The European Commission has unveiled on November 30, 2017 new tools to make the EU's Value Added Tax (VAT) system more fraud-proof and close loopholes which can lead to large-scale VAT fraud
The new rules aim to build trust between Member States so that they can exchange more information and boost cooperation between national tax authorities and law enforcement authorities.
The most cautious estimates show that VAT fraud can lead to lost revenues of over €50 billion a year for EU Member States – money that should be going towards public investment in hospitals, schools and roads.
Revelations in the ‘Paradise Papers' have again shown how tax avoidance schemes can be used to help wealthy individuals and companies to circumvent the EU's VAT rules to avoid paying their fair share of tax.
Recent reports also suggest that VAT fraud schemes can be used to finance criminal organisations, including terrorists.
The proposals would enable Member States to exchange more relevant information and to cooperate more closely in the fight against these activities.
While the tax authorities of Member States already exchange some information on business and cross-border sales, this cooperation relies heavily on the manual processing of information.
At the same time, VAT information and intelligence on organised gangs involved in the most serious cases of VAT fraud are not shared systematically with EU enforcement bodies.
Finally, a lack of investigative coordination between tax administrations and law enforcement authorities at national and EU level mean that this fast-moving criminal activity is not currently tracked and tackled quickly enough.
The proposals would strengthen cooperation between Member States, enabling them to tackle VAT fraud more quickly and more efficiently, including on fraud that takes place online.
Taken together, the proposals would give a major boost to our ability to track and clamp down on fraudsters and criminals who steal tax revenues for their own gain.
Key measures in this legislation include:
- Strengthening cooperation between Member States: VAT fraud can happen in a matter of minutes, so Member States need to have the tools to act as quickly as possible. Today's proposal would put in place an online system for information sharing within 'Eurofisc', the EU's existing network of anti-fraud experts.
The system would enable Member States to process, analyse and audit data on cross-border activity to make sure that risk can be assessed as quickly and accurately as possible.
To boost the capacity of Member States to check cross-border supplies, joint audits would allow officials from two or more national tax authorities to form a single audit team to combat fraud - especially important for cases of fraud in the e-commerce sector. New powers would also be given to Eurofisc to coordinate cross-border investigations. - Working with law enforcement bodies: The new measures would open new lines of communication and data exchange between tax authorities and European law enforcement bodies on cross-border activities suspected of leading to VAT fraud: OLAF, Europol and the newly created European Public Prosecutor Office (EPPO).
Cooperation with European bodies would allow for the national information to be cross-checked with criminal records, databases and other information held by Europol and OLAF, in order to identify the real perpetrators of fraud and their networks. - Sharing of key information on imports from outside the EU: Information sharing between tax and customs authorities would be further improved for certain customs procedures which are currently open to VAT fraud.
Under a special procedure, goods that arrive from outside the EU with a final destination of one Member State can arrive into the EU via another Member State and transit onwards VAT-free.
VAT is then only charged when the goods reach their final destination. This feature of the EU's VAT system aims to facilitate trade for honest companies, but can be abused to divert goods to the black market and circumvent the payment of VAT altogether.
Under the new rules information on incoming goods would be shared and cooperation strengthened between tax and customs authorities in all Member States. - Information sharing on cars: Trading in cars is also sometimes subject to fraud due to the difference in how VAT is applied to new and used cars.
Recent or new cars, for which the whole amount is taxable, can be sold as second-hand goods for which only the profit margin is subject to VAT. In order to tackle this type of fraud, Eurofisc officials would also be given access to car registration data from other Member States.These legislative proposals will now be submitted to the European Parliament for consultation and to the Council for adoption.
Background
The proposed measures follow up on the 'cornerstones' for a new definitive single EU VAT area proposed in October 2017, and the VAT Action Plan towards a single EU VAT area presented in April 2016.
The common Value Added Tax (VAT) system plays an important role in Europe's Single Market. VAT is a major and growing source of revenue in the EU, raising over €1 trillion in 2015, which corresponds to 7% of EU GDP. One of the EU's own resources is also based on VAT.
Despite many reforms, the VAT system has been unable to keep pace with the challenges of today's global, digital and mobile economy. The current VAT system dates from 1993 and was intended to be a transitional system.
It is fragmented and overly complex for the growing number of businesses operating cross-border and leaves the door open to fraud: domestic and cross-border transactions are treated differently and goods or services can be bought free of VAT within the Single Market. The Commission has consistently pressed for the reform of the VAT system.
For companies trading across the EU, borders are still a fact of daily life when it comes to VAT. Current VAT rules are one of the last areas of EU law not in line with the principles underpinning the Single Market.
Eurofisc
Chapter X has established Eurofisc for the swift exchange of targeted information between Member States, in order to tackle large-scale or new VAT fraud patterns.
To speed up the joint processing and analysis of data within Eurofisc, the Commission is currently developing TNA software for voluntary use by the Member States as of 2018.
In order to maximise TNA’s potential to identify fraudulent networks across the whole EU, Regulation (EU) No 904/2010 would make clearer provision for the joint processing and analysis of data within Eurofisc.
