- Commission, ‘Communication from the Commission to the Council, the European Parliament, and the European Economic and Social Committee on the future of VAT: Towards a simpler, more robust and efficient VAT system tailored to the single market' COM(2011) 851 final.
- The Council of the European Union acknowledged that continued work is needed to improve the robustness and resilience of the EU VAT system, including taking into account new technological developments. See press release, 9733/12, 3167th Council meeting Economic and Financial Affairs, Brussels, 15 May 2012, www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/130268.pdf.
- The ‘VAT Expert Group’ was established by a Commission Decision of 26 June 2012: [2012] OJ C188/2. The Director-General for Taxation and Customs Union appointed members of the VAT Expert Group on 20 September 2012: http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/key_documents/expert_group/veg-members.pdf. The European Commission has also set up the EU VAT Forum, where business and tax authorities strive to improve the way VAT works in practice: Commission Decision of 3 July 2012 setting up the EU VAT Forum [2012] OJ C198/4.
- Christian Amand and Kris Bosques, ‘A New Defence for Victims of EU Missing Trader Fraud?’ [2011] International VAT Monitor 236.
- On tendencies shifting from direct to indirect taxation see Ine Lejeune, ‘Designing VAT/GST Law to be Effective and Efficient' in Thomas Ecker, Michael Lang and Ine Lejeune (eds), The Future of Indirect Taxation: Recent Trends in VAT and GST Systems around the World (Kluwer, 2012) 727.
- According to statistics, VAT rates in the EU rose by 1.5 points in just four years and in 2012 stood at 21%. See Taxation Trends in the European Union: Data for EU Member States, Iceland and Norway (Publications Office of the European Union, 2012) 27, http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DU-12–001/EN/KS-DU-12–001-EN.PDF.
- Commission, ‘Communication from the Commission to the Council, the European Parliament, and the European Economic and Social Committee concerning the need to develop a co-ordinated strategy to improve the fight against fiscal fraud' COM(2006) 254 final.
- The recently published Green Paper on VAT makes no closer references either. Commission, ‘Green Paper on the Future of VAT: Towards a Simpler, More Robust and Efficient VAT System' COM(2010) 695 final, 5 ff.
- EU coherent strategy against fiscal fraud—Frequently Asked Questions, MEMO/06/221.
- HM Revenue & Customs, ‘Measuring Tax Gaps 2012: Tax Gap Estimates for 2010–11. Official Statistics Release 18 October 2012′, 12, www.hmrc.gov.uk/statistics/tax-gaps/mtg-2012.pdf.
- Reckon LLP, ‘Study to Quantify and Analyse the VAT Gap in the EU-25 Member States', 9, http://ec.europa.eu/taxation_customs/resources/documents/taxation/tax_cooperation/combating_tax_fraud/reckon_report_sep2009.pdf.
- According to the facts of the case, mobile phones were sold into Latvia from Estonia. Since the seller did not perform its obligation to prove the transaction as being with a foreign taxable person and delivery of the goods outside of Estonia, the Court did not deem it necessary to verify whether the seller was aware or should have been aware of the potential tax fraud of the recipient, and found that in this specific case taxation of the goods as internal supply was justified (see Estonian Supreme Court case 3–3–1–40–12).
- Joined Cases C-439/04 and C-440/04 Axel Kittel [2006] ECR I-616.
- In 2012, the Court of Justice delivered several more rulings on buyers' diligence. See eg Case C-324/11 Tóth [2012] ECR I-0000; Joined Cases C-80/11 and C-142/11 Mahagében and Dávid [2012] ECR I-0000.
- Case C-146/05 Albert Collée [2007] ECR I-7861.
- Case C-409/04 Teleos [2007] ECR I-7797.
- Axel Kittel (n 13) 56.
- ibid, 59.
- The ECJ has explained that transactions such as those at issue in the main proceedings which are not themselves vitiated by VAT fraud constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Arts 2(1), 4 and 5(1) of the Sixth Directive, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge (see Case C-354/03 Optigen [2006] ECR I-483, para 51).
- In the practice of the Estonian Supreme Court, the criterion ‘knew or should have known’ was first stated in 2006 (see Estonian Supreme Court case 3–3–1–34–06, para 12).
- Explained in Axel Kittel (n 13) at 53–55.
- See the Green Paper (n 8) 20.
- See Richard T Ainsworth, ‘Zappers: Retail VAT Fraud’, Boston University School of Law Working Paper No 10–04 (2010), 2, www.bu.edu/law/faculty/scholarship/workingpapers/documents/Ainsworth022610.pdf.
