Special Report No 9/98 concerning the protection of the financial interests of the European Union in the field of VAT on intra-Community trade together with the Commission's replies (Submitted pursuant to Article 188c(4)(2) of the EC Treaty)
Date: 1998-07-02
Institutions: European Court of Auditors
Subjects: EU Member State, VAT, administrative cooperation, approximation of laws, fraud against the EU, intra-EU trade

20.11.98

EN

Official  Journal  of  the  European  Communities

C  356/1

I

(Information)

COURT  OF  AUDITORS

SPECIAL  REPORT  No  9/98

concerning  the  protection  of  the  financial  interests  of  the  European  Union  in  the  field  of  VAT
on  intra-Community  trade  together  with  the  Commission’s  replies

(Submitted  pursuant  to  Article  188c(4)(2)  of  the  EC  Treaty)

(98/C  356/01)

CONTENTS

Paragraph
reference

Page

1.  VAT  AND  THE  VAT  RESOURCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1 — 1.18

A  field  of  national  and  Community  interest . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.1 — 1.2

The  changes  introduced  on  1  January  1993 . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.3 — 1.5

A  greater  risk  of  irregularities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.6 — 1.9

Prospects  for  changes  in  the  transitional  scheme . . . . . . . . . . . . . . . . . . . . . . .

1.10 — 1.15

Audits  carried  out  by  the  Court  together  with  certain  National  Audit
Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1.16 — 1.18

2.  VAT  FRAUD  IN  INTRA-COMMUNITY  TRADE . . . . . . . . . . . . . . . . . . . . .

2.1 — 2.9

No  single  definition  of  fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.1 — 2.3

No  uniform  sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.4 — 2.8

No  evaluation  of  the  system  of  penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.9

3.  THE  PROTECTION  OF  THE  COMMUNITY’S  FINANCIAL  INTERESTS
AS  REGARDS  VAT  ON  INTRA-COMMUNITY  TRADE . . . . . . . . . . . . . . .

3.1 — 3.48

A  responsibility  shared  between  the  Member  States  and  the  Commission . . .

3.1 — 3.5

Administrative  cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.2 — 3.3

Mutual  assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.4 — 3.5

3

3

3

4

4

5

5

5

6

6

6

6

7

7

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The  action  taken  by  the  Member  States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.6 — 3.21

Audit  strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.6 — 3.8

Differences  in  powers  of  prosecution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.9

The  reconciling  of  data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.10 — 3.11

Access  to  the  legislation  of  other  Member  States . . . . . . . . . . . . . . . . . . . . .

3.12

The  recovery  of  evaded  VAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.13 — 3.14

Exchanges  of  information  between  Member  States . . . . . . . . . . . . . . . . . . .

3.15 — 3.21

Action  taken  by  the  Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.22 — 3.34

Periodic  reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.22 — 3.28

Reports  on  the  national  systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.22 — 3.26

Reports  on  administrative  cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.27 — 3.28

The  Standing  Committee  on  administrative  cooperation  (SCAC)  and  its
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
anti-fraud  subcommittee  (AFS)

3.29 — 3.34

The  work  of  the  anti-fraud  subcommittee . . . . . . . . . . . . . . . . . . . . . . . .

3.29 — 3.31

Other  work  carried  out  by  SCAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative  cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.32 — 3.34
3.32 — 3.34

Mutual  assistance  in  debt  collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.35 — 3.42

Administrative  cooperation  programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.37

Unit  on  Coordination  of  Fraud  Prevention  (UCLAF)

. . . . . . . . . . . . . . . . .

3.38 — 3.42

Fraud  risks  in  connection  with  certain  exceptional  arrangements . . . . . . . . . .

3.43 — 3.48

Distance  sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.43 — 3.45

Intra-Community  tax-free  sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.46 — 3.48

4.  CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1 — 4.15

Increasing  the  protection  of  financial  interests  at  the  level  of  the  European
Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1 — 4.8

Improving administrative cooperation and exchanges of information between
Member  States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.9 — 4.11

Assessment  tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.12 — 4.15

7

7

8

8

8

8

8

8

9

9

10

10

10

11
11

11

11

12

12

12

13

13

13

14

14

The  Commission’s  replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15

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1.  VAT  AND  THE  VAT  RESOURCE

A  field  of  national  and  Community  interest

in  the  sixth  Council  Directive  of  1977 (5),  which
constitutes  the  basis  of  the  European  Union’s  current
legislation  on  VAT.

1.1. Almost  half  of  the  Union  budget  (45 %  in  1997)  is
financed  by  the  VAT  resource (1).  This  resource  was
established  by  applying  a  rate  (a  maximum  of  1,08 %  in
1998) to a uniformly established base representing all the
taxable operations in each Member State subject to VAT
that  cannot  be  deducted  by  the  buyer.