Involvement in such processing and analysis will remain voluntary. However, all Member States should grant Eurofisc officials access to their VIES data on intra-Union transactions through TNA; in that way the software can identify all potential fraud networks, including those involving traders established in non-participating Member States.
The amendments also provide clearer rules on how Eurofisc would run and be run.
They would enable Eurofisc to coordinate joint administrative enquiries launched on the basis of its risk analyses.
Eurofisc officials are often the first to be warned about new fraudulent networks, and they have strong expertise in serious VAT fraud. Therefore, they would be the best placed to coordinate the corresponding administrative enquiries.
This would make for a swifter and more effective reaction to the TNA results and the information from such enquiries could be immediately processed by TNA.
In practice, such coordination would be carried out in the Eurofisc working field with the relevant expertise by one or several Eurofisc officials from the Member States involved in the enquiries.
More coordinated checks between Member States should improve their capacity to react quickly to ever-changing fraudulent activities.
The proposal also opens up the possibility for Eurofisc officials to forward information on VAT fraud trends, risks and serious cases to Europol and the European Anti-Fraud Office (OLAF) and to disclose such cases to the EPPO.
This would cover, in particular, the most damaging VAT fraud, such as MTIC schemes and abuses of customs procedure 42 frequently involving criminal organisations.
These organisations take advantage of their international networks to create advanced MTIC schemes with the aim of extorting money from the national budgets. They hide behind straw men, which gives administrative measures less clout.
Cooperation with law enforcement authorities at EU level would allow for the cross-checking of Eurofisc information with criminal records, databases and other information held by OLAF and Europol and would help identify the real perpetrators of fraud and their networks.
OLAF obtains in particular relevant information in the context of its investigations on customs fraud, which is intrinsically linked to VAT fraud such as customs procedure 42 fraud. OLAF may also facilitate and coordinate VAT fraud investigations, making use of its inter-disciplinary approach.
Most Member States have already put in place such cooperation at national level and involve Europol in their fight against MTIC fraud. However, often these cooperation actions are complex and create the risk that the value of the information will be lost before it reaches the right authorities.
A direct link between Eurofisc, Europol and OLAF as well as with the EPPO, for the most serious VAT fraud cases, would shorten this latency of data and maximise their value in the fight against criminal organisations.
This proposal would lift some restrictions on the right of Eurofisc officials to consult VIES data on intra-Union supplies when the supplier or the customer is registered in another Member State (Article 21(2)).
Currently, access is restricted to Eurofisc liaison officials, who should hold personal user identification for the electronic systems to gain access to this information. In addition, access must occur in connection with an investigation into suspected fraud and only during general working hours.
This proposal would remove the latter condition, as limiting the timespan for fighting serious VAT fraud is difficult to justify. It is also proposed that the practical details around the identification of authorised officials be defined in an implementing act to address the concerns of certain Member States.
Procedures to refund VAT to taxable persons not established in the Member State of refund
Chapter XII covers the forwarding of requests for VAT refunds in other Member States and the exchange of information on such requests.
It would be amended to improve coherence with the collection of VAT debts in the Member State of establishment and to avoid the use of – and the administrative burden and costs linked to – a recovery assistance request from the Member State of establishment to seize the VAT refund amount in the refund Member State.
Under the existing rules on recovery assistance, the authorities of the Member State of establishment may send a request for recovery or precautionary measures to the Member State of refund, for the VAT refund amounts to be seized.
This requires the applicant authority to draw up a specific request for recovery assistance; the VAT refund and tax recovery authorities in the requested Member State must engage in special coordination to carry out this request; and the taxable person concerned who wants to contest the recovery or precautionary measures taken by the requested authorities, has to undertake this action in the requested Member State, in accordance with Articles 14(2) and 17 of Directive 2010/24/EU.
The taxable person concerned may consent to have a direct transfer of the VAT refund to the Member State of establishment, in order to discharge his outstanding VAT liabilities in that Member State, or in order to have this refund amount retained as a precautionary measure in case of disputed VAT debts in that Member State.
In the latter case, a contestation of that retention could be brought before the competent judicial authorities in his own Member State of establishment, in all stages of the proceedings concerning the disputed VAT debt.
The current proposal would avoid the need for recovery assistance requests, insofar as the tax debtor would agree to the direct transfer.
In this way, it would also reduce the administrative burden for the applicant Member State and avoid all administrative burden and costs for the requested Member State.
When applying the transfer and retention arrangements in view of securing the payment of disputed VAT liabilities in the Member State of establishment, that Member State must clearly respect the tax debtor’s rights.
In this regard, the proposal envisages judicial oversight of the retention of the VAT refund amount in the Member State of establishment.
This is designed to help tax debtors wishing to contest the measure, as they will no longer have to contest precautionary measures in the other Member State.
Disclosure of serious VAT fraud cases involving at least two Member States to OLAF and the EPPO
Chapter XIII, which covers relations with the Commission, would be amended to better protect the European Union’s financial interests.
