The European Commission has said new figures revealing that the value-added tax gap was EUR160bn in 2014 demonstrates the need for member states to get behind its proposals for far-reaching EU VAT rule reform.
The VAT gap is the difference between the estimated VAT revenues that a member state could expect to receive compared with the amount of VAT actually collected. It measures the effectiveness of a member state's VAT enforcement and compliance measures, covering revenue lost to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies, and miscalculations.
The Commission acknowledged that the VAT gap had fallen by EUR2.5bn since 2013, but noted the performance of individual member states varies enormously. 18 member states had closed their VAT gap, while the gap widened in eight states.
Publishing the report, the Commission said that the VAT gap continues to be at an "unacceptably high level," stating that the findings support recent calls by the Commission to overhaul the EU's VAT system to tackle fraud and make it more efficient.
The VAT Gap rate ranged from a high of 37.9 percent of uncollected VAT in Romania to a low of only 1.2 percent in Sweden. In absolute terms, the highest VAT gap of EUR36.9bn was recorded in Italy, while Luxembourg had the lowest of EUR147m.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation, and Customs, said: "Our member states are losing tens of billions of euros in uncollected VAT revenue. This is unacceptable. The current regime is woefully ill-equipped to deal with the problems of VAT fraud and miscalculations, and it's clear that the numbers will not get better by themselves. Member states must now quickly agree on a definitive fraud-proof EU VAT system, as laid out by the Commission earlier this year. I therefore urge all of our member states to have a frank and meaningful discussion in order to feed into next year's proposals, so we can tackle this issue once and for all."
Typically VAT fraud occurs when a supplier pretends to have transported goods to another member state but the goods are in fact consumed VAT-free locally. It also occurs when a client of a cross-border transaction purchases goods or services VAT-free and charges VAT without remitting it to tax authorities while his/her customer can deduct it, known as missing trader fraud. In addition, other types of fraud can arise, e.g. fraudsters claiming to be taxable persons to obtain goods intended for final consumption VAT-free.
In its Action Plan on VAT reform, the Commission said that fighting organized crime networks engaged in missing trader fraud requires joint efforts between tax administrations and law enforcement authorities within and between member states. The Commission also intends to investigate the possibility of extending the use of automated access to data. It will also explore with member states the possibility to develop an automated mechanism that would allow a cross-matching between the data reported by each party of every single transaction. This would allow detecting fraud in early stages and ultimately prevent a missing trader fraud, be it domestic or intra-Community.
Further, since May 2012, the Commission has engaged member states and other stakeholders on possible options for implementing the "destination principle" in B2B cross-border trade, to establish a "definitive regime" in place of the current transitional rules. This has included a proposal for a generalized reverse charge system, which appears to have been dismissed as flawed.
Under a generalized reverse charge system, VAT would be "suspended" along the whole economic chain and would be charged only to consumers. This means that total VAT collection is shifted to the retail stage. Such a system would not have the self-policing nature of the current VAT system (i.e. under the principle of fractionated payment), which ensures that a small number of fairly large, reliable taxable persons in the economic chain account for most of VAT.
The Commission has concluded that, instead of a generalized reverse charge system, the best option for the EU as a whole would be to tax B2B supplies of goods within the EU in the same way as domestic supplies, thereby fixing the great flaw of the transitional arrangements while keeping the underlying features of the VAT system intact. Such a system of taxation of cross-border supplies will ensure consistent treatment of domestic and cross-border supplies along the entire chain and re-establish the basic features of the VAT in cross-border trade i.e. the fractionated payments system with its self-policing character, the Commission said.
According to the Commission, "this change should reduce cross-border fraud by about EUR40bn (80 percent) a year in the EU. The intermediate and final consumption of the goods will continue to be taxed where the goods are transported to, which is a reliable proxy of the place of consumption. Such an objective criterion would make it difficult for taxable persons to engage in tax planning or commit fraud. This will enable tax administrations to concentrate resources on other challenges."
Some significant simplification measures will be taken to accompany this change. For instance, the One Stop Shop that already exists for telecommunication, broadcasting, and electronic services, and which is due to be extended to all e-commerce transactions as part of the Action Plan, will be even more widely implemented and rebooted, so as to fully exploit the opportunities presented by digital technology to simplify, standardize, and modernize processes. Businesses will need to register for VAT purposes in the member states where they were established only. Collectively, businesses should save an average of around EUR1bn.
Such a system would require more trust and cooperation between tax administrations, the Commission says, as the Member State where the goods arrive would have to rely on the Member State of departure to collect the VAT due on the cross-border supply.