- Tax authorities need technical competence to monitor accounting or cash-register systems because manipulation is based on computer software.
- Ainsworth (n 23) 11–13.
- In Sweden, the authority responsible for this is a standardisation authority, Swedac (or Styrelsen för ackreditering och teknisk kontroll, whose name in English is ‘Swedish Board for Accreditation and Conformity Assessment’). In relation to cash-register systems, Swedac has been given the right to grant persons authority to certify control devices: www.swedac.se/en/Working-areas/Certification/Cash-registers.
- This is an abbreviation of the words ‘Integrierte Sicherheitslösung für messwertverarbeitende Kassensysteme’. Currently it is a research project that is supported by the German Federal Ministry of Economics and Technology (Bundesministerium für Wirtschaft und Technologie der Bundesrepublik Deutschland). The project website is at www.insika.de.
- So far, INSIKA is still a project, and no legal basis has been introduced.
- In the practice of the Court of Justice, the requirement set by Poland-according to which a seller must use a cash register in selling to a consumer—has been appraised (Case C-188/09 Naczelny Sàd Administracyjny [2010] ECR I-7639). Until a person commences accounting on their turnover and tax to be paid using a cash register, they have no right to deduct input tax from VAT to be paid, which makes up 30% of the VAT calculated on the taxable value of the goods purchased or service received. The Court of Justice took the stand that it is not in conflict with the VAT system for a Member State to temporarily reduce the amount of input tax to be deducted for such persons liable to VAT as have not made suitable entries in the accounts on supply of goods or provision of services, on condition that the principle of proportionality is observed in imposing this punishment. The Court of Justice treated this measure as an administrative penalty and found that Member States have a right to impose such a punishment.
- This possibility has been exercised in Lithuania, which established the cash-register requirement with effect from 1 May 2011. For more on the requirements, see ‘Tax Procedures at the State Tax Inspectorate: Information for New Taxpayers' (2011), www.vmi.lt.
- Today, several Member States of the European Union have established VAT identification thresholds that are higher than that laid down in Art 287 of the Directive. An example is Council Implementing Decision (EU) 2010/584 authorising the Republic of Latvia to introduce a special measure derogating from Art 287 of Council Directive (EC) 2006/112 on the common system of VAT [2010] OJ L256/29 (VAT Directive). This Decision allows the Republic of Latvia to derogate from the amount of 17,200 EUR laid down in Art 287(19) of the Directive and set a threshold of 50,000 EUR. Another is Council Implementing Decision (EC) 2009/790 authorising the Republic of Poland to apply a measure derogating from Art 287 of Directive 2006/112/EC on the common system of VAT [2009] OJ L283/53. This Decision allows Poland to derogate from the amount of 10,000 EUR laid down in Art 287(14) of the Directive and set a threshold of 30,000 EUR.
- Klaus Tipke, Die Steuerrechtsordnung, vol II (Dr Otto Schmidt KG, 1993) 1023.
- For example, the European Commission has explained that it is common in all Member States for under 10% of all taxable persons to pay 80% of VAT. This means that the tax authorities of Member States, through very few verification measures, can ensure the receipt of most of the VAT revenue due. Commission, ‘Communication from the Commission to the Council in accordance with Art 27(3) of Directive 77/388/EEC' COM(2006) 404 final, 3–4.
- For example, Werner Haslehner takes the stance that the European internal market is opening a door to abuse with its harmonised standards, lack of control by customs authorities and the right of Member States to establish autonomous procedural rules. See Markus Achatz and Michael Tumpel, Missbrauch im Umsatzsteuerrecht (Linde, 2008) 73.
- The Commission of the European Communities was forced to concede, six years after the elimination of border controls between Member States, that the intervening period had been enough for fraudsters to start turning the transitional provisions to their benefit, and at the same time Member States have been unable to prevent this fraud. See Commission, ‘Report from the Commission to the Council and the European Parliament: Third Article 14 Report on the Application of Council Regulation (EEC) No 218/92 of 27 January 1992 on administrative cooperation in the field of indirect taxation (VAT) and Fourth Report under Art 12 of Regulation (EEC, Euratom) No 1553/89 on VAT collection and control procedures' COM(2000) 28 final, 5.
- The European Commission has stated that the cost in terms of VAT obligations will lead to logistical routes being taken other than the economically most obvious ones. Some businesses do not allow sales on ex-works conditions or insist on financial guarantees. VAT Expert Group 1st meeting, 24 October 2012, taxud.c.1(2012)1325533–EN, http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/key_documents/expert_group/taxation_destination_shortcomings_en.pdf.
