Combatting VAT fraud in the EU: use of the reverse charge mechanism - Exchange of views - Main contents

Document date	22-12-2015
Publication date	23-12-2015
Reference	15196/15
From	Delegation of the Czech Republic
External link	original article
Original document in PDF

Council of the European Union Brussels, 22 December 2015

PUBLIC

(OR. en)

15196/15

LIMITE

FISC 189 ECOFIN 971

NOTE

From: Delegation of the Czech Republic

To: Permanent Representatives Committee/Council

Subject: Combatting VAT fraud in the EU: use of the reverse charge mechanism - Exchange of views

• 1. 

  At the meeting of the Committee of Permanent Representatives of 18 December 2015, the delegation of the Czech Republic requested that this item is included in the agenda of the ECOFIN Council of 15 January 2016.

• 2. 

  In view of this discussion, delegations will find in the annex the note from the delegation of the Czech Republic on "Combatting VAT fraud in the EU: use of the Reverse Charge

  Mechanism".

__________________

ANNEX

COMBATTING VAT FRAUD IN THE EU:

USE OF THE REVERSE CHARGE MECHANISM

• I. 

  History and background

  The reverse charge mechanism (RCM) was introduced with the aim to tackle the risk of “missing trader fraud” in such cases where the supplier avoids to pay the VAT from sales and where at the same time the customer has the right to deduct the input VAT. Initially, the scope of the RCM transactions was rather limited, however, has significantly broadened with the

  development of the Internal Market, namely in 2013 1 . There is a common system of VAT at

  the EU level, nevertheless, the administration of the VAT differs Member State by Member State. All the 28 tax administrations have undergone a considerable development over the time the current transitional VAT system in the EU has existed.

II. Domestic and intra-Community transactions comparison

There are two systems of VAT collection in the field of domestic supplies in place: a fractional payment system and a RCM. The RCM has been increasingly used but is still limited in scope. There are also the so-called conventional anti-fraud measures that are in principle used in the first place by the Member States; their number has gradually grown as well. Despite that, the VAT gap in the EU has been constantly exorbitant (almost EUR 170 billion in 2013), and has not significantly changed for a number of years. In sum, the evidence shows that the measures currently available, including the Quick Reaction Mechanism, are highly insufficient to combat VAT fraud in the EU.

1 Articles 199a and 199b to the VAT Directive

Unlike the domestic supplies, the taxation of the intra-Community supplies results in a situation which to a great extent resembles the RCM as the tax liability is, in principle, charged reversely. In these cases the Members States demonstrated to be able to keep track of intra-Community transactions through using IT technologies such as the VAT Information Exchange System (VIES). Given these facts, to control domestic transactions under the RCM should prove to be an even easier task.

III. Impacts of the reverse charge mechanism

The RCM has been often presented as the end of the VAT system in the EU and a potential threat to the Internal Market. However, in reality the available legal options to apply the RCM have been broadly and increasingly used by a majority of Member States as an effective antifraud measure. In this respect, history has shown no negative impacts on the Internal Market or the competitiveness of EU businesses. Besides, looking more closely at the structural elements of the VAT with or without the RCM, we observe the very opposite of any daunting prognoses. The tax base, tax rate, taxable transactions, place of taxable supply etc. remain exactly the same regardless of whether or not the RCM has been applied. The only part that changes in the given process is the point of collection of VAT by the tax administration. Thus, the fiscal neutrality of the tax would be maintained. Moreover, the VAT revenues remain either unchanged or would increase as a result of reduced VAT fraud.

IV. New scope and new risks

We argue that the wider use of the RCM will eliminate missing trader fraud. The key risk of this option is non-payment of the tax at the end of the business chain. A potential transfer of VAT fraud to the end of the business chain can be readily eliminated through the introduction of specific reporting obligations relying on modern technologies and enabling the tax administrations to cross check transactions on-line. The tools being used in the collection of VAT have developed dramatically over the last 10 years. In this respect, it is no longer true that a wider application of the RCM would push fraudulent behaviour to neighbouring countries. The potential risks linked to the RCM are the very same as in the case of introducing a massive and successful conventional measure against VAT fraud by any single Member State.

• V. 

  Implementation of the reverse charge mechanism

  Nowadays, the RCM is implemented only in selected business sectors. However, the missing trader fraud can be carried out using any kind of goods or services. Fraudsters can thus move very flexibly and fast from one business sector to another. The experience has shown that the only reliable common denominator of missing trader fraud is a high supply value that can bring substantial gain to fraudsters. This implies that it might be better to focus on the supply value rather than the respective sector when defining the scope for the RCM in the future. Therefore, the introduction of the so called general RCM with a set level above a certain threshold would serve this purpose in our opinion the best.

