Analytics, EU – Baltic States, Financial Services, Legislation, Modern EU, Taxation

Despite many reforms, the VAT system has been unable to follow modern challenges in global, digital and mobile economy. Current VAT system dates back to 1993 and was intended to be a transitional system. However, it is still very fragmented and overly complex for the growing number of businesses operating cross-border and leaves the door open to fraud.

Besides, domestic and cross-border transactions are treated differently, while a number of goods and/or services can be bought free of VAT within the Single Market.

The Commission has consistently pressed for the reform of the VAT system in order make it easier for companies trading across the EU, to account for VAT. However, existing VAT rules still do not correspond to the EU Single Market principles.

Commission’s proposed already in April 2016 some measures in the “VAT Action Plan”; besides, a new “single European-wide VAT system” was presented in October 2017. See: Press release “European Commission proposes far-reaching reform of the EU VAT system” in: http://europa.eu/rapid/press-release_IP-17-3443_en.htm.  

See also publication in the “Baltic Course Magazine”: European Commission proposes far-reaching EU VAT system’s reform. 09.10.2017. In: 

http://www.baltic-course.com/eng/modern_eu/?doc=133919&ins_print;

Combating lost revenues

According to Commission’s estimates, VAT fraud leads to lost revenues of over €50 billion in the EU-28; this money could be used instead in public investment for hospitals, schools and infrastructure. Recent “Paradise Papers” showed again that tax avoidance schemes are being used to help wealthy individuals and companies to circumvent the EU’s VAT rules to avoid paying their fair share of tax. Thus, reports suggest that VAT fraud schemes can also be used to finance criminal organisations, including terrorists.

New proposals would enable the EU states to exchange more relevant information and to cooperate more closely in the fight against these activities.

While the EU states’ tax authorities already exchange some information on business and cross-border sales, this cooperation relies mostly on the manual processing of information. At the same time, VAT information and intelligence on organised gangs involved in the most serious cases of VAT fraud are not shared systematically with EU enforcement bodies.

Finally, a lack of investigative coordination between tax administrations and law enforcement authorities at national and EU level mean that this fast-moving criminal activity is not currently tracked and tackled quickly enough.

The new proposals would strengthen cooperation among EU states, enabling them to tackle VAT fraud more quickly and more efficiently, including on fraud that takes place online. Taken together, the proposals would give a major boost to the EU’s ability to track and clamp down on fraudsters and criminals who steal tax revenues for their own gain.

Commission Vice-President for the Euro and Social Dialogue, Valdis Dombrovskis, mentioned that cross-border VAT fraud was the main cause of revenue loss both in the EU states and in the EU budget. The new proposal will help to strengthen the cooperation among national institutions and the EU in order to effectively tackle this problem and improve tax collection. One of the EU's own resources is also based on VAT.

Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici, said that some companies were still taking advantage of lax application of EU VAT rules to get away with paying less VAT using off-shore jurisdictions. Combating fraud, he added, required more effective information-sharing than currently exist between the competent national authorities; this has been the aim of new proposals.  

The draft will now be submitted to the European Parliament for consultation and to the Council for adoption.

Key measures in the draft include:

= Strengthening cooperation among EU states: VAT fraud can happen in a matter of minutes, so the EU states need to have the tools to act as quickly as possible. New proposal would put in place an online system for information sharing within 'Eurofisc', the EU's existing network of anti-fraud experts. The system would enable EU states to process, analyse and audit data on cross-border activity to make sure that risk can be assessed as quickly and accurately as possible. To boost the capacity of 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, which would be especially important for cases of fraud in the e-commerce sector. New powers would also be given to Eurofisc to coordinate cross-border investigations.

= Working with law enforcement bodies: 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, including 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.

= Sharing of key information on imports from outside the EU: information sharing between tax and customs authorities would be further improved for some customs procedures which are currently open to VAT fraud. Under a special procedure, goods that arrive from outside the EU with a final destination of one EU state can arrive into the EU via another member state and transit onwards VAT-free. VAT is then only charged 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 EU states.

= Information sharing on cars: trading in cars is also sometimes subject to fraud due to the difference in VAT’s application 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 EU states.

More information on: = Q&A on the proposed tools to combat VAT fraud; = Full text of the proposal; = Action Plan on VAT – Towards a single EU VAT area; = Press release on reform of EU VAT rules; = Q&A on reform of EU VAT rules; = Factsheet on reform of EU VAT rules, = Q&A on VAT for e-commerce.

General reference: http://europa.eu/rapid/press-release_IP-17-4946_en.htm?locale=en; Latvian version in: http://europa.eu/rapid/press-release_IP-17-4946_lv.htm