The vulnerability of the European Union’s VAT system to fraud has been a major concern for policymakers in this field for a considerable amount of time. The European Parliament’s report, drafted as a response to the Green Paper on the future of VAT back in 2010, for which I was rapporteur, made it clear that the efficacy of the system must be improved and made more robust in order to address these issues.
The vulnerability of the European Union’s VAT system to fraud has been a major concern- David Casa
This holds true even more so when considering the economic reality of present times. Member state coffers are already significantly burdened by unsustainable public spending and prolonged stunted growth. The cost of VAT fraud runs into billions of euros every year. In light of this, everything should be done to find a way to cut this loss.
When speaking about VAT fraud in this context it is not small-scale cutting corners to which I refer. Fraudsters in this area are highly organised and sophisticated criminal groups, capable of operating extremely complex schemes that take advantage of weaknesses within the VAT system in place.
One such scheme is ‘missing trader’ or ‘carousel’ fraud. This scheme capitalises on the fact that in multi-jurisdictional trading the movement of goods is tax free, allowing the fraudster to charge VAT and then disappear – hence ‘missing trader’.
More sophisticated forms of this fraud consist of goods being transferred in a cycle, completing the same cycle a number of times – ‘carousel’.
In one of the first reports I drafted related to VAT we looked into the viability of the reverse charge mechanism as a way of addressing this particular scheme. The mechanism makes the receiver of the goods or services liable for VAT rather than seller or provider, making it impossible for the trader to abscond.
The mechanism proved to be effective and was applied to goods known to be vulnerable to this kind of fraud; goods such as microchips and mobile phones that are high in value but also small in size and, therefore, easily transportable. But fraudsters have evolved since then and new trends have emerged such a shift of focus from goods to services.
Member states wishing to make use of the reverse-charge mechanism must request the European Commission to grant a derogation. This has proved to be time consuming and inflexible. The process is far too bureaucratic, taking no less than eight months, and, more often than not, a great deal longer.
This is where the quick reaction mechanism comes in – the report I am currently working on. The QRM will seek to complement the derogation system and is to be used only in extreme cases of large-scale fraud, which should see the time taken to react to the fraudulent activity decrease to just one month. In this way, member states will be empowered to take action against criminal gangs and curb the haemorrhage.
The Commission proposal amends the VAT Directive to allow this exception. My report amends the proposal which, so far, is fully supportive of what the Commission aims to achieve yet questions certain aspects.
In the course of the consultation I carried out with stakeholders, I was informed of the burden that compliance with a change in established practices would place on business.
We must therefore strike the right balance: empowering member states on the one hand and protecting businesses from unnecessary costs and burdens on the other. Timely consultation with the business sector can prove important in this regard.
In addition, safeguards should be put in place to ensure that the QRM is not used capriciously. Indeed, it is a mechanism that should only be resorted to when faced with unforeseeable massive fraud.
The report is now at the amendments stage where compromises with other political groups are being formulated. It will then be voted on by the members of the Committee on Economic and Monetary Affairs at the end of this month followed by a final vote by all MEPs at the European Parliament’s plenary in Strasbourg in February.
David Casa is a Nationalist MEP.