Education and Science, EU – Baltic States, Financial Services, Legislation, Markets and Companies, Taxation

Under the QRM, a member state faced with a serious case of sudden and massive VAT fraud would be able to implement certain emergency measures, in a way which they are currently not allowed to under present VAT legislation. In this context, the proposal provides that member states would be able to apply (within the space of a month), a "reverse charge mechanism" which makes the recipient rather than the supplier of the goods or services liable for VAT.

The Quick Reaction Mechanism was foreseen in the new VAT Strategy adopted at the end of 2011.

In a speech called “Future VAT system: pro-business, pro-growth”, Algirdas Šemeta, Commissioner for Taxation, Customs, Anti-fraud and Audit said that VAT accounts for over 20% of national revenues. VAT therefore has a significant impact on every EU citizen and business. However, after 40 years since the EU VAT system was first set up, the regime no longer fits with the modern service-driven and technology-based economy. “The time has come for an ambitious VAT reform", the Commissioner added.

The Commission adopted in December 2011 a Communication on the future of VAT, which set out the fundamental characteristics that must underlie the new VAT regime, and priority actions needed to create a simpler, more efficient and more robust VAT system in the EU.

The new VAT system’s objectives

On 1st December 2010, the Commission adopted a Green Paper on "The future of VAT – Towards a simpler, more robust and efficient VAT system". This Green Paper was followed by a six month public consultation in which the Commission received 1700 contributions from businesses, academics, citizens and tax authorities.

The European Parliament, the European Economic and Social Committee and the Tax Policy Group consisting of the personal representatives of the finance ministers welcomed the Green Paper and confirmed the need to reform the EU VAT system.

In parallel, the Commission carried out an economic evaluation of the VAT system.

For the full text of the Communication and more details on VAT, see:

http://ec.europa.eu/taxation_customs/taxation/vat/key_documents/communications/index_en.htm

First, VAT must be made more workable for businesses. A simpler, more transparent VAT system would relieve businesses of considerable administrative burdens and encourage greater cross-border trade. This, in turn, will be good for growth. Among the measures envisaged for a more business-friendly VAT are expanding the one-stop-shop approach for cross border transactions; standardizing VAT declarations; and providing clear and easy access to the details of all national VAT regimes through a central web-portal.

Second, VAT must be made more efficient in supporting member states' fiscal consolidation efforts and sustainable economic growth. Broadening tax bases and limiting the use of reduced rates could generate new revenue for EU states without the need for rate increases. The standard VAT rate could even be reduced in some member states, without any impact on revenue, if exemptions and reductions were removed. The Communication sets out the principles that should guide the review of exemptions and reduced rates. The Commission will also analyse member states' use of reduced rates and exemptions when reviewing their fiscal policies in the context of the European Semester (see MEMO/11/11).

Third, the huge revenue losses that presently occur due to uncollected VAT and fraud need to be stopped. It is estimated that around 12% of the total VAT (which should be collected), is not collected at all (the so-called VAT Gap). In 2012 the Commission will start “a quick reaction mechanism” to ensure the member states can respond better to suspected fraud schemes. Furthermore, the Commission will see whether current anti-fraud mechanisms, such as Eurofisc, need to be strengthened and will explore the possibility of a cross-border audit team to facilitate multilateral controls.

Finally, the Commission has concluded that the long-standing question of changing to a VAT system based on taxation at origin is no longer relevant. Therefore, VAT will continue to be collected in the country of destination (i.e. where the customer is located), and the Commission will work on creating a modern EU VAT system based on this principle.  

Combating tax fraud

Then in a Communication on fighting tax fraud and evasion (Brussels, 27 June 2012), the Commission proposed concrete measures to strengthen efforts to combat tax fraud in the EU and safeguard public revenues. Among the new measures, there are: increased sanctions for tax crimes, a cross-border tax identification number, an EU tax-payer's charter and stronger common measures against tax havens.

Taking a holistic approach, Communication looks at ways to strengthen current measures and sets out possible new initiatives for eliminating fraud and evasion in Europe.

Algirdas Šemeta, Commissioner for taxation, customs, anti-fraud and audit, said: "Tax evaders steal from the pockets of ordinary citizens and deprive member states of much-needed revenue. If we want fair and efficient tax systems, we must stamp out this activity. The political will to intensify the battle is here; now it is time to translate that into action. If we play as a team, with a common strategy, we can defeat the fraudsters and evaders, and reclaim vast sums of money that are legitimately due."

