REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT - Second Article 14 Report - APPLICATION OF COUNCIL REGULATION (EEC) NO 218/92 OF 27 JANUARY 1992 ON ADMINISTRATIVE COOPERATION IN THE FIELD OF INDIRECT TAXATION (VAT)
Date: 1997-01-08
Institutions: European Commission
Subjects: VAT, administrative cooperation, exchange of information, fraud, indirect tax

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels,  08.01.1997 
COM(96) 681  final 

REPORT FROM THE COMMISSION TO THE COUNCIL 
AND  THE EUROPEAN  PARLIAMENT 

Second  Article  14 Report 

APPLICATION  OF COUNCIL  REGULATION 
(EEC) NO 218/92 OF 27 JANUARY  1992 ON 
ADMINISTRATIVE  COOPERATION  IN THE 
FIELD OF INDIRECT TAXATION  (VAT) 

CONTENTS 

1.  BACKGROUND 

' 

1.1. The transitional  VAT arrangements 

1.2.  The control  implications of the  transitional  VAT arrangements 

1.3. The Community  legal framework  for  administrative cooperation 

2.  DEVELOPMENTS  IN  ADMINISTRATIVE  COOPERATION  DURING 

1994 AND  1995: AN EVALUATION 

2.1.  Community developments 

2.1.1.  The  1995 enlargement 

2.1.2.  Anti-Fraud  matters 

2.1.3.  Multilateral  VAT control  experiments 

2.1.4.  Mutual  assistance on recovery 

2.2.  Administrative  cooperation  at  Member  State level 

2.2.1.  Use of the tools of cooperation 

2.2.2.  Member  States' role in collecting data 

2.2.3.  Central  Liaison Offices  and  their  role in meeting deadlines 

3.  CONCLUSIONS  AND RECOMMENDATIONS 

3.1.  Conclusions 

3.2.  Recommendations 

3 

3 

3 

4 

5 

5 

5 

5 

6 

7 

8 

8 

13 

13 

15 

15 

16 

BACKGROUND 

1.1. 

The transitional  VAT arrangements 

• f c >* 

the  Council  decided 

In order to achieve the removal  of border controls for  tax  purposes  inside the  Community 
the  transitional  VAT 
from  1.1.1993, 
arrangements1.  These  arrangements  provide  that  intra-Community  operations  between 
taxable  persons  continue  to  be  taxed  at  the  rate  and  conditions  of  the  Member  State  of 
destination.  An  exemption  for  supplies  of goods  destined  for  another  Member  State  was 
introduced  to  replace  the  exemption  for  exports  and  the  taxable  event  of  "importation" 
was replaced  by "acquisition" in the Member  State of arrival of the  goods. 

to  establish 

in  1991 

Detailed  information  on  the  functioning  of  the  transitional  VAT  arrangements  can  be 
found  in the  report  from  the  Commission  to  the  Council  and  the  European  Parliament  on 
the  operation  of  the  transitional  arrangements  for  charging  VAT  in  intra-Community 
trade2. 

1.2.  The  control  implications  of the transitional  VAT arrangements 

Before  1  January  1993,  cross-border  trade  in  goods  between  taxable  persons  in  the 
Community  was  controlled  by  checks  at  national  frontiers  on  documents  accompanying 
the physical  movement  of the goods.  Abolishing border  controls resulted  in the integration 
of the control  of taxation  of intra-Community  trade into domestic  VAT control. 

The  demands  of  VAT  control  and  the  challenge  presented  by  the  abolition  of  border 
controls  required  cooperation  between  Member  States  on  a  new  scale.  In  particular, 
Member  States  needed  information  from  other  Member  States  in  order  to  be  able  to 
control  the tax. These needs were: 

•  To  be  able  to  obtain  information  on  all  intra-Community  transactions  made  between 
traders  on  their  own  VAT  identification  register  and  those  identified  in  other  Member 
States. 

•  To be able to  confirm  the validity  of a VAT identification  number of the  purchaser. 

These  data,  which  form  an  input  into  Member  States'  methodology  to  control  VAT  on 
intra-Community  transactions,  are  provided  by  the  VAT  Information  Exchange  System 
(VIES)  which  is a common  computer  network. 

1  Council  Directive  91/6S0/EEC  supplementing the common  system  of value added  lax  and  amendim 
Directive 77/3SS/EEC with a view to the abolition of fiscal  frontiers. OJ  No L :>7f>.  } \.  12.  I Wl.  p. I 

2 

C()M(')4)51>  filial.  23.1  I. I  W4 

1.3. 

The  Community  legal  framework  for  administrative  cooperation 

Council  Regulation  (EEC)  No  2I8/923  concerns  administrative  cooperation  in  the  field  of 
indirect  taxation  (VAT).  It  provides  the  legal  framework  which  obliges  the  Member  States 
to  provide  to  one  another  the  information  necessary  for  controlling  VAT  on  intra-
Community  trade;  it  is  designed  to  complement  the  provisions  of  Directive  77/799/EEC4 
(on  mutual  assistance  between  Member  States  in  the  field  of  direct  and  indirect  taxation). 
The  Regulation  also  provides  Member  States  with  the  right  to  obtain  the  information 
regularly  in  aggregated  form,  as  well  as  to  obtain  supplementary  detailed  information  on 
request.  Directive  76/308/EEC  provides  for  mutual  assistance  between  Member  States  in 
the  recovery  of,  inter  alia,  VAT  claims  owing  to  national  administrations5. 

