Italy €1bn anti VAT fraud proposal rejected by EU

A proposal from Italy to impose the domestic VAT reverse charge on wholesale to retail sales has been rejected by the European Commission (EC).

The measure, which targets suspected VAT fraud, shifts to burden of reporting from the wholesale seller to the retailer, and eliminates and cash transfer of Italian VAT. The Italian tax authorities suspect the domestic retails supply chain is rife with VAT evasion – up to €1 billion per annum, so requested permission from the EC for a derogation from the EU VAT Directive.

The EC rejected the request this week on the basis that there is still not sufficient evidence of such fraud.  It stated that such a measure may actually just shift the fraud to the retail level, and encourage fraudsters to move on to other countries.

Italy required the measure as part of a package of VAT reforms to help it reduce its deficit below the 3% to GDP Euro currency requirement.  If it cannot do so, under an agreement with the EC, it may have to raise duties, and increase Italian VAT to 24% in 2016.

Various forms of VAT fraud have engulfed the EU VAT system in the past 10 years. It initially emerged in the computer chip and mobile phone sectors. It has since spread to carbon trading and wholesale electricity sectors.

5 EU countries recently proposed extending the reverse charge to a wide range of transactions, and will submit a formal request to the Commission in June.