1.4. When  the  single  market  came  into  being  on  1
January  1993,  a  new  transitional  scheme  for  VAT  on
intra-Community trade entered into force (6). This system
attempted to fulfil the requirements of an internal market
without  frontiers  whilst  allowing  room  for  manoeuvre  at
national  level  as  regards  the  establishment  of  VAT  rates
and  the  collection  and  auditing  of  the  tax.

1.2. Payments  by  the  Member  States  in  respect  of  the
VAT  resource  depend,  inter  alia,  on  their  VAT  revenue.
They therefore also depend partly on the results that they
achieve in the fight against fraud, for which they bear the
main responsibility (2).  There  has  been  a  worrying  rise  in
tax  fraud.  Work  carried  out  by  the  Court  in  order  to
assess  all  losses  of  VAT  revenue  (both  internal  and
are
intra-Community) 
considerable (3).

shows 

losses 

these 

that 

The  changes  introduced  on  1  January  1993

1.3. Since  the  common  VAT  system  was  introduced  in
the  1970s (4) its declared objective has been to create the
conditions  necessary  for  the  establishment  of  an  internal
market  characterised  by  healthy  competition,  with  the
elimination  of  import  taxes  and  tax  refunds  on  export
trade between Member States. This objective was restated

(1)  Council  Decision  No  94/728/EC,  Euratom  of  31  October
1994,  OJ  L  293,  12.11.1994,  p.  9.  For  details  of  the
calculation  of  the  VAT  resource,  see  Council  Regulation
(EEC)  No  1553/89  of  29  May  1989,  OJ  L  155,  7.6.1989,
p. 9.

activities, 

economic 

and  underground 

(2)  Doc.  SEC(92)  280  final  of  24  February  1992,  p.  5(a).  Tax
failing
fraud 
appropriate  adjustments,  may  affect  not  only  VAT  revenue
but  also  the  calculation  of  the  GNP  itself  (and  hence  of  the
GNP  resource,  another  major  source  of  funds  for  the
Community  budget).  Because  of  this,  not  only  may  the
breakdown  of  the  financial  burden  among  the  Member
States  be  affected,  but  so  may  also  the  level  of  budgetary
resources,  which  is  established  as  a  percentage  of  the  GNP.
(3)  See  the  Court’s  Special  Report  No  6/98  on  the  ‘Assessment
of  the  system  of  resources  based  on  VAT  and  GNP’,
paragraphs  4.16  to  4.19.

(4)  Since  1967,  the  first  and  second  Council  Directives  (Council
Directives  67/227/EEC  and  67/228/EEC  of  11  April  1967,
OJ 71, 14.4.1967, p. 1301/67) concerning the harmonisation
of  legislation  regarding  taxes  on  turnover  have  provided  for
the elimination of the cumulative multi-stage tax systems still
in  force  and  the  setting  up,  in  each  Member  State,  of  a
general  tax  on  consumption  proportional  to  the  price  of  the
goods sold or the services rendered, whatever the number of
the 
the  production  and
intermediaries 
distribution  process.

involved 

in 

1.5. The  main  characteristics  of  this  scheme  were  as
follows:

supplies  of  goods’ 

(a) the  terms  ‘export’  and  ‘import’  were  abolished  with
reference  to  trade  between  Member  States  (thus
achieving  one  of  the  objectives  of  the  first  Directive)
and,  in  practice,  replaced  by  an  equivalent  system:
‘intra-Community 
(formerly
‘exports’)  were  exempted  from  VAT  in  the  Member
State  of  origin  provided  that  the  purchaser  was
registered  for  VAT  in  another  Member  State  and  that
the goods left the national territory. ‘Intra-Community
acquisitions of goods’ (formerly imports) were taxable
in  the  Member  State  where  they  were  consumed  and
had  to  be  declared  by  the  buyer  in  his  periodic  VAT
statements;

(b) in order to compensate for the elimination of customs
formalities  and  checks  and  avoid 
losses  of  tax
revenue,  a  computerised  system  for  the  automatic
exchange  of 
value  of
information  on 
intra-Community  deliveries  was  set  up  among  the
national  authorities 
information  exchange
(VAT 
system  or  VIES) (7);

the 

(c) consumers  could  henceforth  pay  VAT  at  the  point  of
origin  on  goods  purchased  in  another  Member  State
without  any  further  formalities.  Tax-free  sales  for
intra-Community  travellers  in  airports  and  on  board
aeroplanes  and  ships  were  to  come  to  an  end  on  30
June  1999;

(d) under three special schemes (distance sales, new means
of  transport,  intra-Community  purchases  by  flat-rate
farmers,  exempted  persons  and  legal  entities  that  are
not  liable  for  VAT),  transactions  were  generally
subject  to  taxation  in  the  country  of  consumption.

(5)  Council  Directive  77/388/EEC  of  17  May  1977,  OJ  L  145,

13.6.1977,  p.  1  and  subsequent  amendments.

