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Both
systems have the potential to considerably reduce the
phenomenon of 'missing trader' (MTIC) fraud, also commonly
called carrousel fraud.
Potential
problems
A
missing trader fraud is where a taxable person, having
made an intra-Community acquisition on which VAT has not
been charged makes a subsequent domestic supply on which
he charges VAT and then disappears without having paid
that VAT to the Treasury.
Both
systems also pose potential problems, however, that the
Commission said would need to be examined further before
either system could be agreed.
The
taxation of intra-Community supplies of goods could create
competitive cash flow disadvantages for businesses trading
in the internal market and would require the re-allocation
of VAT revenues between member states.
As
regards the possible introduction of a generalised reverse
charge system for domestic transactions, the Commission
insists that this could only work effectively if it was
applied uniformly across all member states and it should
not be made available as an optional system.
Given
the dearth of experience with such a generalised system,
however, the Commission said it was not opposed to a pilot
project being launched by a willing member state, provided
that certain conditions are met.
László
Kovács, Commissioner for Taxation and Customs, added that
the system of taxing intra-Community supplies and a
generalised reverse charge system both presented
advantages in the fight against MTIC fraud.
He
said that the lack of empirical data and the need to
preserve national budgets from other, new types of fraud
obliged the Commission to be very cautious in proposing
changes to the current VAT system.
“Before
continuing work in this area, political steering is needed
to ensure that member states are prepared to accept the
consequences of any radical change,” Kovács added.
Taxation
of intra-Community supplies of goods
Under
this concept, intra-Community supplies would be taxed in
the member state of origin at the rate of 15 per cent.
Where
the member state of arrival applies a rate of more than 15
per cent, the purchaser in the latter member state would
have to pay that additional VAT directly to that member
state.
Likewise,
where the member state of arrival applies a rate lower
than 15 per cent (due to the application of certain
reduced VAT rates or the zero rate in certain member
states), the member state of arrival will allow credit to
the taxable person who is making the intra-Community
acquisition.
Taxation
of intra-Community supplies appears to provide an adequate
solution to the problem of Missing Trader Intra-Community
(MTIC) fraud, but it by no means solves other types of
fraud.
The
Commission said that it would potentially cause cash-flow
difficulties for traders, in particular for SMEs, which
would have to pre-finance the VAT in transactions where
they currently do not pay VAT.
Clearing
system
According
to the Commission, the trickiest issue with this option
would be to define a clearing system of the VAT revenues
between the member states.
Member
states of origin will have to collect VAT - applied at a
rate of 15 per cent - and transfer it to the member states
of arrival.
As
a result, the Commission has calculated that on average,
10 per cent of member states' VAT receipts would depend on
transfers made by other member states.
Before
further analysing how a clearing system could function,
the Commission is seeking political guidance from the
ECOFIN Council to determine whether taxing intra-Community
supplies in the member state of origin is a viable option
to be considered.
One-stop
scheme
If
member states are unwilling to agree that their VAT
receipts could be dependent on other member states, the
Commission sees the only alternative to be taxation of
intra-Community supplies at destination.
This
alternative would allow for taxation at the appropriate
rate in the member state of arrival, while a common rate
of 15 per cent for intra-Community supplies would not be
necessary.
In
addition, there would be lower costs both for taxable
persons and for tax administrations. Such an alternative
would, however, require setting-up a real one-stop scheme.
The
“one stop” scheme would enable traders to fulfil their
registration and declaration obligations in their home
member state, including for services provided in other
member states where they are not established.
The
payment would be made directly by the taxable person to
the member state of consumption.
Generalised
reverse charge system
Under
a generalised reverse charge system, the VAT system that
is currently applicable to intra-Community supplies would
also apply to domestic transactions.
This
means that VAT would not be charged by the seller to the
customer if the latter was another taxable person.
Instead, the customer (rather than the vendor) would be
responsible for paying the VAT to the Treasury.
The
Commission said it believed that such system would
substantially reduce MTIC fraud.
It
was concerned, however, that this reverse charge system
may negatively affect member states’ revenues, due to
other new types of fraud such as untaxed consumption and
the misuse of VAT identification numbers.
General
reverse charge
In
order to combat these new types of fraud, a number of new
measures would need to accompany the reverse charge
system, and these could complicate the system and create
new - but in the eyes of the Commission not insurmountable
- burdens for businesses and tax administrations.
The
Commission took the view that a general reverse charge
should either be introduced on a mandatory basis in the
whole EU or be entirely disregarded as a concept.
It
would not be acceptable to have an optional reverse charge
system for member states, as this would lead to
considerable burdens on companies trading in several
member states.
In
view of all the points outlined above, and the lack of
empirical data on the impact of a generalised reverse
charge system, the Commission concluded that it was
worthwhile to launch a pilot project in one member state
in order to test the impact of such as system, on
condition that strict criteria were fulfilled.
Source
: Director of Finance online - UK, dated
25/02/2008
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