- In a report by the German Federal Court of Auditors, it was deemed necessary to address separately the situation of immovable properties in which the losing side in the case of insolvency is the state. See Steuerausfälle bei der Umsatzsteuer durch Steuerbetrug und Steuervermeidung: Vorschläge an den Gesetzgeber (Report of the German Federal Court of Auditors on VAT Fraud), 43–44, www.bundesrechnungshof.de/de/veroeffentlichungen/sonderberichte/2003-sonderbericht-steuerausfaelle-bei-der-umsatzsteuer-durch-steuerbetrug-und-steuerverme-idung-vorschlaege-an-den-gesetzgeber/view.
- Wolfgang Jakob, Umsatzsteuer, vol 4 (CH Beck, 2009) 327.
- At this point a peculiarity of the Estonian taxation system should be taken into consideration which is significantly different from the classic systems in the taxation of legal persons. In Estonia, retained profits of legal persons are not periodically taxed and as long as the persons themselves do not divide the profit, no taxation takes place. Taxation does not take place before distribution of profit. Therefore, non-tax-deductible expenses transform into taxable disbursements under VAT legislation.
- An example of abusive VAT arrangements can be found in the circumstances stated in Case C-255/02 Halifax plc, Leeds Permanent Development Services Ltd, County Wide Property Investments Ltd v Commissioners of Customs & Excise [2006] ECR I-1609.
- In Estonia, for example, neither the Value Added Tax Act nor other legislation defines the concept of fixed assets. Therefore, taxable persons can define ‘fixed assets’ in the manner most suitable to them and avoid corrections to deducted VAT. Such a shortcoming in the legislation can lead to serious forfeitures, but for some reason the Estonian legislator has not yet sought to eliminate this deficiency.
- Axel Kittel (n 13), Proposal of AG Dámaso Ruiz-Jarabo Colomer.
- Amand and Bosques (n 4).
- This missing trader may even declare the tax, but it is left unpaid. Thus, formally, the tax is declared—an attempt is made to establish seeming credibility in this way.
- Case C-384/04 Commissioners of Customs & Excise and Attorney-General v Federation of Technological Industries [2006] ECR I-4191, 12.
- The scheme of carousel fraud is expressively and schematically described in the proposal of AG Dámaso Ruiz-Jarabo Colomer (n 42) 28 ff. The nature of carousel fraud is also explained in ‘Report from the Commission to the Council and the European Parliament on the use of administrative co-operation arrangements in the fight against VAT fraud' COM(2004) 260 final.
- House of Lords European Union Committee, Stopping the Carousel: Missing Trader Fraud in the EU, 20th Report of Session 2006–07, www.publications.parliament.uk/pa/ld200607/ldselect/ldeucom/101/101.pdf.
- Ingo Oellerich, Defitzitärer Vollzug des Umsatzsteuerrechts: Legislative Verantwortung für Vollzugsdefizite, Rechtsfolgen und Rechtsschutz (Nomos, 2008) 35.
- Fabrizio Borselli, ‘Pragmatic Policies to Tackle VAT Fraud in the European Union’ [2008] International VAT Monitor 334.
- While individual derogations granted to Member States on the basis of Art 395 of the VAT Directive take up to eight months, the Commission has proposed a legal base for Member States to take immediate measures amending VAT Directive with Art 395a. This would be called the Quick Reaction Mechanism (QRM) and make it possible that after the Commission has obtained all the necessary information, the deadline of one month to grant the derogation is met. Commission, ‘Proposal for a Council Directive amending Directive 2006/112/EC on the common system of value added tax as regards a quick reaction mechanism against VAT fraud' C0M(2012) 428 final.
- In Estonia, reverse charging on forest material was in force from 1 January 2000 to 30 April 2004.
- This special procedure has been stipulated in §132 of the Latvian Value Added Tax Act: www.vvc.gov.lv/export/sites/default/docs/LRTA/Likumi/Value_Added_Tax.doc.
- Council Implementing Decision (EU) 2013/55 authorising the Republic of Latvia to extend the application of a measure derogating from Art 193 of Directive 2006/112/EC on the common system of VAT [2013] OJ L22/16.