(6)  Council  Directive  91/680/EEC  of  16  December  1991,  OJ  L

376,  31.12.1991,  p.  1.

(7)  Council  Regulation  (EEC)  No  218/92  of  27  January  1992
concerning administrative cooperation in the field of indirect
taxation,  OJ  L  24,  1.2.1992,  p.  1.

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A  greater  risk  of  irregularities

be no possibility other than the continuation of the above
arrangement.

1.6. The  creation  of  the  single  market  involved  the
disappearance  of  routine  inspections  at  internal  borders.
A  system  involving  the  ex-post  exchange  of  information
(VIES) was therefore set up. Given that, rather than being
collected  at  the  moment  of  importation,  VAT  is  now
recovered  at  a  later  stage,  on  the  basis  of  the  taxpayers’
periodic  declarations,  the  possibility  of  fraud  has  been
proportionately  increased.

1.7. There  were  two  main  types  of  fraud:

(a)  the  declaration  of 

intra-Community
deliveries: the exempted goods are in fact sold on the
internal market and VAT due on final consumption is
thus  evaded;

fictitious 

(b) failure  to  declare  VAT  due  on  intra-Community
purchases: this may then result in VAT fraud on final
through
consumption 
underground  trade  channels;  the  right  to  deduct  the
tax  upstream  may  also  be  misused  in  cases  where
buyers’  VAT  declarations  request  the  refund  of  VAT
on  purchases  for  which  no  VAT  was  paid.

the  goods  are  resold 

if 

1.8. Certain Member States are worried by the fact that
their  VAT  revenue  has  recently  fallen  below  estimated
amounts.  Two  of  them  have  identified  an  erosion  of  the
tax  base,  which  they  feel  is  linked  to  the  development  of
an  underground  economy (8)  caused  by  the  transitional
VAT  scheme.

1.9. According  to  the  Commission,  intra-Community
trade involving the circulation of goods currently covered
by  the  VAT  exemption  scheme  itself  accounts  for  more
than  ECU  700 000  million,  or  ECU  100 000  million  in
taxes.  There  are  therefore  significant  amounts  of  money
at  stake  in  the  field  of  intra-Community  trade.

Prospects  for  changes  in  the  transitional  scheme

1.10. When  the  Directive  introducing  the  transitional
VAT  scheme  was  adopted,  it  was  intended  to  last  until
31  December  1996.  In  the  absence  of  a  Council  decision
on  a  definitive  system,  this  ‘transitional’  scheme  has
remained  in  force.  For  the  years  to  come,  there  seems  to

economy: 

(8)  The  Commission  gives  the  following  definition  of  the
covers

underground 
undeclared  but  licit  activities,  i.e.
—  those  which  are  the  activities  of  production  units  which
are  properly  registered  but  which  in  returns  understate
either  their  production  or  their  income,

‘the  black 

economy 

—  those  which  are  the  activities  of  clandestine  production

units,  relying  on  hidden  labour’.

See  Doc.  SEC(92)  588  final  of  24  April  1992,  p.  30.

traders.  This 

1.11. The fact is that the Commission’s proposal for the
adoption  of  a  definitive  scheme (9)  requires  at  least  two
prior conditions to be satisfied. In particular, it envisages
the  elimination  of  any  distinction  between  internal  and
intra-Community  transactions  (goods  to  be  taxed  at
origin) and a single place of registration and taxation for
Community 
therefore  presupposes  an
identity  of  goods  and  services  and  of  the  VAT  rates
applied  in  all  the  Member  States.  Failing  this,  a  trader
could  sell  his  goods  in  other  Member  States,  where
necessary via a branch company, at the rate applicable in
the Member State where he is registered (which could be
2  or  3 %  lower).  The  result  at  the  final  consumption
stage  would  be  similar  goods  with  different  VAT  rates
according  to  the  seller’s  place  of  residence.

1.12. Secondly,  given  that  VAT  revenue  would  be  paid
in  by  the  traders  in  their  country  of  registration  rather
than  in  the  country  of  consumption  of  the  goods,  the
proposal  would  make  it  necessary  to  reallocate  VAT
in  accordance  with
revenue  to  the  Member  States 
national  consumption.  In  order  to  guarantee  that  each
Member  State  none  the  less  retains  the  same  level  of
revenue as under the current system, the Commission has
proposed  setting  up  a  macroeconomic  mechanism
taxable  consumption  by
designed 
subtracting  transactions  relating  to  the  underground
economy,  for  which  no  VAT  was  collected (10).  Failing
this,  the  varying  levels  of  fraud  in  the  Member  States
would  create  distortions  in  the  revenue  allocated  to
them.

reconstitute 

to 

1.13. The  choice  of  a  macroeconomic  method  implies
the  availability  of  uniform  or  equivalent  sources,
methods,  funds  and  statistical  procedures.  This  choice  is
likely  to  bring  about  disagreements  between  Member
States in their individual calculations of statistical taxable
consumption,  in  particular  as  regards  the  reduction  in
each  Member  State’s  assessment  base  via  the  subtraction
of  the  underground  economy.  In  actual  fact,  this  subject
has  been  the  subject  of  study  for  many  years,  inter  alia,
in  connection  with  the  drawing  up  of  national  accounts.
The  estimates  put  forward  vary  considerably,  as  a  result,
in  particular,  of  the  methods  and  sources  used (11).

