Fiscal fraud is a concern for all EU member states, and this is one area where cooperation between them can address some of the problems, particularly those related to the internal market. VAT is an important component of such intra-community fraud, mainly because some traders have shown that it is very possible to abuse the current exemption on intra-Community supplies – a situation commonly referred to as “missing trader” or “carousel” fraud.

Briefly, fraudulent traders charge VAT but do not pass it on to the state’s revenue department. A worse scenario for member states is the possibility of giving VAT refunds for uncollected tax. The United Kingdom appears to be bearing the more substantial brunt of this criminal activity, with losses calculated at more than EUR10 billion over a period of 12 months. Just to show the extent of the problem, earlier this year international media reports suggested that the UK was ready to given in on the well-known EU budgetary rebate in return for help in combating this type of fiscal fraud. It must be said that the UK government denied any link between the two issues.

The Economic and Financial Affairs (ECOFIN) Council has invited the European Commission to study the situation and suggest ways of moving forward by the end of this year. Some member states have already suggested the introduction of a generalised reverse charge mechanism that would ultimately place tax liability on the recipient, rather than the supplier, on domestic commercial transactions valued over a specific threshold. Indirectly, some form of reporting requirements would need to be imposed, probably both for the supplier and the recipient.

The European Commission is calling for a cautious approach in this respect. Although such a step would disrupt missing trader fraud, the Commission wants to know what impact this will have on additional costs to taxpayers and the extent to which such action will deter traders from operating across borders. To this end, and because it is expected that any changes will have an impact on the European business community, such as those relating to reporting obligations and cash flow effects among others, it is giving the opportunity to such stakeholders to react.

It is also making available a study on the issue. The conclusions of this point to extra one-time and recurring administrative costs, with the highest recurring costs being due to electronic filing of general purchase and sales lists particularly for SMEs, negative cash-flow impacts on SMEs, although positive impact on the large companies studied (the reasons for which are not identified by the study), and, no impact on competitiveness on most of the companies in the sample of 20 case-studies across four member states. The reactions gathered also point out that solutions other than a general reverse charge mechanism could perhaps be more effective.

Interested traders and businesses are encouraged to submit their views up to 15 October. The relevant documents and details are available on: http://ec.europa.eu/taxation_customs/common/consultations/tax/article_4209_en.htm

Julian Micallef is Consultation Coordinator at Forum Malta fl-Ewropa