The  Standing  Committee  on  Administrative  Cooperation  in  the  field  of  Indirect  Taxation 
(SCAC)  was  set  up  under  Article  10 of  the  Regulation.  The  SCAC,  managed  and  chaired 
by  the  Commission,  is  responsible  for  keeping  a  continuous  watch  on  the  development  of 
administrative  cooperation  and  mutual  assistance.  It  also  monitors  the  performance  of  the 
Member  States  in  the  collection,  exchange  and  exploitation  of  the  data.  At  Member  State 
level,  the  day  to  day  operation  of  the  arrangements  is  overseen  by  a  network  of  Central 
Liaison  Offices  (CLOs). 

Article  11  of  Regulation  (EEC)  No  218/92  requires  that  "Member  States  and 
the  arrangements 
Commission 
shall  examine  and  evaluate 
...".  Under  Article  1  1,  the 
administrative  cooperation  provided  for  in  this  Regulation 
Commission  is  also  responsible  for  pooling  Member  States'  experience  concerning  new 
means  of tax  evasion  and  avoidance. 

the  operation  of 

the 
for 

Article  14  requires  that  "Every  two  years  after  the  date  of  entry  into  force  of  this 
Regulation,  the  Commission  shall  report  to  the  European  Parliament  and  the  Council  on 
the  conditions  of  application  of  this  Regulation  on  the  basis,  in  particular,  of 
the 
continuous  monitoring  procedures  provided  for  in  Article  1  I ". 

The  first  report  under  Article  14 of  Regulation  (EEC)  No  218/92  which  was  published  on 
23  June  19946  outlined 
in  place 
following  the  removal  of  border  controls  for  VAT  purposes  and  reported  on  its  successful 
implementation.  This  second  report  describes  the  development  of  the  arrangements  since 
1993,  evaluates  their  effectiveness  and  makes  recommendations  for  improvements. 

the  new  administrative  framework  which  was  put 

3  O.I  No  L  24.  1.2.  1992.  p.  I. 

4 

OJ  No  L  366.  27.  12.  1977.  p.  15.  Directive  last  amended  b\  Dnvciive  ';2/l2/EEC  (OJ  No  t.  7<,.  .•>  ; 
3.  1992.  p.  I). 

5 

O.I  No  L  7.v  19.  .V  l')7(v  p.  IS  D i r e c t i ve  last  a m a u l ed  In  D n v c i i ve  {>2/ l u X /N  •'.(.'  (O.l  no  I  3'JO.  3 1.  12 

i<)'>2.  p. 

124). 

6 

COM(94)  262  final. 

2. 

DEVELOPMENTS  IN  ADMINISTRATIVE  COOPERATION  DURING  1994  AND  1995: 
AN  EVALUATION 

2.1. 

Community  developments 

2.1.1.  The  1995  enlargement 

One  of  the  main  tasks  facing  the  SCAC  and  its  Technical  Sub-Committee  during  1994 
was  to  prepare  for  enlargement  of  the  Community  on  1  January  1995.  The  acceding 
Member  States  and  the  Community  had  to  prepare  to  ensure  that  the  transitional  VAT 
arrangements  for  intra-Community  trade  could  be  properly  applied  from  the  date  of 
accession.  This  task  principally  fell  to  the  new  Member  States  themselves,  but  the  SCAC 
still  had  to  ensure  that  Austria,  Finland  and  Sweden  were  connected  to  the  VIES  network 
and  the  system  was  adapted  for  the  enlarged  Community. 

The  VIES  was  successfully  made  available  for  testing  by  the  three  new  Member  States 
the  first  week  of  December  1994,  and  was  fully 
and  the  Community  of  12  from 
operational  for  the  Community  of  15 from  1  January  1995. 

2.1.2.  Ami-Fraud  mailers 

In  1992,  the  SCAC  had  set  up  an  Anti-Fraud  Sub-Committee  whose  purpose  was  w'to 
examine  the  existing  legislative,  administrative  and  technical  arrangements  -  already  in 
existence  and/or  in  the  course  of  development  within  the  Community  -  for  anti-fraud 
activity  in  the  field  of  indirect  taxation."  At  the  time,  the  Commission  had  recommended 
that  the  Member  States  adopt  a  more  strategic  and  operational  programme  for  the  fight 
against  fraud,  but  this  was  rejected  by  some  Member  States.  During  1994  the  Sub-
Committee  met  only  twice  and  it  did  not  meet  at  all  during  1995.  The  activity  at  its 
meeting  in December  1994  was  limited  to  cases  of  VAT  fraud,  provided  by  a  few  Member 
States. 

in  its  early  years  concentrated  on 

In  practice,  the  work  of  the  Sub-committee 
the 
installation  of  a  computerised  network  (Fiscal  SCENT)  in  the  Member  States  and  on  the 
training  of  national  officials  in  its  use.  Although  all  Member  States  are  now  connected  to 
the  network  and  despite  the  training  of officials,  it  is  clear  that  with  a few  exceptions,  very 
little  use  is  made  of  the  network  for  the  communication  of  messages  between  Member 
States.  This  suggests  that  the  full  potential  of  the  system  is  not  being  exploited.  This  is 
particularly  worrying  as  the  purpose  of  the  fiscal  SCENT  was  to  facilitate  rapid  and 
secure  contacts  between  national  services  dealing  with  VAT  fraud. 
the 
Commission  has  relaunched  its  efforts  to  demonstrate  the  advantages  of  the  system. 