1.14.
It  is  true  that  the  Member  States  already  have  to
comply,  by  the  end  of  1998,  with  certain  exhaustiveness

(9)  Doc.  COM(96)  328  final  of  22  July  1996.
(10) For  a  definition  of  the  underground  economy,  see  note  8.
(11) On  this  point,  see  paragraphs  4.8  to  4.26  of  the  Court’s
Special  Report  No  6/98  on  the  ‘Assessment  of  the  system  of
resources  based  on  VAT  and  GNP’.

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obligations  in  respect  of  their  national  accounts (12).
Nevertheless,  in  the  current  situation,  it  should  be
stressed  that  exhaustive  national  accounts  will  involve  a
conflict  of  interests  for  the  Member  States,  in  so  far  as
they  would  lead  to  an  increase  in  the  gross  national
product  at  market  prices  (GNP) (13).  This  is  because  any
increase  in  the  GNP  requires  the  States  to  provide
additional  resources  for  the  Community  budget  via  the
GNP  resource.  The  Commission  proposal  can  only
accentuate  this  conflict  of  interests  since,  under  the
proposed  VAT  system,  Member  States  would  have  an
objective  interest  in  limiting  the  size  of  the  underground
economy 
even
underestimating  taxable  consumption,  so  as  to  maximise
their  share  of  the  redistribution  of  overall  VAT  income.
Auditing  the  way  in  which  the  national  accounts  are
drawn up would thus take on even greater importance in
the  context  of  the  establishment  of  the  GNP.

their  national 

accounts,  or 

in 

1.15. The Commission, however, has acknowledged that
‘Eurostat  itself  is  not  engaged  in  directly  measuring  the
size  of  the  underground  economy  in  the  Member  States’
and, in respect of the current work on the exhaustiveness
of  the  GNP,  ‘it  is  not  expected  that  reliability  or
variability  indicators  will  be  attached  to  the  results’ (14).
This therefore seems to imply that an objective evaluation
of  the  underground  economy  is  not  possible  at  the
present  time.

Audits  carried  out  by  the  Court  together  with  certain
National  Audit  Institutions

suffering 

1.16. Since  1994,  a  Working  Party  made  up  of  the
National  Audit  Institutions  and  the  European  Court  of
Auditors  has  been  examining  various  aspects  relating  to
VAT  on  intra-Community  trade.  This  group  has  found
that  the  VIES  automatic  information  exchange  system  is
still 
the
improvements  made  since  its  creation.  Moreover,  it  has
become  evident  that  the  Member  States’  audit  methods
need  to  take  account  specifically  of  the  tax  evasion  risk
linked  directly  to  the  abolition  of  tax  frontiers.  Lastly,
the  Member  States  and 
the  Commission  were
recommended  to  monitor  the  development  of  revenue
from  VAT  on  intra-Community  trade  more  closely (15).

shortcomings 

despite 

from 

In  1996  and  1997,  the  Working  Party  examined
1.17.
the  Community’s  fraud  prevention  arrangements  and

(12) Commission  Decision  97/19/EC,  Euratom  of  3  September
1997, OJ L 252, 16.9.1997, p. 33. For Austria, Finland and
Sweden,  the  deadline  is  1999.

(13) GNP  at  market  prices  is  defined  in  Council  Directive
89/130/EEC,  Euratom  of  13  February  1989  (OJ  L  49,
21.2.1989,  p.  26).

(14) See  reply  to  written  question  P-1784/97,  OJ  C  45,

10.2.1998,  p.  103.

(15) See  the  Annual  Report  of  the  Court  of  Auditors  concerning
the  1994  financial  year,  paragraphs  1.90  to  1.111  and  the
Annual  Report  concerning 
financial  year,
paragraphs  1.72  to  1.103.

the  1995 

systems. 

national 

certain 
of
intra-Community  fraud  that  the  competent  national
authorities  considered  to  be  representative  were  analysed
and,  more  particularly,  the  way  the  machinery  for
administrative  cooperation  works  was  examined.

Certain 

cases 

taken 

1.18. The 
from
following  observations  are 
inquiries  carried  out  by  the  Working  Party  in  five
Member  States  and  at  the  Commission.  The  results  of
these inquiries have been communicated to the authorities
concerned.  Taking  into  account  the  various  reports
drawn  up  by  the  Commission (16)  and 
information
obtained  from  its  departments,  the  majority  of  the
shortcomings  noted  and  recommendations  put  forward
might  concern  other  Member  States,  or  even  all  of
them.

