On November 30 the European Commission released new tools intended to make the European Union's value-added tax system more resilient to fraud.
The package includes numerous changes to how member states will communicate and cooperate with one another, it will alter the mandate of law enforcement agencies, and it will establish a new European Public Prosecutors Office.
VAT fraud is estimated to cause losses for EU member states of about EUR50bn (USD59.2bn) each year and there are growing concerns that terrorist organizations are branching out into carrying out value-added tax fraud schemes to fund their activities.
According to the Commission, the proposal will enable member states to communicate more quickly to challenge fraudsters, as fraud can happen nearly instantaneously. The proposal would put in place an online system for information sharing within Eurofisc, a network that connects anti-fraud experts from the member states. This system would enable member states to process, analyze, and audit data on cross-border activity to make sure that risk can be assessed as quickly and accurately as possible. New powers would also be given to Eurofisc to coordinate cross-border investigations.
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. The Commission said this is especially important for cases of fraud in the e-commerce sector.
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.
Many of these measures will help member states and law enforcement agencies to better tackle carousel fraud, which costs member states tens of billions in revenue each year. Carousel fraud involves a fraudulent seller charging VAT but not remitting that VAT to the relevant tax authority and disappearing. The name of the fraud is derived from the typical circular chain of transactions set up by the criminals to maximize profits, and often entails sham paperwork and the creation of temporary companies to engage in the trades. In order to hide the fraud, the circle sometimes involves compliant honest traders.
The Commission said of the measures: "The measures announced today would have a profound effect on how member States exchange information around cross-border VAT fraud in the EU, allowing them to consolidate information on the businesses taking part in this activity in different countries and to investigate suspicious activity more easily. Once agreed, the rules would put in place a mechanism by which member states would be able to jointly process and analyze data on VAT fraud via the Eurofisc network of member state experts. At the same time, member states would be able to jointly audit and assess companies operating cross-border where there is reason to believe that fraudulent activity is taking place. EU countries would also be able to send officials abroad to assess cases of VAT fraud in other member states where their country has been losing out on tax revenues."
Other actions are planned to tackle fraud in other areas.
The Commission has proposed that member states should share key information on imports from outside the EU and on vehicle registration. According to the proposal, information sharing between tax and customs authorities would be further improved for certain customs procedures that are open to VAT fraud.
Presently there is a special arrangement that enables goods arriving from outside the EU with a final destination in another member state to transit onwards VAT-free. VAT is charged only 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.
Among other things, in respect of goods, the relevant information about the imported goods (e.g. VAT numbers, value of the imported goods, type of commodities, etc.) already submitted electronically with customs declarations will be shared by the member state of import with the tax authorities in the member state of destination.
The plan will include providing law enforcement agencies with access to car registration data. The Commission explained: "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."
The measures will enter into force as soon as they are agreed by the member states and the European Parliament has given its opinion, the Commission said. As the implementation of the automated access to the information collated by the customs authorities and to vehicle registration data will require new technological developments, their application will be deferred until January 1, 2020, to allow the member states and the Commission to carry out those developments, it said.