Italian VAT fraud domestic reverse charge on retail sector

Italy is proposing to introduce the domestic reverse charge in the large-sized retail sector in new terms included within the 2015 budget. The government is seeking to tackle large-scale fraud being perpetrated in supply chains.

Whilst such a change would help reduce growing fraud in the sector, it could seriously present a major cash-flow challenge to law-abiding retail supply companies. They would lose their right to charge Italian VAT, and would therefore be left with major VAT credits which can take months or longer to recover from the tax authorities.

The EU VAT system has been vulnerable to a specific type of fraud in recent years which is estimated to cost the free-trade region around €100 billion per annum, with related court cases doubling in the past two years.

The fraud exploits the zero-rating of VAT on goods sold across EU state borders. Fraudsters report these transactions as no VAT collected, but actually sell the goods domestically in the country and charge full local VAT. They then pocket this VAT without declaring it to the tax authorities. Often the chains in these transactions can become very complex, involving multiple fraudulent transactions and companies across many EU countries’ borders – known as carousel fraud.

To combat this fraud, the EU permits member states to apply the reverse charge on industries targeted by missing trader fraudsters. This would eliminate the VAT cash payment on a domestic sale and thus prevent any fraud. The buyer of the goods then becomes liable to record the whole transaction without any cash movements.

To date, fraudsters have targeted mobile phones, computer chips, carbon credits, computer tablets and electricity. However, Italy now believes there is significant missing trader fraud in the supply chain – particularly in wholesales to retailers.

Italy is now discussing with the European Commission to possibility to extend the domestic reverse charge to its retail sector.