2.  VAT  FRAUD  IN  INTRA-COMMUNITY  TRADE

No  single  definition  of  fraud

fraud  require 

In  the  Member  States  audited,  the  legal  definitions
2.1.
of 
the  presence  of  an  element  of
intentionality  on  the  part  of  an  individual (17).  Fraud  is
not  always  defined  specifically  for  VAT  purposes,  but
may have a more general scope. As a rule, cases involving
failure  to  make  a  VAT  statement,  the  submission  of
declarations  with  false  or  incomplete  information,  the
falsification  of  documents  or  the  use  of  false  documents’
constitute  criminal  offences.  In  some  Member  States,
however,  the  existence  of  an  offence 
linked  to
obtaining  a  profit,  whereas  in  others  it  is  enough  for  the
act  to  have  been  committed  (for  example,  failing  to
submit  a  statement).

is 

(16) These  are  the  reports:

—  second  and  third  reports  under  Article  12  of  Regulation
(EEC,  Euratom)  No  1553/89,  Doc.  COM(95)  354  final
and  Doc.  COM  (98),

—  study  on  the  systems  of  administrative  and  criminal
sanctions of the Member States and the general principles
of  the  Community’s  system  of  sanctions,  Doc  SEC(93)
1172  of  16  July  1993,

—  comparative  analysis  by  the  Commission  of  the  Member
States’  reports  concerning  measures  taken  at  a  national
level  in  the  fight  against  the  waste  and  misappropriation
of  Community  funds,  Doc.  COM(5)  556  final  of  14
November  1995,

—  1995  Annual  Report:  ‘the  fight  against  fraud’,  Doc.

COM(96)  173  final  of  8  May  1996,

—  second  report  under  Article  14  of  Regulation  (EEC)  No

218/92,  Doc.  COM(96)  681  final,

—  report  submitted  by  the  Commission  in  accordance  with
Article  28(l)  of  Directive  77/388/EEC,  Doc.  COM  (94)
515  final.

(17) The  Court  of  Justice  of  the  European  Communities  has
stressed the distinction between the notion of evasion, which
is  a  purely  objective  phenomenon,  and  that  of  fraud,  which
contains an element of intentionality. See the Judgment of 12
July  1998,  Joined  Cases  138  and  139/86,  Direct  Cosmetics,
ECR  p.  3937,  paragraphs  20-23.

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2.2. On  26  July  1995,  because  of  various  shortcomings
and 
incompatibilities  that  were  detrimental  to  the
repression  of  fraud  and  to  legal  cooperation  in  criminal
matters,  the  Member  States  subscribed  to  a  Convention
on  the  protection  of  the  financial  interests  of  the
European  Communities (18).  The 
this
Convention  was  to  create  minimum  criminal  standards,
starting  with  a  single  definition  of  fraud  for  both
Community  expenditure  and  revenue.  In  respect  of
revenue,  it  defined  fraud  as  ‘any  intentional  act  or
omission  relating  to:

intention  of 

—  the  use  or  presentation  of  false, 

inaccurate  or
incomplete  statements  or  documents,  which  has  as  its
effect  the  illegal  diminution  of  the  resources  of  the
general  budget  of  the  European  Communities  or
budgets  managed  by,  or  on  behalf  of  the  European
Communities,

—  non-disclosure of information in violation of a specific

obligation,  with  the  same  effect,

—  misapplication  of  a  legally  obtained  benefit,  with  the

same  effect’.

2.3. However,  according  to  the  explanatory  report  on
the  Convention  adopted  by  the  Council,  VAT  was
excluded  from  its  scope  because  it  was  not  ‘an  own
resource  collected  directly  for  the  account  of  the
Communities’ (19).  Accordingly,  unlike  other  Community
fields,  provision  was  not  made  for  ensuring  an  identical
level  of  protection  in  all  the  Member  States,  despite  the
fact  that  it  accounts  for  almost  half  the  Communities’
budgetary  resources (20).

No  uniform  sanctions

2.4. The  exclusion  of  VAT  from  this  agreement  implies
the maintenance of different definitions of fraud. This has
repercussions  in  terms  of  legal  action  taken  as  the  result
of  fraudulent  behaviour  in  connection  with  VAT.  Thus,
the  same  behaviour  could  be  sanctioned  in  substantially
different  ways  according  to  the  Member  States.  Here  are
some  examples.

2.5.
In  one  Member  State,  falsification  of  accounting
records  by  a  company  manager  constitutes  a  serious
fraud  which  is  liable  to  a  criminal  penalty  (a  prison
sentence).  In  another,  it  is  regarded  as  a  preparatory  act
and  is  punished  as  a  breach  of  administrative  law  (a
fine).

same act. However, only in some could multiple penalties
really  be  imposed  for  the  same  offence.