The Member States participating in the EPPO should communicate to it, information on the most serious VAT offences as referred to in Article 2(2) of Directive (EU) 2017/1371.
These would be cases involving activity in two or more Member States and total damage of at least EUR 10 million.
The EPPO will be an independent and decentralised EU body. It will be responsible for investigating and prosecuting crimes against the EU budget such as cross-border VAT fraud above EUR 10 million. It will operate as a single office across participating Member States and will combine European and national law enforcement efforts in a unified, seamless and efficient approach.
OLAF will remain responsible for administrative investigations into non-fraudulent and fraudulent irregularities affecting the EU’s financial interests.
Its mandate and competence with regard to VAT fraud therefore go beyond those cases identified as most serious in Article 2(2) of Directive (EU) 2017/1371.
In addition, as not all Member States will be part of the EPPO, OLAF will continue with its administrative investigations in relation to nonparticipating Member States in the same way as it does today.
In the participating Member States, in areas under the EPPO’s remit, the EPPO and OLAF will establish and maintain close cooperation aimed at ensuring the complementarity of their mandates, and avoiding duplication.
In this context, OLAF may bring support to the EPPO investigations on VAT fraud cases.
OLAF may also facilitate and coordinate VAT fraud investigations making use of its interdisciplinary approach, as well as provide analysis and intelligence.
To this end, the Member States should communicate to OLAF information about VAT offences where they deem it appropriate for the exercise of its mandate.
Update of the conditions governing the exchange of information and the Commission’s exercise of implementing powers
Chapter XV, which lays down the conditions for the exchange of information, would be amended to reflect the new legal basis for personal data protection: Regulation (EU) 2016/679.
Chapter XVI, with the general and final provisions, must be updated with the new legal basis for Member State checks on how the Commission exercises its implementing powers: Regulation (EU) 182/2011.
Measures applicable from 1 January 2020
Sharing customs procedures 42/63 and vehicle registration data with tax authorities
Chapter V deals with the storage and exchange of information on taxable persons and transactions. Amending this chapter would allow for exchanges of data on customs imports with VAT exemptions and on vehicle registrations.
The first new set of data would be exchanged to tackle the abuse of the VAT scheme for importing goods free of VAT (customs procedures 42 and 63) where they were supposed to be delivered to another Member State but were diverted to the black market.
One weakness of these procedures is that the entire process can take a long time to check, despite the risk of fraud occurring quickly. Before they can carry out such checks the tax authorities in the Member States of import and of destination have to wait for the importer’s recapitulative statement, which often fails to materialise.
With this proposal, the relevant information in relation to customs procedures 42 and 63 submitted electronically with the customs declaration (e.g. VAT numbers, value of the imported goods, type of commodities etc.) would be shared by the Member State of import with the tax authorities in the Member State of destination.
The tax authorities in both countries would therefore be able to cross-check this information with the information reported by the importer in his recapitulative statement and VAT return, and by the recipient in his VAT return.
In addition, if the Member State of destination detected that the VAT number of the customer, albeit valid, had been hijacked by the importer, it could immediately inform the Member State of import, so that it could check the importer.
In addition, by crosschecking the customs information with the VAT recapitulative statements, the tax authorities would be able to detect cases of undervaluation at the moment of import, designed to avoid customs duties.
Extended access to the data could be granted to Eurofisc officials, as for intraUnion supplies.
Amending Article 21 would also clarify that customs authorities responsible for checking the conditions for the VAT exemption in customs procedures 42 and 63 should be granted automated access to the VAT Information Exchange System (VIES) so that they could check the validity of VAT identification numbers.
This is one of the conditions for granting the VAT exemption at the moment of import and an automatic check at the border would be a considerable deterrent against this type of fraud.
The second new set of data to be exchanged would be used by Eurofisc officials to tackle cross-border fraud involving the sale of second-hand cars.
In particular it would allow them to identify swiftly who has committed the fraudulent transactions and where.
In practice, this access would be granted through the EUCARIS platform, where automated information exchanges on vehicle registrations already take place.
Measures applicable as from 1 July 2021
When taxable persons established in one Member State supply goods or services to customers established on the territory of another Member State, they are increasingly subject to obligations in that other Member State.
This is often driven by technological developments.
In order to facilitate the correct application of VAT on such cross-border transactions, the mechanism provided for in Article 32 by which information is made readily available for taxable persons should be extended to encompass other information, notably on rates and measures targeting small enterprises.
Full text of the proposal
Fact sheet
Fraud - Table of contents
- VAT fraud
- Fair Taxation: Commission proposes new tools to combat VAT fraud
- New EU study confirms billions lost in VAT gap
- European Commission - Action Plan on VAT
- Towards a definitive VAT system and fighting VAT fraud
- European Commission - VAT lost across the EU is estimated at €168 billion
- Quick reaction mechanism
- Fighting tax evasion and avoidance: a year of progress 2013
- What is tax avoidance?
- Tax Fraud: commission looks at how VAT collection and administrative cooperation can be improved
- Study to quantify and analyse the VAT gap in the EU-27 member states 2012
