Photo: European Union audiovisual libraryWhile many Europeans are hard-pressed to pay the heightened taxes that have resulted from austerity measures employed to solve the economic crisis, loopholes in the tax system have facilitated massive amounts of tax fraud that drain crucial funds from public finances.
In order to address the public outcry that has ensued, leaders within the European Union are searching for solutions that would crack down on tax fraud while creating a more cohesive tax system.
Although the right of taxation is fundamental to member states’ sovereignty, the interactions of 28 different tax systems create gaps that lend to tax evasion, eroding the tax bases of many nations. Global solutions are required to safeguard the stability of the international tax system and create a level playing field for multinationals and small businesses alike.
Moreover, recent disclosures regarding extreme losses in VAT have placed anti-tax fraud proposals at the forefront of the EU’s agenda. Data released by the European Commission in September revealed that uncollected VAT receipts led to losses of about €193 billion in 2011, almost 1.5 per cent of the Union’s GDP. Surveys indicate that these numbers have more than tripled since 2008, highlighting the impact of the financial crisis on lost VAT.
Global solutions are required to safeguard the stability of the international tax system
However, the recent sharp escalation in missing VAT can be attributed to more than merely the impact of the bankruptcies and falling import levels during the recession because ‘carousel fraud’ has become an increasingly salient problem. Carousel fraud occurs when individuals import products without paying VAT, then sell the goods domestically and charge VAT, fleeing the country before they file the tax. According to Algirdas Šemeta, the EU´s Taxation and Anti-Fraud Commissioner, “The amount of VAT that is slipping through the net is unacceptable; particularly given the impact such sums could have on bolstering public finances”.
Thus, the Commission has proposed a VAT quick reaction mechanism, enabling member states to take quick action against massive cases of VAT fraud. This proposal hastens the cumbersome process by which a member State can request a derogation from the Commission to combat VAT fraud using measures not outlined by EU VAT legislation, allowing member states to counteract the fraud almost immediately.
As the rapporteur for the European Parliament’s report on the quick reaction mechanism, I have also supported its expansion, which charges the recipient of foreign goods and services for VAT rather than the external provider, equipping member states with the means to tackle carousel fraud.
The reverse charge mechanism was implemented in 2010 after increases in carousel fraud were identified and it can currently be employed by member states in restricted circumstances. However, the recent proposal will enable member states to apply the mechanism one month from the detection of extreme levels of fraudulent activity.
These tools better equip member states to combat criminals that are swindling both public finances and taxpayers alike.
The reforms made to the VAT system in 2011 have already proven to be effective. Thus, the addition of the quick reaction mechanism will only further augment the efficiency of this revised system.
According to Šemeta, the ambitious reforms are directing the EU in the right direction to tackle the issue of VAT fraud.
On November 18, the European Commission gathered 250 participants from 37 countries for a fiscal forum in Brussels to discuss strengthening the efficiency of the VAT system in the EU
Since VAT accounts for over 20 per cent of national revenues, it is crucial that the system works efficiently and effectively.
VAT fraud places an uneven burden on European taxpayers and creates an uncompetitive environment for businesses. Thus, continuous innovation is needed from policymakers, experts, investors and the public in order to tackle the issue.
David Casa is a Nationalist MEP.