2.7. Accomplices may often benefit from a commutation
of  penalty  if  they  have  played  a  marginal  role,  but  the
legal  systems  of  the  Member  States  differ  with  regard  to
the  degree  of  involvement  in  the  fraud  (instigator,  main
perpetrator,  accessory,  principal  in  the  second  degree,
etc.).  Moreover,  in  two  Member  States,  accomplices  are
not  punishable  if  the  fraud  did  not  entail  financial
consequences. The fact that fraud of this kind may cause
losses  for  other  Member  States  was  not  sufficient  to
justify  legal  proceedings.

2.8. Other  differences  concerned,  for  example:

—  the criminal liability of the company or legal entity to
which  a  fraudulent  manager  belonged,  a  liability  that
is  recognised  in  certain  Member  States  but  not  in
others,

—  the  application  of  the  penalty  as  from  the  ‘beginning
of  the  (attempted)  implementation’  of  the  fraud  or
only  when  it  has  been  carried  out  to  the  full,

—  the  determination  of  the  penalties  in  relation  to  the
‘seriousness of the crime. For example, some Member
States envisage a fine ranging between a minimum and
a  maximum,  others  a  penalty  that  is  proportional  to
the  amount  defrauded.

No  evaluation  of  the  system  of  penalties

regard 

to  whether 

2.9. Most of the Member States audited do not evaluate
the  application  of  the  system  of  penalties,  in  particular
with 
they  are  effective  and
proportionate  to  the  offence.  An  analysis  of  this  kind
would,  however,  give  a  better  idea  of  the  degree  of
dissuasion  offered  by  the  penalties  in  the  field  of  tax
evasion. This would seem to be all the more necessary as
the penalties are not yet defined and applied in a uniform
fashion  throughout  the  Member  States(see  the  previous
section).

3.  THE 

PROTECTION  OF  THE  COMMUNITY’S
INTERESTS  AS  REGARDS  VAT  ON

FINANCIAL 
INTRA-COMMUNITY  TRADE

2.6. Moreover,  in  certain  Member  States  administrative
penalties  may  be  combined  with  criminal  ones  for  the

A  responsibility  shared  between  the  Member  States  and
the  Commission

(18) See  OJ  C  316,  27.11.1995,  p.  48.  It  should  be  noted  that
this  agreement  was  not  yet  in  force  because  it  had  not  been
ratified  by  the  Member  States.

(19) See  OJ  C  191,  23.6.1997,  pp.  1  and  4.
(20) It  should  be  noted  that  VAT  fraud  may  also  affect  the  GNP
resource,  which  constitutes  the  other  main  source  of  funds
for  the  Community.  See  note  2.

3.1. Responsibility  for  the  detection  and  the  correction
of  VAT  irregularities  and  fraud  is  in  the  first  place  the
responsibility  of  the  Member  States,  which  are  required
to  take  effective  action  to  prevent  and  repress  the
phenomenon  in  question  and  recover  the  resources  lost.
However,  the  Regulation  defining  the  arrangements  for

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the  collection  of  Community  VAT  own  resources (21),
assigned  to  the  Commission  a  role  in  monitoring  the
the
effectiveness  of 
prevention 
the
of 
in
Commission,  the  provisions  of  this  Regulation, 
particular the procedures for the on-the-spot audit of the
VAT  resource,  constitute  a  legal  basis  for  the  fight
against  fraud (22).

the  collection  procedures  and 
to 
irregularities.  According 

States  under  the  chairmanship  of  the  Commission,  is
responsible  for  evaluating  the  working  of  administrative
cooperation.  Two  subcommittees  deal  respectively  with
the  fight  against  fraud  and  IT 
issues.  The  same
Regulation also provides for a two-year assessment report
by  the  Commission.

Administrative  cooperation

3.2. Regulation  (EEC)  No  218/92 (23)  on  administrative
cooperation  in  the  field  of  indirect  taxes  was  adopted  in
connection  with  the  establishment  of  the  internal  market
and subsequent amendments to the legislation on VAT. It
enabled  the  creation  of  a  common  system  of  electronic
exchanges  of  information  on  VAT  in  respect  of  transfers
of  goods  between  Member  States  so  that  the  transitional
VAT scheme could ‘be effectively established without the
risk  of 
fraud  which  might  cause  distortions  of
competition’ (24).  Each  Member  State  had  set  up
electronic  databases 
information  was
exchanged  via  a  network  controlled  by  the  Commission,
which  provided  quarterly 
(the
monitoring  of  management,  figures  for  the  exchanges  of
data  on  turnover,  etc.).

from  which 

summary 

statistics 

the  operation  of 

3.3. Article 11 of Regulation No 218/92 stated that ‘the
Member  States  and  the  Commission  shall  examine  and
for
evaluate 
administrative 
this
cooperation  provided 
Regulation  and  the  Commission  shall  pool  the  Member
States’  experience,  in  particular  that  concerning  new
means  of  tax  avoidance  and  evasion,  with  the  aim  of
improving  the  operation  of  those  arrangements’.  The
Standing  Committee  on  Administrative  Cooperation
(SCAC),  composed  of  the  representatives  of  the  Member

the  arrangements 
in 

for 

(21) Council Regulation (EEC) No 1553/89 of 29 May 1989 (OJ

L  155,  7.6.1989,  p.  13).