  Potential procedures of broadening the application of RCM are as follows:

  • 1. 

    Using Article 395 of the VAT Directive. Given the Commission’s assessment of this option to be outside of the current legal framework repeatedly for three times already over the last 10 years, the usage of this respective Article cannot be considered a viable

    solution any longer 2 .

  • 2. 

    Broader application of the RCM as an option for the definitive VAT regime. In a nutshell, the available options are as follows (i) keeping the current transitional regime, (ii) extending the current regime applicable to the intra-Community supplies to the domestic supplies (reverse charge), and (iii) extending the current regime applicable to the domestic supplies to all intra-Community supplies (One-Stop-Shop). Any selected option must be agreed by all Member States unanimously. Consensus on the final VAT system has not been reached yet.

2 2006 (Austria and Germany), 2015 (Austria, Bulgaria, Czech Republic, and Slovakia)

• 3. 

  A pilot scheme for selected interested Member State(s). Launching a pilot would present the opportunity to test the scheme proposed in the short term. A pilot project applied by one or two Member States would generate valuable information about any possible impacts of the general RCM set above a certain threshold. Already in 2008, the European Commission recognised the absence of empirical evidence concerning the generalised RCM and it declared at that time its willingness to proceed with the preparatory work to allow a volunteering country to start a pilot project. Considering the current conditions, under which different options for the definitive VAT regime have been discussed, it is more than obvious that the Commission should take into consideration launching a pilot project once again. In November 2015, the European Commission signalled that this option may be contrary to Article 113 of the Treaty on the functioning of the EU since it would lead to a substantial dis-harmonisation of VAT in the EU. However, such a legal analysis should be dismissed as rather inaccurate vis-à-vis the existing concept of harmonised indirect taxes in the EU. The system of VAT in the EU is based on a common fundamental framework but within this common setting shared by 28 Member States there still exist many differences and particular details. Therefore, by applying the very same analysis on other issues, e. g. VAT rates or the so-called Quick Reaction Mechanism, we would have to conclude that the current system is in many ways in contradiction to the EU Treaties.

VI. Conclusions

VAT fraud in the EU has not been successfully mitigated since the introduction of the common system of VAT. Therefore, the common VAT system is in urgent need of a reform. The RCM is not per se a new measure and as shown above it is not necessarily having a

substantial impact on the current VAT system. On the contrary, both systems have functioned side by side for years without any evidence of serious distortion of the Internal Market. Moreover, the structural elements of the system remain unaltered and the RCM’s potential contribution on VAT fraud especially with respect to missing trader fraud is considerable. All in all, the RCM is not only broadening the scope of action of the Member States but allowing them for more flexibility in their engagement in tackling VAT fraud. Given the desirability and necessity to find a timely and efficient solution, it is our very conviction, that the issue of widening our options of VAT collection through the RCM deserves to be elaborated further in a structured debate.

As a solution the Czech Republic proposes:

• 1. 

  A prompt and realistic assessment of the advantages and disadvantages of the available options for a VAT definitive regime with view of the actual state of administration of the harmonised VAT in the 28 Member States (the “Future of VAT” Group run by the European Commission is an appropriate vehicle for technical debate).

• 2. 

  Giving interested Member States a possibility to apply the RCM on a general basis unless a more appropriate alternative is available.

• 3. 

  Launching a pilot project as the unique opportunity to demonstrate that the application of the RCM on a broad basis could be fully functional. The experience gained could be used for preparing the definitive VAT regime in the future. Given that there are certain conditions to be fulfilled when introducing a pilot project including technical preparations and control mechanisms in the Member State engaged the Czech Republic is ready to run the pilot, and have all necessary IT tools and control mechanisms including appropriate legislation in place as of 2016.

Questions for discussion:

• Against the background of the necessity to solve the problem of VAT missing trader fraud in the EU, do you consider the generalised reverse charge mechanism with a set level above a certain limit to be an option for the taxation of domestic supplies?

• If not, what measures do you see as a viable alternative?

• Would a pilot scheme similar to the one foreseen in 2008 be an appropriate tool that could contribute with relevant experience and information and lead to further progress in this area? Would you object to the Czech Republic running such a pilot before the establishment of a definitive regime and doing so at the soonest time possible?

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