “disappears”, taking the VAT with them. Meanwhile, the original supplier of the imported goods is able to reclaim the full VAT from their government.

The logical extension of such practices are the creation of so-called “carousel schemes” where criminals create a network of suppliers and traders which continuously indulge in such trades, stealing millions of VAT payments which are due in the process.

The proposed reforms, which the EU hopes to have in place by 2022, will see suppliers charge VAT on all EU sales.

These proposals are part of wider global efforts to reduce tax avoidance, and aggressive tax evasion, and forms part of a broader programme by governments and regulators to promote greater transparency and harmonisation when it comes to tax, including initiatives such as BEPS, CRS and new rules on transfer pricing.


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