(22) See  the  Commission’s  reply  to  written  question  2630/94  (OJ

C  75,  27.3.1995,  p.  62  and  unpublished  annex).

(23) OJ  L  24,  1.2.1992.
(24) See  the  third  recital  of  Regulation  (EEC)  No  218/92.  In  its
first  proposal  for  the  Regulation  (Doc.  COM(90)  183  final),
the  Commission  had  envisaged  other  provisions  concerning
the exchange of information between the Member States and
the Commission in order to strengthen the fight against VAT
and  excise  fraud  on  a  similar  model  to  that  used  in  the
customs  field  (Regulation  (EEC)  No  1468/81).  At  the  time,
the  Member  States  did  not  accept  them.

Mutual  assistance

3.4.
In  addition  to  the  VIES  system,  Council  Directive
77/799/EEC  of  19  December  1977  also  provides  for
exchanges  of  information  between  Member  States (25).
This  piece  of  legislation,  which  originally  applied  to  the
field of direct taxation, was extended to VAT because ‘as
a matter of particular urgency, mutual assistance must be
extended  to  cover  value  added  tax,  both  because  it  is  a
general  tax  on  consumption  and  because  it  plays  an
important  part 
in  the  Community’s  own  resources
system.’ (26).  The  Directive  laid  down  procedures  for
exchanging  information  between  Member  States  and
provided  for  procedures  for  consultation  and  the  sharing
of  experiences (27)  among  the  Member  States  and  the
Commission.  The  SCAC  committee  was  also  competent
for  questions  concerning 
this
Directive.

the  application  of 

3.5. The  field  covered  by  Council  Directive  76/308/EEC
of  15  March  1976  concerning  mutual  assistance  as
regards  the  recovery  of  debts (28)  was  extended  to  VAT
by  Directive  79/1071/EEC (29).  A  Recovery  Committee
to  organise  close  and  effective
was  also  set  up 
cooperation  between 
the
the  Member  States  and 
Commission  in  this  field.

The  action  taken  by  the  Member  States

Audit  strategies

3.6. All  the  Member  States  audited  use  risk  analysis  to
improve  their  targeting  of  checks  on  taxpayers  and  high
risk  sectors.  This  enables  them  to  rank  their  checks  in
order of priority so as to make more efficient use of their
resources (30).  However,  they  do  not  normally  keep
detailed  data  on  their  anti-fraud  activities  or  on  the

(25) OJ  L  336,  27.12.1977,  p.  15.
(26) Council  Directive  79/1070/EEC  of  6  December  1979,  OJ  L

331,  27.12.1979,  p.  8.

(27) Council  Directive  77/799/EEC  of  19  December  1977,

Articles  9  and  10.

(28) OJ  L  73,  19.3.1976,  p.  18.
(29) OJ  L  331,  27.12.1979,  p.  10.
(30) In  the  draft  version  of  its  third  report,  drawn  up  in
accordance  with  the  requirements  of  Regulation  (EEC,
Euratom)  No  1553/89,  the  Commission  gives  a  detailed
description  of  the  audit  methods  introduced  in  the  Member
States.

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results of such activities. This impairs the effectiveness of
risk analyses, in so far as it makes it impossible to assess
the  relevance  of  the  criteria  used.

3.7.
In  order  to  avoid  the  need  to  carry  out  the  often
problematic task of recovering undue tax credits, most of
the  Member  States  audited  take  great  care  over  checking
the  VAT  statements  involving  the  reimbursement  of  tax
credits.  Nevertheless,  their  verification  strategy  does  not
involve  the  systematic  checking  of  the  payment  of  the
VAT invoiced by suppliers. One Member State has taken
specific  measures,  in  the  event  of  any  signs  of  fraud,  to
freeze  taxpayers’  VAT  credit  as  long  as  is  necessary  to
establish the merits of the question and, where necessary,
until  information  requested  from  the  authorities  of  the
other  Member  States  has  been  obtained.

3.8. Some  fraud  systems  involve  fictitious  companies
which,  once  registered,  can,  before  disappearing,  ask  for
unwarranted  refunds,  draw  up  false  invoices  or  fail  to
declare  their  turnover  or  not  pay  in  the  VAT  that  they
owe.  For  this  reason  certain  Member  States  provide
specifically  for  the  checking  of  new  VAT  registrations.
The Court’s audit in one Member State also revealed that
tax  evaders 
in
particular  because  of  their  limited  turnover,  are  only
required  to  submit  their  VAT  statements  once  a  year.  It
therefore  often  becomes  impossible  to  reconcile  the  data
with  those  from  the  taxpayer  if  the  latter  applies  for
reimbursement  on  the  basis  of  a  quarterly  or  even
monthly  statement.

increasingly  used  companies  which, 

Differences  in  powers  of  prosecution

3.9.
In  this  field,  the  situation  varies  from  one  Member
State  to  another.  In  some  cases,  legal  action  has  to  be
taken whenever fraud is suspected. In others, charges can
only  be  preferred  at  the  request  of  the  public  prosecutor
or  the  tax  authorities.