Reference: Press Release, “Tackling tax fraud and evasion: Commission sets out concrete measures”; IP/12/697, 27 June 2012.

Combating tax fraud

At the March 2012 European Council, Member States asked the Commission "to rapidly develop concrete ways to improve the fight against tax fraud and tax evasion, including in relation to third countries and to report by June 2012". The Communication submitted to the EU Summit at the end of June concrete measures to combat tax fraud.

The size of the shadow economy is estimated to be nearly one fifth of GDP on average across EU member states, representing nearly €2 trillion in total.. Given the globalisation of the economy and technological advances, it is clear that isolated national efforts to overcome this problem will not work.

Therefore, the Communication sets out a 3 tier approach aimed at attacking evasion and fraud from every possible angle.

= At national level

Member states should focus on improving their administrative capacity to collect taxes, as was clearly set out in the Country Specific Recommendations (see IP/12/513). The Commission will monitor closely their progress in this field, while also providing technical assistance where needed. National authorities should also make it easier for the willing to comply, for example, through voluntary disclosure programs. EU instruments such as the one-stop-shop (see IP/12/17) and a possible Tax Web-Portal should also assist better compliance.

= At the EU level

Action to tackle tax evasion at European level has proven to be effective. Thanks to the EU Savings Directive, for example, member states exchange information on non-resident tax-payers to the value of €20 billion. The challenge now is to deepen such cooperation and strengthen common tools. In this respect, agreement by the EU-27 on the revised Savings Directive is essential. In addition, a number of new ideas are presented, which include a possible European cross border tax identification number, a quick reaction mechanism for VAT fraud and minimum EU rules and sanctions for fraud and evasion.

= At the international level

For the fight against tax evasion to be truly effective, international partners must apply good governance standards that are equivalent to the EU's. The mandates that the Commission has requested to negotiate stronger savings agreements with key neighbouring countries are crucial in that respect. Before the end of 2012, the Commission will also set out a "stick and carrots" approach to dealing with tax havens, and measures to deal with aggressive tax planners.

Next steps: Quick Reaction Mechanism

The Commission will start work on developing the ideas set out in its Communications. Before the end of 2012, it will present an Action Plan on fighting fraud and evasion, with specific measures that could be rapidly developed. In tandem, the Commission will also come forward with its initiative on tax havens and aggressive tax planning.

The Commission's Communication can be found on:
http://ec.europa.eu/taxation_customs/common/publications/com_reports/taxation/index_en.htm

This would significantly improve their chances of effectively tackling complex fraud schemes, such as carrousel fraud, and of reducing otherwise irreparable financial losses. In order to deal with possible new forms of fraud in the future, it is also foreseen that other anti-fraud measures could be authorised and established under the QRM.

Algirdas Šemeta, Commissioner for Taxation, Customs and Anti-Fraud, mentioned that when it comes to VAT fraud, fraudsters have become quicker and cleverer in developing schemes to rob the public purse. “The Quick Reaction Mechanism will ensure that the EU system is sufficiently equipped to tackle VAT fraud effectively. It will help preserve much needed public revenues and create a fair and level-playing field for honest businesses."

Reference:  Press Release, IP/12/868, 31 July 2012.

VAT fraud costs the EU and national budgets several billion euro every year. In some serious cases, vast sums are lost within a very short timeframe, due to the speed at which fraud schemes evolve nowadays. For example, between June 2008 and December 2009, an estimated €5 billion was lost as a result of VAT fraud in greenhouse gas emission allowances.

Currently, if a member state wish to counteract VAT fraud through measures not provided for under EU VAT legislation, it must formally request a derogation to do so. The Commission then draws up a proposal to this effect and submits it to Council for unanimous adoption before the measures can be implemented. This process can be slow and cumbersome, delaying the member state in question from taking the necessary action to stop the fraud.

With the Quick Reaction Mechanism, member states would no longer have to wait for this formal process to be completed before applying specific anti-fraud measures. Instead, a much faster procedure would grant them a temporary derogation within a month. The derogation would be valid for up to one year. This would allow the EU states to begin counteracting the fraud nearly immediately, while more permanent measures are being established (and if necessary while the standard derogation procedure is being launched).

More information on:

The Draft Council Directive, see:
http://ec.europa.eu/taxation_customs/taxation/vat/key_documents/legislation_proposed/index_en.htm

For more information, see MEMO/12/609