EU Approves Measures To Combat VAT Fraud
25 June 2013
Posted by: Author: Ulrika Lomas
Author: Ulrika Lomas
The Council of the European Union has agreed on a package of measures aimed at enabling member states to more effectively combat value-added tax (VAT) fraud.
- One aimed at enabling immediate measures to be taken in cases of sudden and massive VAT fraud, to be known as the quick reaction mechanism; and,
- Another allowing member states to implement, on an optional and temporary basis, a reversal of liability for the payment of VAT on the supply of certain goods and services.
The measures are in particular aimed at enabling states to mitigate the impact of Missing Trader Intra-Community (MTIC) fraud, where fraudsters take advantage of the fact that goods or services may be imported from another member state free from value added tax, and sold to the domestic market inclusive of value-added tax. The trader that imported and re-sold the goods then "goes missing" without remitting the VAT collected on the domestic transaction to the local tax authority. Meanwhile, providing the person acquiring the goods or services has adhered to domestic reporting requirements, did not know, and could not reasonably have known that the transaction would be fraudulent, input tax credits may be claimed on the inputs use in making taxable supplies, or their resale.
The Council of the European Union explained that fraud schemes evolve rapidly, giving rise to situations that require a swift response, creating the need for such a quick reaction mechanism. Until now, MTIC has been tackled either by amendments to the VAT Directive or through individual derogations granted to member states under that Directive. Both require a proposal from the Commission and a unanimous decision by the Council -— a process that can take several months.
The proposed quick reaction mechanism would involve an accelerated procedure for allowing member states to apply a "reverse charge" to specific supplies of goods and services for a short period of time, by derogation from the provisions of the VAT directive. When a member state wishes to introduce a specific measure under the quick reaction mechanism, the Commission will have a short period in which to confirm whether it objects, taking into account the views of other member states.
The reverse charge mechanism shifts the liability for the payment of VAT from the supplier to the customer, who then accounts for both output tax and input tax; a tax-neutral consideration. The mechanism ensures that VAT is not passed from the customer to the supplier, preventing unscrupulous suppliers from vanishing with VAT that is required to be remitted to local tax authorities.
Member states will be afforded the option of applying the reverse charge mechanism to a pre-determined list of sectors, namely: mobile phones, integrated circuit devices, supplies of gas and electricity, telecoms services, game consoles, tablet PCs and laptops, cereals and industrial crops and raw and semi-finished metals.
The two mechanisms will be temporary and exceptional, expiring on December 31, 2018. In the meantime, the Council agreed to prioritize work on the development of a new VAT system, as outlined in a December 2011 communication, with a view to preventing opportunities for fraudsters rather than relying on solutions based on derogations. This review will in particular look to refine the EU's place of supply rules, which require that VAT is paid on the destination principle, ie. the location of the buyer at the domestic rate applicable in that member state.