In  1996, 

level  is 
This  lack  of  common  activity  in  the  fight  against  fraud  on  a  Community 
regrettable.  It  stems  partly  from  the  limited  terms  of  reference  initially  given  to  the  Sub-
Committee  by  the  Member  States,  which  fell  well  short  of  trying 
to  formulate  a 
Community  strategy  for  the  fight  against  fraud.  In  addition,  the  reluctance  of  some 
Member  States  to  cooperate  with  one  another  on  a  multilateral  basis  in  investigating 
suspected  fraud  also  hampered  the  Community's  ability  to  develop  a  coherent  strategy. 
The  Commission  accordingly  encountered  problems  in  meeting  its  responsibility  under 
Article  1  1 of  Regulation  (EEC)  No  218/92  to  pool  Member  States'  experience  concerning 
new  means  of  tax  avoidance  and  evasion. 

However  the  SCAC  has,  during  1996,  adopted  the Commission's  proposed  new  terms  of 
reference  for  the  Sub-Committee  with  the  aim  of  encouraging  and  facilitating  a  greater 
coordination  of  Member  States'  efforts  and  resources  in  the  fight  against  fraud.  The 
relaunched  Sub-Committee  has  adopted  an  ambitious  work  programme:  to  identify  the 
aspects  of the  indirect  tax  system  most  sensitive  to  fraud;  to  evaluate  the  functioning  and 
adequacy  of the arrangements  in place to tackle fraud  and  to  maximise their  effective  use. 
For  this  work  programme  to  succeed,  all  Member  States  will  need  to  commit  themselves 
to  the  exchange  of  information  based  on  concrete  investigation  case  studies.  Only  a real 
willingness  to  pool  information  will  permit  the  development  of  a  Community  strategy, 
which  is  essential  for  the  proper  functioning  of  the  internal  market,  to  deal  with  VAT 
fraud. 

The  Commission  has  been  informed  on  an  ad  hoc  basis  of  cases  which  concern  revenue 
loss of between  2 and  60  million  ECU.  It  is clear  from  such  cases  that  a  need  exists  for  a 
close  coordination  of the efforts  of the  national  authorities  in complex  transnational  cases. 
The  assistance  which  the  Commission  can  provide  in  coordinating  Community  action  in 
this area is hampered  by the lack of a sufficiently  broad  legal basis such  as already  exists in 
the fields  of Customs  and  Agriculture. 

2. /. 3.  Multilateral  VA T control experiments 

Companies  trading  in  several  Member  States  are  normally  treated  as  separate  national 
entities  for  the  purposes  of  VAT  control.  The  Commission  and  Member  States  became 
concerned  in  1994  that  multinational  companies  were  capable  of  exploiting  any  apparent 
differences  in  treatment  by  Member  States'  tax  administrations  to  the  detriment  of  fair 
competition  and  overall  control.  As  multinational  traders  are  responsible  for  large 
amounts  of  VAT,  Member  States  need  to  give  a  high  priority  to  the  control  of  these 
traders. 

In  1994  and  1995  the  SCAC  launched  experiments,  using  Directive  77/799/EEC  as  its 
principal  legal  basis,  with  financial  support  from  the  Community,  on  the joint  control  of 
multinational  companies. 

The objective  of the  experiments  was to test  the effectiveness  of the tools  provided  by the 
in  controlling 
Community 
multinational  enterprises.  The  experiments  also  provided  an  opportunity  to  compare  the 
different  control  methods  in the Member  States. 

for  administrative  cooperation 

framework 

legislative 

Certain  Member  States  did  not  participate  in  the  experiments,  for  a  number  of  reasons. 
Some  preferred  bilateral  rather  than  multilateral  VAT  control  and  some  felt  that  they 
could  not  participate  because  of  the  involvement  of  the  Commission.  The  national 
legislation  of  some  Member  States  inhibited  their  participation,  notwithstanding 
that 
Community  legislation  permits  such  activities. 

As  a  result  of  the  coordinated  controls,  those  Member  States  that  did  participate  reported 
that  they  had  obtained  a  more  complete  knowledge  and  understanding  of  the  activities  of. 
the  traders  controlled.  Trade  practices  designed  purely  to  maximise  tax  advantages  were 
discovered.  Indeed  some  administrations  discovered  activities  of  the  traders  which  were 
previously  completely  unknown  to  them.  The  controls  also  confirmed  that  traders  were 
exploiting  the  complexity  and  ambiguity  of  the  transitional  VAT  arrangements  and  the 
different  interpretations  permitted  to  Member  States. 

The  results  of  the  experiments  showed  that  the  tools  provided  by  the  Community  legal 
framework  can  be  used  to  improve  the  control  of  multinational  traders.  They  also, 
however,  highlighted  a  number  of  legal  and  practical  impediments  to  fully  effective 
cooperation  in  the  control  of  these  complex,  but  not  unusual,  trading  activities.  The 
SCAC  adopted  a  first  set  of  general  guidelines  to  be  followed  for  future  multilateral  VAT 
controls. 

