Progress and Future Challenges in the Fight Against VAT Fraud
Combating VAT fraud remains a critical priority for EU Member States and the European Union as a whole. The substantial revenue lost to VAT fraud, often linked to organized crime, underscores the urgency of addressing this issue. European Commission President Ursula von der Leyen has tasked Commissioner Hoekstra with maintaining "the highest level of ambition" in the fight against tax fraud.
Achievements Over the Past Decade
The progress made in the past decade should bolster confidence in the efficacy of anti-fraud strategies. Strengthened VAT regulations, coupled with enhanced cooperation at the EU level, have successfully uncovered international VAT fraud networks responsible for billions in losses and helped to reduce the VAT gap. Beyond protecting national budgets, this increased collaboration among Member States has also fostered new avenues for communication and cooperation, laying the groundwork for efforts to tackle other forms of fraud and tax avoidance.
Examples
Italy: Sistema di Intercambio (SDI)
Italy had for a long time one of the highest VAT gaps in the EU, amounting to about €35 billion in 2018. To counter the high levels of VAT fraud in the country, Italy in 2019 introduced the Sistema di Intercambio (SDI) exchange system for business-to-business transactions. Under this DRR, businesses must issue electronic invoices for such transactions and send them to the SDI platform, allowing the tax authorities to check the content. If there are no irregularities, the invoice is validated and sent to the customer, allowing tax authorities to have an overview of transactions and the VAT-trail almost in real-time. The SDI system was one of the first and most stringent electronic invoicing DRR frameworks in the EU, representing a highly advanced 'clearance' model, with a broad scope. SDI's introduction coincided with a notable reduction in Italy's VAT gap, which decreased from €35 billion to €16 billion between 2018 and 2022. While it is difficult to determine the precise impact of the SDI system alone, the timing suggests it likely played a considerable role in supporting this progress.
Admiral (I, II, III)
In April 2021, the Portuguese Tax Authorities launched an investigation into a local company specialising in the sale of electronic devices due to suspicions of VAT fraud. This initial investigation, later reported to EPPO, culminated into a large scale EU-wide operation, involving more than 200 searches (Investigation Admiral). With the support of Europol and national authorities, the operation unveiled the largest VAT carousel fraud network ever discovered in the EU, worth a staggering €2.2 billion. Based on the initial investigation, a subsequent series of searches and arrests were carried out in November 2024 (Admiral 2.0) across 16 countries to uncover another suspected VAT fraud network, raising the fraud damage to €2.9 billion. One month later, a new suspected fraud network was uncovered in Greece (Admiral 3.0), worth €38 million.
Moby Dick
A 2024 investigation – codenamed Moby Dick – led by the EPPO into suspected VAT carousel fraud, linked to Italian organised crime, resulted in the issuance of 43 arrests warrants and a €520 million freezing order. In Italy alone, 129 bank accounts were frozen, 44 luxury cars and boats, together with 192 real estate properties seized.
Silk Road
Europol, at several locations in Belgium. Four suspects were arrested who were believed to have been involved in a CP42 fraud ring, where goods were imported via Liege airport VAT-free under the pretence that the goods were destined for another Member State. The fraud ring is believed to have caused for up to €310 million in evaded taxes and duties.
Concerns About Coordination and Efficiency
However, the involvement of multiple stakeholders in the fight against fraud has raised important questions about the efficiency and coherence of their collective efforts. Commissioner for Budget, Anti-Fraud, and Public Administration, Piotr Serafin, has been assigned the task of leading a review of the overall anti-fraud structure. In his confirmation hearing before the European Parliament, he highlighted ongoing and forthcoming evaluations of various anti-fraud bodies. The outcomes may lead to changes aimed at enhancing synergies and streamlining operational frameworks to optimize efforts against fraud. Serafin emphasized the need to strengthen cooperation and complementarity between the European Anti-Fraud Office (OLAF) and the European Public Prosecutor’s Office (EPPO). A revision of Council Regulation (EU) No 904/2010 on administrative cooperation in VAT, scheduled for the first quarter of 2025, is anticipated to bolster Eurofisc’s capabilities and enhance its cooperation and information exchange with other anti-fraud entities.
Innovations in Technology
The development and utilization of new digital tools have significantly transformed the fight against VAT fraud. Advanced technologies enable the analysis of VAT data, visualization of supply chains, and real-time fraud detection, with their effectiveness likely to increase in the coming years. Following the Council's backing for the VAT in the Digital Age package, the introduction of an EU-wide Detailed Reporting Requirement (DRR) by 2030 represents a pivotal advancement in addressing Missing Trader Intra-Community (MTIC) fraud. Meanwhile, several Member States are already operating or planning to implement national equivalents for domestic transactions, which should further combat various types of VAT fraud.
Challenges Ahead
Nonetheless, the extensive data reported and collected under the DRR will demand significant time and resources from both tax administrations and businesses. The VAT Expert Group—a stakeholder advisory body to the European Commission—has voiced concerns that the DRR might result in excessive data clarification requests for compliant businesses. They urge the Commission to devise a set of guiding principles for Member States regarding the use, collection, and security of DRR data.
Furthermore, the dynamic and complex nature of the VAT system, alongside the emergence of new goods and services in an increasingly digital and globalized landscape, may create new opportunities for fraudsters to exploit. Policymakers and authorities must remain vigilant in addressing these evolving challenges to sustain their efforts against VAT fraud effectively.
Conclusion
While significant strides have been made in the fight against VAT fraud, the journey ahead is fraught with challenges that require ongoing commitment and innovation. By enhancing cooperation, embracing technological advancements, and remaining alert to new tactics employed by fraudsters, the EU and its Member States can fortify their defenses and continue to protect public finances from VAT fraud.