EU to Propose VAT Overhaul to Combat $63 Billion Fraud

The European Commission will propose a major overhaul of the European Union’s value-added tax rules in September in an effort to fight fraud associated with the tax, costing governments as much 60 billion euros ($63 billion) a year, reports BNA.

“The European Commission has today proposed that the fight against cross-border VAT fraud be taken up as an EU priority to combat serious and organized crime,” said European Taxation Commissioner Pierre Moscovici in an April 12 statement. “It is no longer acceptable to put our heads in the sand, pretending that this problem does not exist.”

Missing Trader Fraud

According to a commission report published April 12, a large part of the VAT fraud in the EU can be traced to “missing trader fraud” where merchants collect VAT and then disappear. The report says 2 percent of organized crime groups are responsible for 80 percent of the missing trade cross-border fraud.

“Worse, those huge sums can be used to fund further organized cross-border crime such as human trafficking, drug smuggling and terrorist activities, as some ongoing investigations have already shown,” Moscovici said.

The new VAT proposal, which had been planned for early 2017 and will require the unanimous consent of the 28 EU member states in the Council of Ministers, would require that VAT is charged under the rules of the originating country on sales made across borders to another country in the EU at the rate applicable in the country of consumption.

The VAT on a cross-border sale, whether it be goods or services, would be collected by the tax authority of the originating country and transferred to the country where the goods or services are ultimately consumed.

Online Web Portal

A key provision of the upcoming VAT overhaul would allow EU-based businesses to sort out their VAT via an online web portal in their home country instead of having to register for VAT, file returns and make payments in every EU country where they operate.

The upcoming proposal comes amid the pending “reverse-charging” VAT legislative proposal, which is also designed to fight cross-border fraud. Countries led by the Czech Republic and Austria insist reverse charging, which puts the responsibility for collecting VAT on retailers, is the best way to fight fraud.

The pending reverse-charging plan is expected to be a temporary measure that ends in 2022. Its critics, which include the commission, believe it could clash with the upcoming EU VAT regulatory overhaul.

EU finance ministers also are negotiating two other key VAT legislative proposals. One calls for EU-member states to be given the right to allow digital publications, including e-books, to be allowed the same low or zero VAT rate as printed publications. Another would extend the EU’s one-stop-shop VAT system to allow for various electronic services to be extended to all electronic commerce sales throughout the bloc.

Another pending VAT proposal would eliminate VAT-free status for the importation of approximately 150 million small consignments into the EU, which the European Commission says is also a major source of VAT fraud.

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