The  Commission  will,  in  the  short  term,  continue  to  fund  some  experiments,  to  further 
demonstrate  the  necessity  of  multilateral,  rather  than  national  or  bilateral  VAT  control, 
and  to  refine  the  guidelines  already  issued.  Despite  the  evident  success  of  the  two 
experiments,  however,  Member  States  have  yet  to  undertake  such  multilateral  controls  on 
their  own  initiative  as  part  of  their  day  to  day  control 

The  Commission  believes  that,  to  meet  the  challenges  posed  by  such  traders,  these 
controls  should  become  a  common  part  of  national  control  strategies.  In  addition,  the 
Commission  believes 
the 
that 
experiments  to  date  should  do  so  as  soon  as  possible. 

those  Member  States  who  have  not 

taken  part 

in 

2.1.4.  Mutual  assistance  on  recovery 

It  has  been  clear  for  some  time  that  there  were  shortcomings  in  the  functioning  of 
cooperation  under  Directive  76/308/EEC,  which  provides  for  mutual  assistance  between 
Member  States  in  the  recovery  of  VAT  claims.  The  number  of  claims  for  which  assistance 
is  requested  is  very  small  and  Member  States  acknowledge  that  the  success  rate  in 
recovering  the  often  significant  amounts  of  tax  outstanding  are  well  below  what  should  be 
expected.  The  Commission,  with  the  help  of  the  Member  States,  undertook  an  extensive 
analysis  of  the  causes  of  these  problems.  The  results  of  the  Commission's  analysis,  broadly 
endorsed  by  the  SCAC,  identified  five  main  factors  behind  the  shortcomings: 

•  wide  divergence  between  Member  States'  national  recovery  powers; 

• 

lack  of  equal  legal  treatment  between  inter-Member  State  claims  and  domestic  claims; 

• 

low  priority  given  to  recovering  claims  for  other  Member  States. 

• 

slow,  complicated  and  poorly  understood  mutual  assistance  arrangements  and; 

• 

the  sheer  difficulty  of tracing  some  debtors; 

The  Commission  will  make  proposals  in  early  1997  to  improve  the  functioning  of  the 
Directive.  This  will  also  have  to  be  backed  up  by  a  sustained  effort  from  the  Member 
States  both  to  make  greater  use  of  the  Directive  and  to  give  higher  priority  to  responding 
to  requests  made  under  it. 

2.2.  Administrative  cooperation  at  Member  State  level 

2.2.1.  Use  of  the  tools  of  cooperation 

The  purpose  of  the  Community  arrangements  for  administrative  cooperation  put  in  place 
by  Regulation  (EEC)  No  218/92  is to  avoid  tax  revenue  losses  for  Member  States.  Article 
4(2)  of  the  Regulation  provides  information  on  request  to  a  Member  State  about  whether 
one  of  its traders  has  made  intra-Community  purchases  during  a  particular  quarter.  Article 
4(3)  of  the  Regulation  identifies  the  suppliers  from  which  the  purchases  have  been  made. 
The  aggregated  form  of  Article  4(2)  data  is  also  exchanged  automatically  between 
Member  States  at  the  end  of  each  quarter  by  the  VIES.  Member  States  can  also,  under 
Article  5  of  the  Regulation  and  Article  2  of  Directive  77/799/EEC,  make  more  specific 
requests  for  information,  for  the  purpose  of  control  of  particular  traders,  relating  for 
example  to  the  invoice  numbers,  dates  and  values  of  individual  transactions.  The  use  of 
Articles  4(2),  4(3)  and  5  of  the  Regulation  by  Member  States  are  the  key  elements  in  the 
control  of traders  engaged  in  intra-Community  trade. 

At  the  time  of  the  adoption  of  the  transitional  VAT  arrangements,  the  Community  did  not 
lay  down  any  particular  single  control  methodology  or  method  of  exploiting  the  VIES 
data  and  other  opportunities  to  gather  information.  Each  Member  State  retained  the  right 
to  control  its  own  traders  in  the  way  which  it  deemed  appropriate.  Nevertheless,  the 
Community  has,  in  the  context  of  the  Matthaeus-Tax  programme7,  fostered  a  debate  on 
the  methodology  of  control  of  intra-Community  trade  The  programme  has  provided 
opportunities  for  Member  States  to  compare  approaches  to  VAT  control  generally  and 
the  intra-Community  trade  and  the  use  of  the  VIES  in  particular  and  to  identify  best 
practice. 

7 

0.)  No L 2S<).  13.  I 1.  1093. p. 27.  Further  details of the  programme can  be  found  in  the  Commission 
reports lo the Council  and  the  European  Parliament  (COM(95) 663  final)  and  COM(%)  343  final). 

Early  in  1993, in an  effort  to  evaluate  the effectiveness  of the use  to  which  the  VIES  data 
is  put,  the  Commission  asked  Member  States  to  provide  details  of  additional  tax 
discovered  because  of  the  information  exchanged  over  the  VIES.  At  the  time,  most 
Member  States  were  unwilling  (or  unable)  to  provide  this  information,  though  they  did 
agree  to  report  to  the  Commission  the  number  of  cases  in  which  further  control  action 
was  taken  arising  from  information  exchanged  over  the  VIES;  nevertheless  even  now, 
only  two  or  three  Member  States  regularly  provide  this  information.  Accordingly,  the 
Commission  can  only  evaluate  the  Member  States'  exploitation  of  the  administrative 
cooperation  framework  by  examining  their  use  of  its  key  elements  which  consist  of 
requests  made  under  Article  5  of  the  Regulation  and  Article  2  of  the  Directive,  and 
enquiries made under  Articles 4(2) and 4(3) of the  Regulation. 

