VAT Fraud in the European
Union
Fabiola Annacondia
IBFD
Manager VAT & Topicals
Brussels, 4 February 2015
IBFD - www.ibfd.org
EU VAT legislation
1954: Value added tax (VAT) was first introduced in
France.
1967: the Member States of the European Economic
Community agreed to replace their national turnover tax
systems with a common VAT system.
.
.
.
2015: Member States of the European Union – 28
Member States apply the EU VAT legislation (EU VAT
Directive, 28 VAT National Acts, EU Implementing
Regulations, etc.)
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EU VAT legislation
VAT in the EU is regulated by a Council Directive.
Any change to the regime require a unanimous decision by
the 28 Member States.
High turnover of Presidency of the Council of the European
Union means reform takes time.
Pressure from business to modernize, simplify and harmonize
VAT across the Member States.
Pressure from tax administration to increase VAT revenue and
reduce the VAT gap.
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Future of VAT proposed (Green Paper)
December 2011 the Commission adopted a
Communication on the Future of VAT (Green paper)
Fundamental characteristics that must underlie the new
VAT regime and intended to create a:
• simpler (clear and transparent rules on VAT
registrations, VAT returns and compliance),
• more efficient (supporting Member States:
propose the removal of exemptions and limiting
reduced rates without effecting Member States
revenue); and
• more robust (preventing fraud and closing the
“VAT Gap”)
VAT system in the EU tailored to the single market
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VAT Fraud - Action plan (White Paper )
− one-stop-shop arrangements: further extension 1 January 2015 
− VAT information on web portal 
− tripartite VAT Forum (Commission, Member States and businesses)
2012: Expert Group + VAT Forum 
− quick-reaction mechanism(accelerated derogation procedure - RCM)
− anti-fraud measures, cross-border audit teams (Fiscalis 2020)

Reg. 1286/2013
− standard VAT return – (Proposal COM(2013) 721)
− public bodies, transport, non-profit organizations (studies –
consultations)
− restriction of reduced rates (consultation report 2013)
− efficiency and effectiveness of tax administration
− co-operation with third countries and between VAT and customs
− split payment – data warehousing –
SAF-T (Standard Audit File - Tax)
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(Russia, Norway)
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VAT Gap – Reverse charge mechanism
VAT Gap: Expected VAT revenue and VAT actually
collected (estimated EUR 177 billions – Study 2014)
VAT Gap: non-compliance, VAT fraud, bankruptcies and
insolvencies, statistical errors, delayed payments, legal
avoidance, others.
VAT Gap (< 30%) - Reverse charge mechanism (QRM)
(type of transactions)
Italy
32%
6
Slovak Rep. 33%
11
Lithuania
36%
5
Latvia
37%
3
Greece
38%
2
Romania
44%
9
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Optional reverse charge mechanism
Member States may, until 31 December 2018,
apply the reverse charge mechanism to:
– transfers of CO2 emission and
similar allowances (Article 199a(1)(a) and (b))
– mobile telephones (Article 199a(1)(c))
– integrated circuit devices (Article 199a(1)(d))
– gas and electricity supplied to taxable dealers(Art. 199a(1)(e))
– gas and electricity certificates (Article 199a(1)(f))
– telecommunications services (Article 199a(1)(g))
– game consoles, table PCs and laptops (Article 199a(1)(h))
– cereals and industrial crops, including oil seeds and
sugar beets (Article 199a(1)(i))
– raw and semi-finished metals (Article 199a(1)(j))
(Article 199a)
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Missing-trader fraud
VAT: broad base + high tax rate
→ perfect conditions for fraud
Goods:
− low value added
Services:
− high value added
not suitable for fraud, unless input
tax can be avoided:
− intra-Community acquisition
− postponed accounting
(transfers of CO2
emission allowances
and other tradable services)
Victim ("innocent" trader) to be persuaded by:
− low purchase price, or
− intermediate supplier in pre-arranged deal with third party
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Missing-trader fraud (Carousel fraud)
NL
BG
(VAT rate: 21%)
(VAT rate: 20%)
payment 100
supply of goods (100 + 0%)
A
"conduit
company"
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"missing
trader"
supply of goods
95 + 19 VAT
supply of goods (100 + 0%)
payment 100
B
20
20
19
payment
114
C
BG
tax
authorities
19
"broker" or
"innocent
trader"
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Options to recovery of revenue loss
Recovery of the revenue loss from the "innocent trader":
− denial of C's VAT deduction in respect of B's invoices, or
− application of joint-and-several-liability provision
− correction of zero rate on C's subsequent supply to A, or
New legislative measures (COM(2008) 109):
− abolition of the zero rate for intra-Community supplies → 15%
− introduction of the reverse charge mechanism applicable
to domestic supplies
− increase frequency recapitulative statements(Directive 2008/117)
− real-time VAT collection
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