- Originally, in the 2003 Act of Accession (OJ L236/33), more precisely in Annex VIII, Chapter 7, Section 1, Subsection b, until 20 April 2005. After that, the application of the measure was extended by Council Decision (EC) 2006/42 [2006] OJ L25/31. In relation to derogation, it has been stated in connection to Latvia that one of the widespread methods of avoiding taxes is not paying the tax authority after invoices have been issued for the transactions, nevertheless leaving a client with a valid invoice for deduction of VAT. See ‘Proposal, Council decision authorising the Republic of Latvia to extend the application of a measure derogating from Art 193 of Directive 2006/112/EC on the common system of value added tax' COM(2009) 582 final, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0582:FIN:ET:PDF.
- Where Latvia is authorised to continue to designate the recipient as the person liable to pay VAT in the case of timber transactions, the Romanian derogation is more specific and applies to the supply of wood products by taxable persons including standing timber, round or cleft working wood, fuel wood, timber products, square-edged or chipped wood and wood in rough, processed or semi-manufactured states. Council Implementing Decision (EU) 2010/583 authorising Romania to introduce a special measure derogating from Art 193 of Directive 2006/112/EC on the common system of VAT [2010] OJ L256/27.
- Council Implementing Decision (EU) 2010/99 authorising the Republic of Lithuania to extend the application of a measure derogating from Art 193 of Directive 2006/112/EC on the common system of VAT [2010] ELT L045/10. The final date for this exemption has been extended by Council Implementing Decision (EU) 2012/704 to 31 December 2015.
- Council Decision (EC) 2007/740 authorising the Kingdom of the Netherlands to apply a measure derogating from Art 193 of Directive 2006/112/EC on the common system of VAT [2007] OJ L300/71. This decision extended the derogation previously adopted through Council Decision (EC) 1998/20 to 31 December 2009.
- Council Implementing Decision (EU) 2010/710 authorising Germany, Italy and Austria to introduce a special measure derogating from Art 193 of Directive 2006/112/EC and amending Decision 2007/250/EC to extend the period of validity of the authorisation granted to the United Kingdom [2010] OJ L309/5.
- Council Implementing Decision (EU) 2012/624 authorising Hungary to introduce a special measure derogating from Art 193 of Directive 2006/112/EC on the common system of VAT [2012] OJ L274/26.
- Council Implementing Decision (EU) 2011/363 authorising Romania to introduce a special measure derogating from Art 193 of Directive 2006/112/EC on the common system of VAT [2011] OJ L163/26.
- For example, this has been stated with regard to reverse charging for construction services in the Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee concerning the need to develop a co-ordinated strategy to improve the fight against fiscal fraud COM(2006) 254 final, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2006:0254:FIN:ET:PDF.
- Wolfgang Jakob, for example, refers to problems with Germany's construction services and concludes that the provision in its current form should be declared invalid. Jakob (n 38) 327.
- Reverse charging has been applied to timber in Estonia. This special arrangement entered into force on 1 January 2000 and was valid in various wordings until Estonia became a member of the European Union on 1 April 2004. In connection with European Union membership, a new Value Added Tax Act entered into force in Estonia on 1 April 2004. This no longer included provisions on reverse charging, probably because a separate application was not deemed necessary, although forestry continues to be a problematic field. However, reverse charging provisions currently do apply in Estonia. According to the Value Added Tax Act's §411 as it entered into force on 1 January 2011, special arrangements for imposing VAT on resale apply to fixed assets and metal waste in line with Art 199 of the European Value Added Tax Directive.
- Richard T Ainsworth, ‘VAT Fraud and Technological Solutions' [2011] The VAT Reader: What a Federal Consumption Tax Would Mean for America, 206, www.taxanalysts.com/www/features.nsf/Articles/CC76D307B727B865852578310059FFD2.
- Europol press release, ‘Further Investigations into VAT Fraud Linked to the Carbon Emissions Trading System' (2010), https://www.europol.europa.eu/content/press/further-investigations-vat-fraud-linked-carbon-emissions-trading-system-641.
- Commission, ‘Accompanying Document to the Green Paper on the Future of VAT: Towards a simpler, more robust and efficient VAT system' SEC(2010) 1455 final, 15.
- The Commission explained that a reverse charge system considerably weakens control towards the end of the distribution chain. See Commission, ‘Communication from the Commission to the Council in accordance with Art 27(3) of Directive 77/388/EEC' COM(2006) 404 final, 3–4.
- Borselli (n 49); Joep Swinkels, ‘Carousel Fraud in the European Union’ [2008] International VAT Monitor 112.
- Michael Tumpel and Gustav Wurm, ‘Extension of Reverse-Charge: A Solution to Combat VAT Fraud?’ in Ecker, Lang and Lejeune (n 5) 602.