Figure  1: Number of requests  made  per quarter during  1994 and  1995 under Article 
5 of Regulation  (EEC)  No 218/92  and Article  2 ofDirective  77/799/EEC 

1Q94 

2Q94 

3Q94 

4Q94 

1Q95 

2Q95 

3Q95 

4Q95 

Figure  1 above  indicates  a  gradual  increase  in  the  use  of  requests  for  information  by 
Member  States.  However, the number of requests  which  have been  made is only a  fraction 
of  the  tens  of  thousands  of  requests  per  annum  which  Member  States  themselves 
estimated  in June  1993. 

Figure  2 below  analyses the number of requests  made by each  Member  State. 

Figure  2: Number  of  requests  per  Member  State  made  during  1994  and  1995  under 
Article  5  of  the  Regulation  and  Article  2 of  the  Directive 

1200 ! 

1000 

800 

600 

400 

200 

0 

•:-ËS3-
en  ^ 
û 

a 

LU 

ÙL 

JML 

•-'wi:-

The  overall  growth  in  the  number  of  Article  5  requests  with  marked  differences  between 
Member  States  is  mirrored  in the  increase  in enquiries  under  Article  4,  as can  be  seen  from 
figure  3  below.  As  a  prerequisite  to  making  a  request  under  Article  5  of  the  Regulation, 
Member  States  must  first  use  the  possibilities  provided  by  Article  4. 

Figure  3:  Overall  growth  during  1994  and  1995  in  the  number  of  enquiries  made 
under  Articles  4(2)  and  4(3)  of  the  Regulation. 

1800000 

1600000 % 

1400000 

1200000 4 

1000000 

800000 

600000 

400000 

200000 

0 

1Q94 

2Q94 

3Q94 

4Q94 

1Q95 

2Q95 

3Q95 

4Q95 

The  overall  picture  for  the  steady  development  of  administrative  cooperation  shown  in 
figures  1 and  3  is  to  be  welcomed.  The  steady  growth  in  the  use  of  the  VIES  facilities  and 
the  gradual  increase  in  the  number  of  Article  5 and  Article  2  requests  reflects  the  growing 
importance  of  administrative  cooperation  in  the  control  of  intra-Community  trade.  But,  as 
figures  4  and  5  below  demonstrate,  this  overall  growth  masks  sharp  differences  between 
Member  States  in  their  use  of the  Article  4(2)  and  Article  4(3)  instruments. 

10 

Figure  4:  Number  of  enquiries  made  by  each  Member  State  during  1994  and  1995 
under  Articles  4(2)  and  4(3)  of  the  Regulation  per  trader  in  that  Member  State 
making  intra-Conimunity  supplies. 

Many  of the  requests  made  under  Article  4  of  the  Regulation  are  made  to  confirm  that  the 
trader  in  the  requesting  Member  State  did  not  make  any  intra-Community  acquisitions. 
This  is also  a valid  method  of  exploiting  the  VIES  data.  Figure  5 below  indicates  Member 
States'  use  of  Article  4(3)  of  the  Regulation  to  control  those  traders  making  purchases 
from  other  Member  States. 

Figure  5:  Number  of  enquiries  made  by  each  Member  State  during  1994  and  1995 
under  Article  4(3)  of  Regulation  (EEC)  No  218/92,  per  trader  making  intra-
Community  purchases  in  that  Member  State. 

The  conclusion  that  can  be  drawn  from  figures  I  to  5  above  is  that,  while  the  use  of  the 
administrative  cooperation  arrangements  is certainly  increasing,  its  use  is  not  sufficient  to 
control  intra-Community  trade  adequately  in  all  Member  States.  The  low  use  of  the  VIES 
facilities  in  some  Member  States  may  be  attributed  to  a  number  of  factors.  Clearly  the 
extent  to  which  control  officials  have  access  to  the  system  is  important.  Although  the 

VIES  data  is  potentially  accessible  through  more  than  55.000  terminals  within  the 
Community,  some  Member  States  allow  only  limited  access  to  their  officials.  This  also 
tends  to  explain  the  corresponding  low  use  of  the  facilities  offered  by  Article  5  of  the 
Regulation and  Article 2 of the Directive. 

'O1-

Based  on the evidence of the use of the VIES and  the best  practice  that  has emerged  from 
the Matthaeus-Tax  programme,  the Commission  believes that  the most  effective  approach 
to  VAT  control  is  an  integrated  one,  using  the  VIES  data  as  one  input  among  others. 
Firstly,  by  using  the  automatically  exchanged  data  to  inform  risk  analysis  designed  to 
identify  the  traders  or  categories  of  traders  to  be  controlled.  Secondly,  by  making 
enquiries  under  Article  4  of  the  Regulation  as  part  of  the  information  gathering  effort 
prior  to  or  following  a  control  of  a  specific  trader.  And  finally,  to  use  the  provisions  of 
Article 5 to obtain  information  on specific  transactions. 

A high standard  of VAT control  requires the use of administrative  cooperation  to  be  more 
widespread  in the Member  States and thoroughly  integrated  into national  control  strategy. 
Administrative  cooperation  should  not  be a specialist  function.  Those  Member  States  who 
do  not  allow  their  ordinary  control  officials  access  to  the  enquiries  facilities  of  the  VIES 
should  do  so.  Information  about  the  intra-Community  purchases  of  a  trader  should  be 
seen  as another  piece  of the  national  control jigsaw,  without  which  control  is  incomplete. 
This  approach  entails  extensive  use  by  ordinary  VAT  control  officials  of  the  specific 
enquiry  and  request  opportunities  provided  by  the  Community.  Figures  3  to  5  clearly 
show  that  certain  Member  States  have  followed  this  approach  a  great  deal  more  than 
others.  Those  Member  States  which  make  little  use  of  the  opportunities  provided  by  the 
tools of administrative  cooperation  can  not  have such  a complete  picture of their traders. 

