Does the EU facilitate VAT fraud?
VAT fraud
The European VAT system is complex and vulnerable to fraud. Due to the multitude of national provisions in each EU member state, there is no single clear system within Europe when it comes to VAT declarations. A feature inherent to this complexity is the high likelihood that errors will be made. Nevertheless, a mistake does not constitute fraud, and this may always be corrected via a supplementary declaration. For fraud, culpability and intent must be proven and this is not always easy. Still, mistakes may be penalized, and the strictness or lenience that the tax authorities exercise in imposing a fine varies from one EU member state to the other, and even among organizations to be fined.
According to the CBS, in 2007, proceeds from the collection of VAT generated nearly 32% of the total tax income for the Netherlands. This makes it the most important source of tax income and it is thus understandable that more and more focus is being placed on the correct, prompt, complete and accurate compliance with VAT guidelines.
VAT fraud is a major problem, and within the EU, the total of these fraudulent activities is estimated at between 200 and 250 billion Euros per year. Within this context, carrousel fraud, as it is known, is a prominent collective term for VAT fraud that is characterized by multiple variations and fraudulent patterns, and is growing at an extremely rapid rate. In essence, carrousel fraud amounts to the trading of goods in a circle (from A to B, to C and then back to A), and when the fraudulent companies unjustly claim a refund on VAT and when the VAT owed is not being paid. Even bonafide companies can get caught up in carrousel fraud unwittingly and ultimately be subjected to unpleasant investigations by the tax authority and possibly also additional tax payments.
In times of rising budget deficits as a result of the financial crisis, it is only logical that the existence of a ‘pot of fraud money’ will result in a tightening up of measures to combat VAT fraud within Europe. In light of this, various national anti-fraud measures have been implemented, and in late 2008, the European Anti-Fraud Commission submitted proposals which can have far-reaching consequences for businesses, and could also mean a considerable increase in the number of claims. In this proposal, member states would be able to deposit a VAT claim with suppliers in another member state if the buyer has failed to pay VAT, and this claim may be collected mercilessly if the supplier has made a mistake on the VAT declaration it has submitted. The issues of culpability or intent are not even relevant in this case.
The question thus arises, to what extent does the EU itself facilitate VAT fraud?
If the EU had issued a decree regarding VAT instead of a guideline, the differences in interpretation between EU member states could have been prevented. The harmonization of registration and invoice requirements within the EU would promote consistency, and reduce the complexity of the VAT subject matter. The collaboration between the fiscal EU authorities is not a smooth one, and the high volume of information provided by businesses, in the form of listing, Intrastat and VAT declarations is not being used adequately to detect and address incidences of fraud. This is most certainly the case now that listings are being expanded and the frequency has been increased to a monthly basis; the issue of fraud could be approached efficiently if the fiscal EU authorities were to work together effectively.
The primary culprit however remains the mistrust between the EU member states themselves, and the presumed fraudulent intentions of the “partner states” that is implied as a result. After all, this is the reason why the current “temporary” VAT system, based on the country-of-destination principle, will, for the time being, not be set aside to make room for a system with its roots in the country-of-origin principle. With the country-of-origin principle, European VAT proceeds are supposed to be divided among the member states using a central clearinghouse construction, and this requires transparency and mutual trust. The lack of trust between the EU member states only serves to accommodate the methods of fraudulent organizations, thus paving the way for VAT fraud.
In spite of all of the blame one could place on the EU and its member states, saying that the EU facilitates fraud this way is taking it one step too far, in my opinion. The question remains:
Does the EU facilitate companies sufficiently in preventing VAT fraud?
Fortunately, it has been acknowledged that there is a lot the EU can do to improve this situation. In 2002, the EU introduced an online system, called VIES (VAT Information Exchange System), which allows companies to verify a VAT number. Unfortunately, this online service did not produce the proof companies could use in the event they were audited in order to demonstrate that they had acted in good faith. Starting this year, this has been improved. The VIES system now asks for the requesting party’s VAT number, and sends a "certificate” back, allowing this proof to be supplied more easily. Nonetheless, this does not achieve very much in the way of keeping the chance of fraud in check. The only thing anyone intending to commit fraud has to do is provide a valid VAT number.
Further improvement of the VIES System
If a company transfers the liability to pay VAT, it is responsible for determining the correct company name and VAT number combination. At present, the local tax authorities provide possibilities to test this combination for accuracy but the procedure is laborious and time-consuming.
The Unit D4 (Administrative cooperation and fight against fiscal fraud) of the Directorate General Taxation and Customs Union of the European Commission has confirmed to Pincvision that the organization continues to work on improvements to the VIES system.
Given the restrictions that arise within some EU member states as a result of privacy legislation, the VIES System cannot always provide feedback for a company name and/or address details during a VAT number check. These details can however be used during the validation process. The Directorate General Taxation and Customs confirms that in late 2009/early 2010, the VIES System will be expanded, and in addition to the link to the requesting party and the feedback of a “certificate,” it will also provide the possibility to submit the name and/or address of the company in combination with the VAT number for verification.
This is a far-reaching technical improvement of the functionality since spelling, typos and the like must all be able to be tolerated to a certain extent during validation. A matching procedure is performed (a probability matching) whereby a company’s ERP data does not have to correspond letter for letter to the data in the VIES database in order to be approved.
In conclusion, I think that the expansion and the increased frequency of listings in combination with improved validation options via the VIES system and the various anti-fraud initiatives all represent a major step in the right direction in the fight against VAT fraud. Still, the mistrust that exists between the EU member states is a major millstone around the neck of effective anti-fraud efforts, and businesses must continue to remain vigilant that they do not become the victims of it all.
Gert-Jan van Telgen
Business Unit Manager VAT & Intrastat
