The fight against VAT fraud

In December 2008, the European Commission adopted a communication on a coordinated strategy to improve the fight against VAT fraud in the European Union presenting an action plan for future legislative measures to enhance the capacity of tax administrations to prevent or detect VAT fraud.

Presently, the importation of goods is exempt from VAT if followed by a transfer of the same goods to a taxable person in another member state. Relief is granted at initial importation if the VAT is declared, and paid, in the member state of destination. In fact, the importation of goods into an EU member state qualifies as a taxable event and in principle VAT is payable by any person or persons designated or recognised as liable by the member state of importation.

The Commission has stressed however that member states have applied this exemption differently which has been exploited by traders to avoid payment of VAT on goods imported. In its action plan, the Commission proposed to tighten the conditions under which the importer can benefit from the VAT exemption in a bid to cut down on traders intentionally failing to report their supply to the tax authorities, which failure leaves the member state of destination without any information about the arrival of goods on its territory, thus hampering the detection of potential VAT losses.

In its recent Directive 2009/69/EC of June 25, which amends Directive 2006/112/EC on the common system of VAT, the EU has strengthened the conditions for VAT exemption related to the supply or transfer of goods to a taxable person in another member state.

In order for the exemption to apply, at the time of importation, the importer must provide to the competent authorities of the member state of importation his VAT identification number issued in the member state of importation; the VAT identification number of the customer to whom the goods are supplied issued in another member state; and evidence that the imported goods are intended to be transported or dispatched from the member state of importation to another member state.

Therefore, the importer has to prove that the above mentioned conditions are fulfilled in order to benefit from the import-VAT exemption for intra-Community supplies.

The directive ensures that businesses making intra-Community supplies of goods observe their obligation to report the supplies to the tax authorities in the member state of destination, the latter thus being informed at all instances that goods have been supplied to a taxable person in their territory and that therefore tax should be accounted for by the recipient.

These new conditions will become effective as from January 1, 2011.

Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.