Member  States  still  have  much  to  do  to  make  administrative  cooperation  more  widely 
known  within  their  administrations.  Even  in those  Member  States  where  use of the  system 
is well  established,  it is still not  uncommon  to find  national  officials  in Member  States  who 
are  unaware  of  the  opportunities  to  request  information  from  other  Member  States,  to 
help them  deal  with  particular  problems they encounter  either  during  routine  VAT  control 
or  in the course  of  anti-fraud  activities.  Extensive  training  is clearly  needed  in the  use and 
exploitation  of the  VIES data  and  other  cooperation  opportunities. 

The  Community  also  has  a  role  to  play  in  making  national  officials  aware  of  the 
Community  dimension  of  their  work,  fostering  mutual  confidence  between  officials  of 
different  national  administrations  and  making  cooperation  as  user-friendly  and  low  in 
opportunity  cost  as  possible.  This  means equipping  them  with  the  skills  and  infrastructure 
needed  to cooperate  and  encouraging  a habit  of doing so. 

12 

Low  use  of  the  instruments  of  cooperation  raises  serious  questions  about  the  overall 
credibility  and  effectiveness  of  some  Member  States'  control  of  VAT  on  intra-Community 
trade.  The  establishment  of  the  VIES  and  Regulation  (EEC)  No  218/92  (adopted  by 
unanimity)  were  originally  seen  by  all  the  Member  States  as  essential  to  the  effective 
control  under  the  transitional  VAT  arrangements.  The  setting  up  and  running  of  the 
infrastructure  has  required  significant  investment  from  the  Community  and  the  Member 
States  in  terms  of  human  and  financial  resources  and  the  obligations  on  traders  to  file 
quarterly  recapitulative  statements  imposes  a considerable  burden  on  them. 

2.2.2.  Member  States'  role  in  collecting  data 

Under  Article  4  of  Regulation  (EEC)  No  218/92,  Member  States  "shall  ensure  that  their 
data  bases  are  kept  up  to  date,  complete  and  accurate".  The  Commission  has  constantly 
pressed  the  Member  States,  in  the  SCAC  and  in  the  periodic  meetings  of  the  Heads  of 
national  Central  Liaison  Offices  (CLOs),  to  improve  the  completeness  and  accuracy  of  the 
information  which  they  collect  and  exchange. 

During  1994  and  1995  the  compliance  rate  for  recapitulative  statements  reached  95  % 
(number  of  statements  received  from  traders  compared  with  the  number  of  statements 
estimated  by  the  tax  administrations  to  be  due).  Over  this  period,  1,5  %  of  the  reported 
information8  could  not  be  exchanged  because  it  was  regarded  as  incorrect,  as  the 
purchaser's  VAT  identification  number  declared  by  the  supplier  did  not  correspond  to  the 
rules  governing  construction  of  such  numbers  in the  Member  State  of  the  purchaser. 

Such  rates  of  compliance  and  accuracy  are  a  considerable  and  welcome  improvement  on 
performance  in  the  early  months  of  the  system  and  reflect  a  real  effort  on  the  part  of 
national  administrations  and  intra-Community  traders.  Nevertheless,  for  as  long  as  the 
data  collected  is  not  complete  and  accurate.  Member  States  must  do  all  in  their  power  to 
improve  quality  by  streamlining  their  own management  of  their  databases,  sustained  trader 
education  and,  where  necessary,  the  application  of  penalties. 

2.2.3.  CoUral  Liaison  Offices  and  their  role  in  meeting  deadlines 

Regulation  N°  218/92  EEC  provides  for  the  setting  up  in  each  Member  State  of  a  Central 
Liaison  Office  (CLO).  The  legislation  does  not  lay  down  detailed  requirements  for  the 
constitution  of  CLOs,  but  at  a  very  early  stage,  the  Commission  and  the  Member  States 
agreed  a  set  of  guidelines  setting  out  their  main  functions  and  objectives.  These  were 
principally  to  act  as  the  normal  channel  of  communication  between  competent  authorities; 
to  manage  the  flow  of  cooperation  and  assistance  between  Member  States;  to  monitor  the 
quality  and  pertinence  of  requests  for  assistance  and  of  the  responses  to  them  and  to 
supervise  the  respect  of  deadlines.  In  short,  the  CLO  should  act  as  a  single  point  of 
contact,  through  which  other  Member  States  can  rely  on  obtaining  effective  and  timely 
assistance  with  any  matters  relating  to  VAT  control  and  cooperation.  It  is  important  that 
CLOs  should  have  the  resources,  powers  and  the  expertise  needed  to  provide  that  service. 

8 

35.000.000  lines of data  were  reported  by intm-Coininimily  suppliers. 

13 

Article  5  of  Regulation  (EEC)  No  218/92  states  that  "The  requested  authority  shall 
provide the information  [requested  by another Member  State] as quickly as possible and in 
any event  no more than three months after  receipt  of the request."  No  such  deadline exists 
for  requests  under  Directive  77/799/EEC,  but  in  1994  the  SCAC  decided  that  requests 
made  under  Article  2  of  the  Directive  would  be  subject  to  the  same  time  limit  of  three 
months  which  applies  to  requests  made  under  Article  5 of  the  Regulation.  This  decision 
provided  for  a streamlining  of  procedures  applying  in Member  States  to  the  management 
of requests and  replies under the two  legal bases. 

