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EU to propose radical VAT fraud measure

  • Feb 24, 2016 | Richard Asquith

EU to propose radical VAT fraud measure

The European Commission is formulating a highly radical proposal to combat VAT fraud. It aims to eliminate missing trader / carousel fraud, which is estimated to cost member states over €100bn per annum.

If agreed to by member states, it would require some 3 million businesses selling goods across internal EU borders to start collecting and remitting approximately €600 billion in foreign VAT.

Fraudsters exploit EU VAT regime

Currently, the EU ‘reverse charge’ is operated on B2B sales of goods across EU borders. This simplification eliminates the need for a seller to charge VAT in the country of their EU customers, and so avoid having VAT register and report in other member states. This is known as an intra-community supply of goods, and is zero rated for VAT.

Fraudsters have exploited this measure in the past ten years by reporting foreign sales, with no VAT, as intra-community supplies. The criminals then actually sell the goods domestically with local VAT, which they do not report and pocket instead.

EC wants VAT payments at source

The EC’s idea to combat this is to require sellers of goods to other EU countries to charge and collect the sales VAT of their foreign customers. This would be at the VAT rate of the customer’s country of residence. The seller would report and pay this foreign VAT to their own national tax authority through their regular VAT return. This VAT would then be paid to the sellers’ national tax authority, for forwarding to the relevant tax authorities. Customers would simultaneously report the transaction in their VAT return – reflecting a purchase invoice with input VAT but no cash payment.

The above operation would work in a similar way to the EU’s 2015 VAT MOSS regime, whereby sellers of digital goods collect the VAT of their foreign customers and pay over through the MOSS portal of their home territory.

When the current 'transitional' EU VAT process for cross-border transactions was introduced in 1993, the EC was committed to implement a 'definitive' alternative by 1996.  This included taxing at the location of the supplier - origination principle - as suggested in this latest proposal.  However, the member states were unable to reach agreement on the framework and the current - destination principle - basis was left in place.

Deterrent to EU trade?

Details of the proposal have yet to be formalized, and would require unanimous agreement from all member states. Whilst this solution would potentially choke off the opportunity for VAT fraud, it would place a substantial new compliance and administrative burden on sellers, which may dissuade them from selling across the EU.  It would also force national tax authorities to fund additional administrative procedures to oversee the cash reporting and payments.

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is the former VP Global Indirect Tax at Avalara