- Liam Ebrill, Michael Keen, Jean-Paul Bodin and Victoria Summers, The Modern VAT (International Monetary Fund, 2001) 23.
- Beate Wohlfahrt refers to the data gathered in Germany according to which VAT cash flow in 2010 came to 720 billion EUR in total, 540 million of which was accounted for by cash flow from person to person (including to the state or from the state). Therefore, the actual tax income in total was 180 billion EUR. See Beate Wohlfahrt, ‘The Future of the European VAT System’ [2011] International VAT Monitor 388.
- Commission, ‘Consultation paper: Possible introduction of an optional reverse charge mechanism for VAT. Impact on businesses', http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/4209_consultation_paper_en.pdf.
- Study in respect of introducing an optional reverse charge mechanism in the EU VAT Directive. Pricewaterhouse-Coopers, Final Report to the European Commission (European Commission, Order TAXUD/2007/DE/305).
- Achatz and Tumpel (n 34) 47.
- Art 402(1) of the VAT Directive continues to state that the arrangements provided for in the said directive for the taxation of trade between Member States are transitional and shall be replaced by definitive arrangements based on the principle of the taxation in the Member State of origin of the supply of goods or services. At the same time, the European Commission has admitted that the latest discussions with Member States have verified that the principle of country of origin remains politically unrealisable. This deadlock has even been conceded by the European Parliament, which thus far has ardently defended the principle yet called for a move towards the principle of the country of destination. See Commission, ‘Communication from the Commission to the Council, the European Parliament, and the European Economic and Social Committee on the future of VAT: Towards a simpler, more robust and efficient VAT system tailored to the single market' C0M(2011) 851 final, 5.
- Communication from the Commission to the Council (n 33).
- In Estonia, the tax administrator has suggested that in the future, taxable persons could submit an annex to their VAT return that would provide overall information on all transactions, both purchases and sales (including the registry code of the transaction partner, the amount without VAT, the VAT amount, supply exempt from tax, etc). Such a proposal cannot be implemented, for several reasons. Firstly, it would be accompanied by a heavy reporting burden for undertakings, especially in retail business. Secondly, it is not clear whether a Member State is allowed this option within the current legislative framework. Art 251 of the VAT Directive (and Art 251a) stipulates an obligation to submit consolidated data, not data by transaction. More specific data by person can only be requested in cases of intra-Community supply (per Art 262).
- Oskar Henkow, Financial Activities in European VAT: Theoretical and Legal Research of the European VAT System and the Actual and Preferred Treatment of Financial Activities (Kluwer, 2008) 319.
- Alan Schenk, ‘Prior US Flirtations with VAT’ [2011] The VAT Reader: What a Federal Consumption Tax Would Mean for America, 59, www.taxanalysts.com/www/features.nsf/Articles/CC76D307B727B865852578310059FFD2.
- ibid, 59.
- Ebrill et al (n 70) 20.
- Ernst & Young, ‘A Study of Methods of Taxing Financial and Insurance Services’ (study carried out for the European Commission), http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/key_documents/reports_published/methods_taxing.pdf.
- In addition to the split payment model, also a central database, invoice database and certification model. These models are not addressed separately in this summary, since they relate to better tax administration and deal more with the consequences than with the prevention and avoidance of abuse.
- Jeremy Woolf, ‘European Commission's VAT Green Paper’ [2011] Tax Journal, www.taxjournal.com/tj/articles/european-commissions-vat-green-paper. Among others, this is verified by opinions presented by several interest groups in the course of consultations. See, for example, the Federation of Enterprises in Belgium (FEB) reply to the Green Paper on the Future of VAT (31 May 2011), 33, http://vbo-feb.be/media/uploads/public/_custom/Dossier/Tax/FEB_reply_VAT_Green_Paper_-_31.05.11.pdf.
- PricewaterhouseCoopers, Study of the Feasibility of Alternative Methods for Improving and Simplifying the Collection of VAT through Means of Modern Technology and/or Financial Intermediaries, Final Report (20 Sep 2010), 11, http://ec.europa.eu/taxation_customs/resources/documents/common/consultations/tax/future_vat/vat-study_en.pdf.
- ibid, 12.
- Real-time VAT, or ‘RTvat’.
- Such a method of paying VAT is separately promoted by a not-for-profit initiative, whose website can be found at www.rtvat.eu.
- Chris Williams, ‘Technology Can Solve MTIC Fraud—2’ [2011] International VAT Monitor 231.
World Journal of VAT/GST Law
Volume 2, 2013 - Issue 2
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