There  has been  a steady  increase  in the  number  of requests  made  under  these  legal  bases, 
as  can  be  seen  from  figure  1 above.  This  increase  in  the  number  of  requests  made  has 
unfortunately  been  matched  by a similar increase in the number of requests outstanding  for 
which  the  maximum  3  months  deadline  has  expired.  The  Commission  and  the  member 
States  have been  keeping  a close watch  on  these  developments,  both  in  the  SCAC  and  in 
meetings  of  the  Heads  of  CLO;  there  is  clearly  a  danger  that  an  unmanageable  backlog 
could  build  up, to  the detriment  of effective  VAT control,  if corrective  action  is not  taken 
in time. 

Figure  6: Proportion  of overdue  replies  to  requests  under  Article  5 of the.Regulation 
and  Article  2 of the  Directive  outstanding  as at 31  December  1995 per  requested 
Member  State 

The  problem  of  overdue  replies  is  partly  due  to  the  fact  that  requests  are  becoming  ever 
more  complex  and  accordingly  take  longer  to  answer.  However,  that  tendency  is unlikely 
to  change  and  Member  States  must  take  account  of  it  in  their  planning.  In  practice, 
differences  in  the  organisation  and  staffing  levels  of CLOs  between  Member  States  have 
led  to  a  variation  in  the  level  of  service  they  are  able  to  provide  which  can  create 
difficulties  for  the  smooth  operation  of  administrative  cooperation.  There  are  strong 
indications  that,  rather  than  acting  as a conduit,  some CLOs  at  least  appear  to  be  causing 
bottlenecks  in  communication  as  can  be  seen  from  figure  6  above.  A  further  problem  is 
created  in  certain  Member  States  by  the  fact  that  different  parts  of  the  administration  are 
competent  in  respect  of  VAT,  and  while "the  CLO  may  be  competent  for  dealing  with 

14 

requests under the  Regulation,  it may not  be competent  to deal  with  similar  requests  made 
under  Directive  77/799/EEC.  In the  Commission's  view,  this division  of  tasks  undermines 
the  complementarity  which  is  explicitly  intended  in  the  Community  legislation.  It  also 
undermines the advantages that  result  from  having a single contact  point. 

CLOs  will  only  be  able  to  provide  their  colleagues  in  other  Member  States  with  the 
service  which  they  expect  and  are  entitled  to  receive,  if  they  can  secure  an  adequate 
response,  in  terms  of  allocation  of  resources  and  priorities,  from  their  own  control 
administration  at  the  appropriate  level.  Member  States  which  do  not  reply  to  requests  in 
time must  empathise with the control  official  in the requesting  Member  State who  may be 
depending  on the  reply  to  resolve  a problem  which  he has encountered.  Missed  deadlines 
can lead to missed  opportunities for  effective  control  and  recovery of the tax. 

Despite  the  potential  improvements  identified  at  meetings  of  the  heads  of  CLOs,  held 
under  the  Matthaeus-Tax  programme,  these  organisational  and  staffing  differences  are 
continuing  to  hamper  the  development  of  administrative  cooperation  and  need  to  be 
addressed  by the Member  States. 

In  particular,  therefore,  administrations  need  to consider  the adequacy  of  resources  within 
CLOs;  the  degree  of  priority  given  at  local  level  to  requests  for  information  from  other 
Member  States;  the  level  of  human  resources  assigned  to  such  work  at  local  office  level; 
the  requirements  for  training  in  the  use  of  the  system  and  for  an  understanding  of  the 
needs  of  other  Member  States;  and  language  training  to  overcome  communication 
difficulties. 

3. 

CONCLUSIONS  AND  RECOMMENDATIONS 

3.1. 

Conclusions 

A  substantial  effort  has  been  made  at  Community  level,  in  the  SCAC  and. in  periodic 
meetings  of heads  of national  CLOs,  to  monitor  closely  and  stimulate  the  development  of 
administrative  cooperation.  These  efforts  have  yielded  valuable  benefits.  Administrative 
cooperation  is  gradually  becoming  more  commonly  used;  a  number  of  Member  States 
have  begun  to  integrate  it  into  their  national  control  strategy.  In  some  cases,  Member 
States  have also  reinforced  their  administrative  structures  to  meet  the  increase  in  demand 
which  has taken  place. 

15 

The completeness  and accuracy  of the  VIES  data  have  significantly  improved  since  1993. 
Technically,  the VIES has continued  to function  to a very  high  standard.  It offers  fast and 
secure access to large quantities of data  regularly  collected  from  intra-Community  traders. 
The  information  made  available  fulfils  a  real  control  need.  The  expansion  of  the 
arrangements  to  implement  the  enlargement  of  the  Community  in  1995  was  a  success 
from  the  technical  and  organisational  point  of  view.  A  start  has  also  been  made  in 
promoting multilateral  VAT control. 

