EU Auditors Slam Inaction On VAT Fraud

By Aline Robert

(EurActiv) — Member states’ unwillingness to cooperate leaves them wide open to VAT fraud, the European Court of Auditors said on Thursday (3 March). This weakness costs the EU as much as €168 billion per year.

“This is a criminal problem. Stopping it should be top of our priorities,” said Neven Mates, the author of the Court of Auditors report. For the official, the need to tackle the problem of VAT fraud in Europe is all the more urgent because a large proportion of the proceeds is used to finance organised crime.

According to Carlo van Heuckelom, the business manager of Europol’s Economic Crime Unit, organised criminals pocket between €40 and €60 billion of the VAT that gets lost in the EU each year. The racket, which consists of importing goods without paying VAT, and then sell them on at a price that includes VAT, directly removes money the coffers of EU countries.

Member states are largely to blame for the poor functioning of this system, as they fail to share the necessary information to close down the tax loopholes.

Rare exchanges

VAT fraud has exploded since 1993, with the abolition of customs barriers. “Before this, importers could only get hold of goods after having paid the VAT. And the authorities could check the data in VAT declarations. Today, declarations are compulsory and member states are required to check the data available in the other member states,” the expert said.

At least, that’s how it works in theory.

In practice, member states are not always very good at exchanging this information. Out of 150 high-risk transactions between member states studied by the Court of Auditors, 18 had not been entered into the EU’s VAT Information Exchange System (VIES).

The European auditors focused an 18-month in-depth audit on five countries, chosen for the extent of their VAT fraud problem and the weakness of their efforts at international cooperation.

Germany, Italy, Hungary, Lithuania and the United Kingdom were all subjected to a particularly high level of scrutiny, “but our conclusion also apply to the other 23 EU countries”, an auditor told EurActiv.

This report appears to have struck a nerve in the Commission, as the College of Commissioners took three months to approve it.

States loath to recognise the scale of fraud

Among states’ failings on VAT, the auditors pointed to the slow pace of verification of company VAT numbers. In one case, the country in question took two years and five months to confirm a VAT number.

Of all the problems associated with VAT fraud, the absence of an international perspective on the issue is the one that is most often cited. “Only two member states publish a precise estimate of this fraud: the United Kingdom and Belgium. We have a severe lack of real data,” the auditors said.

Detailed estimates have also been drafted by the French economy ministry. “We know about them, but we are not allowed to publish them, which limits the usefulness of the information,” the auditors said.

According to the French newspaper Le Parisien, VAT fraud cost France €17 billion in 2012. In 2011, the United Kingdom’s tax authorities estimated a loss of around £1 billion (€1.29 billion).

Belgium has managed to drastically reduce its VAT gap in just a few years, after establishing a dedicated authority to deal with the matter. The country now only loses a few tens of millions in VAT each year.

The 2015 VAT gap report, carried out by a group of independent institutes on behalf of the European Commission, estimated the EU’s total VAT gap for 2013 at €168 billion. Despite the fact that the report covered VAT lost in international and internal transaction, the parallel economy and business bankruptcies, the auditors judged this figure to be an underestimate.

Efforts to prevent states from keeping their VAT data secret have been ongoing for some time. In 2011, the European Court of Justice ruled that Germany had to allow the Commission to access its data, because this tax accounts for a large part of the European budget.

1.7% of the VAT collected by member states is put towards the EU budget. “In theory this gives us a special right to oversee this tax,” a source at the Court of Auditors said.

But faced with such flagrant and persistent failure, the Commission’s lack of response is surprising.

While the European executive accepts the majority of the Court’s proposals for adapting the system, it refuses to initiate legislation to automate the exchange of VAT information. “It is a disconcerting refusal. The question was also raised by the French Court of Auditors in its VAT report, and it is clearly among the system’s major shortcomings,” Mates said.

Equally surprising was the Commission’s decision not to alter article 42 of the customs procedure. This system grants importers a VAT exemption in the first country of import, when the goods are destined for another country.

Defrauding this system is easy, particularly with goods from China. “Fraudsters love article 42!” one auditor joked.

The Court of Auditors had already examined the article and called for its revision in 2011. But their appeals failed to move member states, who continue to suffer as a result.

Flexible fraud

The reluctance of the sates and the inaction of the Commission are all the more “disconcerting” given the flexible nature of VAT fraud. Since the uproar surrounding the carbon trading fraud in 2008 and 2009, which specialists believe may have cost the EU more than €10 billion, double the official Europol estimate, VAT fraudsters have begun targeting other markets.

Notable targets today include the gas and electricity sectors, which have already led to big losses in certain Central European states. An investigation into VAT fraud on electricity certificates is currently under way in Bavaria, in southern Germany.

Precious metals are another common target for VAT fraud, while in Denmark, the sweets and chocolates sector is heavily targeted.

A fraud similar to that directed against the carbon market has emerged on the polymers market, another primary material. This oil-derived chemical product imported from the Gulf has been the object of several millions of euros-worth of fraud in Belgium and Germany in recent years.

This article was update March 8, 2015