I understand that one of your reports has recently been approved by the Committee for Economic and Monetary Affairs. Could you explain what this report is about and what it aims to achieve?
I presume you are referring to the proposal for a Council directive amending Directive 2006/112/EC regarding an optional and temporary application of the reverse charge mechanism in relation to supplies of goods and services susceptible to fraud.
In order to have a better understanding of the importance of the initiative some basic facts are of relevance. The matter revolves round the value added tax (VAT). VAT is a major component of the total tax revenue so one can understand that a systematic revenue loss can have dramatic budgetary consequences. It is estimated that 10% of total VAT receipts are lost through fraudulent activities. In the period 2000 - 2006 the VAT gap was between 90 to 113 billion Euros.
Revenue losses are resulting from the black market, the filing of false returns, bankruptcy of traders in the chain of production and distribution as well as unauthorized VAT deductions. Although every kind of tax evasion causes losses of revenue and possibly leads to distortions of competition, recently Member States have noticed increasing tax fraud emanating from what is termed the missing trader intra-community fraud - in its most serious form referred to as carousel fraud.
Missing trader intra-community fraud occurs when the supplier charges VAT and receives VAT from the customer on an intra-community sale and absconds later on without paying VAT to the treasury. The term “missing trader” refers to the fact that the trader disappears and is generally never found. The cross border dimension means that VAT is not paid in the country of origin. VAT is however subsequently charged when a domestic sale is made. The vendor does not pay the VAT to the treasury and disappears. In the meantime the customer claims a refund of the VAT it paid to the vendor. Consequently the treasury has to pay the refund to the customer an amount for VAT that it never received from the vendor.
Carousel fraud is the carrying out of repeated (cross border) purchase and sales transactions within a rapidly changing group of companies. This intra community sale and purchase cycle can be repeated several times with the same goods or services hence the term carousel fraud. Usually an extensive and complicated chain of transactions in several countries is used to cover up what is actually happening. Carousel fraud is often perpetrated by criminal organisations and involves goods that are easily transported and have a high value like integrated circuits and mobile phones. What is of major concern is the fact that this is spreading to the services sector in particular to the trading of greenhouse emission allowances.
This is where the reverse charge mechanism comes in. The reserve charge mechanism allows a VAT registered firm selling goods to another VAT registered firm not to charge VAT. The tax is only charged by a taxable person selling on the product to the final non taxable consumer or a non-VAT registered firm. All of the tax due on the product is concentrated in that last taxable person who cannot claim a reimbursement. In this way there is no opportunity for carousel fraud. This mechanism is therefore a means of impeding carousel fraud and missing trader fraud.
The proposal allows Member States until 2014 and for a minimum period of two years to introduce and apply a reverse charge system for supplies of defined categories of goods and of allowances to emit greenhouse gases. The proposal limits to three the categories of goods and services that may be subject to this mechanism with a maximum of two being goods.
The report includes some essential changes I felt were required to guarantee the efficiency of the mechanism as well as to ensure that there were no extra burdens on the business sector. The safety and credibility of the Emission Trading Scheme allowances should also be reinforced and for this reason once a Member State decides to use the option, the reverse charge should be mandatory for allowances to emit greenhouse gases. Further by July 2014 the Commission should report to the European Parliament and the Council on the effectiveness and efficiency of the application of the reverse charge mechanism together with appropriate proposals based on the reports of the individual Member States.
My report has received close to unanimous support from the Economic and Monetary Affairs Committee. The very last hurdle should be overcome next week with a debate involving all MEPs and the final vote during the Strasbourg plenary session.
David Casa wrote this article in his weekly coloumn Question Time on Saturday 7th February 2010 on The Malta Independent.