However,  in spite  of these  improvements,  the situation  is clearly  not  satisfactory,  even if 
that  is to a large extent  due to the taxation  system  itself and  to the shortcomings of the 6th 
VAT  Directive.  The differences  in its transposition  and application  by the Member  States 
and  the complexity  of its rules  are causing  problems  for  administrations  and traders  alike 
and  the experience  gained  during  the multilateral  VAT control  experiments  indicates  that 
traders  are  exploiting  these  differences.  To  provide  a  solution  to  such  fundamental" 
problems,  the  Commission  has  proposed  a  complete  overhaul  of  the  Community  VAT 
legislation9. 

Such a move will not, however,  happen  overnight.  And in a number of important  respects, 
there  is  still  a  great  deal  more  that  Member  States  could  and  should  do  to  enable  the 
fullest  possible  benefit  to  be  drawn  from  the  existing  Community  framework.  As 
administrative  co-operation  becomes  an  increasingly  vital  link  in the  VAT control  chain, 
failure  to  make  the  fullest  possible  use  of  it  would  pose  an  unacceptable  threat  to  the 
integrity  of  the  VAT  system  itself.  There  is a  need  not  only  to  make  better  use  of  the 
possibilities  offered  by the existing  framework  but  also  to  construct  a new  infrastructure 
for  the  further  development  of  the  tools  and  activities  needed  to  make  administrative 
cooperation  a  daily  reality  throughout  national  administrations.  As  a  first  stage  the 
Commission  will  shortly  be  putting  forward  a  proposal  foi  an  action  programme  to 
reinforce  the  functioning  of  the  indirect  taxation  systems  of  the  internal  market.  This 
programme  will  also  provide  a  new  legal  and  budgetary  basis  for  Community  funding 
from  1998  of  the  VIES,  and  other  information  exchange  and  communication  systems 
necessary for administrative  cooperation. 

3.2. 

Recommendations 

Member  States  must do more to ensure the fullest  possible  integration  of the control of 
the  taxation  of  intra-Community  trade  into  their  national  VAT control  strategies  and 
the  methodology  of  all  their  control  staff,  rather  than  treating  it  as  a  specialist 
expertise. This entails giving a greater  priority to the use of administrative  cooperation. 

9  A Common  system  of VAT - A programme  for the Single  Market  (COM( W>)  32N  final). 

16 

To  this  end,  the  use  of  the  specific  enquiry  and  request  opportunities  provided  (at 
substantial  cost  to  traders  and  national  administrations)  should  be  more  widespread. 
Similarly  multilateral  VAT  controls  - not just  experiments,  which  have  already  proved 
their  worth,  but  real  operational  controls  should  become  a  common  part  of  national 
control  strategies. 

The  Community,  in  partnership  with  the Member  States,  also  has  a duty  to  encourage 
the  development  of  administrative  cooperation.  More  must  be  done  on  a  Community 
level  and  in  the  Member  States  to  make  national  officials  aware  of  the  Community 
dimension  of  their  work;  to  foster  mutual  confidence  between  officials  of  different 
national  administrations;  to  make  cooperation  as  user-friendly  and  low  in  opportunity 
costs as possible. 

Member  States  must  make  greater  efforts  to  ensure  that  all their  traders  making  intra-
Community  supplies  make  timely  and  correct  declarations,  and  must  reconsider  the 
adequacy  of their enforcement  and penalty policies for  non-compliant  traders. 

Member  States  must  invest  more  resources  to  enable  them  to  answer  requests  for 
assistance as soon  as possible after  they  have been  received  from  other  Member  States. 
Organisational  and  staffing  difficulties  in  certain  CLOs  need  to  be  urgently  and 
vigorously  addressed. 

Member  States must  commit  themselves  to  pool  information  on concrete  investigations 
of  fraud  at  Community  level.  Only  this  will  permit  the  development  of  a  Community 
strategy  against  fraud  of any real  substance. 

increase 
The  Commission  and  Member  States  must  make  a  greater,  effort 
cooperative  activity  in  the  detection  and  prevention  of  fraud.  The  lack  of  complete 
information  at  Community  level  allied  to  the  limitations  of  the  existing  framework  for 
dealing  with  complex  transnational  fraud  represents  an  area  of  risk  that  must  be  faced 
up to. 

to 

The Community  will  need  to take the necessary  legislative  and  administrative  measures 
to  improve  the  arrangements  for  administrative  cooperation  on  recovery.  These  will 
need  to  be  sustained  with  a  greater  effort  from  the  Member  States  to  use  the 
arrangements  and  fulfil  their  responsibilities  under them. 

17 

Cooperation  is  a  positive  sum  game.  Effective  action  by  all  Member  States  in  each  of 
these  areas  would  greatly  enhance  the  ability  of  the  Community  as  a  whole  to  meet  the 
challenges  facing  administrative  cooperation,  both  now  and  in  the  years  ahead.  With  the 
introduction  of  the  new  common  VAT  system  for  the  single  market,  administrative 
cooperation  will  become  even  more  central  to  VAT  control.  A  level  of  cooperation 
between  all  the  Member  States  will  be  required,  at  least  equivalent  to  that  currently 
achieved  within  each  Member  State.  It  is vital  that  the  new tools  and  methodologies  that 
will be needed  should  meet with  a readiness  on the  part  of all Member  States  to  use them 
together  and  to  integrate  the  Community  dimension  into  their  national  strategies.  The 
experience and achievements to date provide a firm foundation  to build on. 

ISSN 0254-1475 

COM(96) 681 final 

DOCUMENTS 

EN 

09  06 

Catalogue  number  :  CB-CO-96-692-EN-C 

ISBN  92-78-13617-4 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg 

ft