The  reconciling  of  data

In 

3.10.
the  1995
its  Annual  Report  concerning 
financial  year (31),  the  Court  had  pointed  out  the
usefulness of cross-checks between the VIES and Intrastat
data  concerning  statistics  on  trade  in  goods  between
Member  States (32).  An  examination  of 
legal
background  in  the  Member  States  audited  showed  that
only  in  one  of  them  were  the  tax  authorities  allowed  to
use  the  individual  taxpayers’  Intrastat  statements  in
connection  with  their  VAT  checks.

the 

In respect of access to computerised data, there are
3.11.
significant  differences  between 
the  Member  States
audited.  For  example,  the  anti-fraud  service  in  one
Member  State  has  access  only  to  tax  declarations.
Moreover,  access  is  not  available  in  real  time  (including
access  to  the  VIES  database).  In  contrast,  the  tax
authorities  in  certain  other  Member  States  have  direct,
unlimited  access  to  other  data.

Access  to  the  legislation  of  other  Member  States

3.12. One effect of the development of the single market
is  that  each  tax  authority  is  also  ultimately  affected  by
transactions carried out by taxpayers established in other
Member States. In the event of fraud in particular, it may
be very important to know about the procedures that are
applied  in  the  other  countries  of  the  Union  in  respect  of
prosecution and time-barring periods. An examination of
the  situation  in  the  Member  States  audited  showed  that
there  were  shortcomings  in  their  documentation  on  the
legal and practical aspects of VAT legislation in the other
Member  States.

The  recovery  of  evaded  VAT

In 

the  words  of 

the  Commission, 

3.13.
‘action
undertaken  with  regard  to  combating  evasion  would
prove  fruitless  if  it  cannot  lead  to  the  actual  recovery  of
the tax payable: the detection and prosecution of evasion
have no real point unless they result in the full collection
of  the  tax  payable’ (33).

3.14. Most  of  the  Member  States  audited  have  overall
data  on  corrections  of  the  tax  base  following  audits
carried  out  on  taxpayers  by  their  departments.  However,
none of these Member States was in a position to provide
information  on  the  amounts  recovered  and  on  the
reasons  for  the  failure  to  recover  other  amounts  owed.
That  being  the  situation,  it  was  not  possible  to  form  a
judgment  on  the  effectiveness  of  the  fight  against  fraud
and  on  all  the  procedures  aimed  at  recovering  amounts
not  paid  to  the  tax  authorities.

Exchanges  of  information  between  Member  States

increase 

3.15. Overall, little use has been made of administrative
cooperation  and  mutual  assistance,  although  there  has
been  an 
(with  considerable
since  1995 
differences from one Member State to another). Although
all  the  Member  States  acknowledge  the  usefulness  of
exchanges  of  information  at  Community  level  for  the
prevention,  detection  and  investigation  of  fraud,  no

(31) OJ  C  340,  12.11.1996,  paragraphs  1.80  to  1.88,  p.  38.
(32) Council Regulation (EEC) No 3330/91 of 7 November 1991

(33) Doc.  COM(94)  471  final  of  3  November  1994,  paragraph

(OJ  L  316,  16.11.1991,  p.  1).

101.

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agreement  has  yet  been  reached  on 
information  that  is  to  be  exchanged (34).

the 

type  of

3.16. One  Member  State  audited  mentioned  problems
with  obtaining  information  as  a  result  of  the  legislation
of  another  Member  State.  The 
invoked
national  provisions  preventing  a  request  for  information
leading  to  an  additional  request  concerning  the  same
taxpayer.

latter  had 

3.17. The possibility of forwarding information received
under the mutual assistance Directive and the Regulation
on  administrative  cooperation  to  other  Member  States
concerned  has  only  been  made  use  of  in  a  few  cases.
Directive  77/799/EEC  provided  for  consultation  between
Member  States  in  order  to  determine  the  categories  of
cases  in  which  an  automatic  exchange  of  information
could  be  carried  out.  It  was  noted  that,  among  the
Member  States  audited,  only  one  such  agreement  had
been  concluded.

3.18. Exchanges  of  information  under  Article  5  of  the
Regulation  on  administrative  cooperation  are  generally
preceded  by  a  reconciliation  of  the  VIES  data  received
from  other  Member  States  with  the  intracommunity
purchases  declared  by 
taxpayers.  However,  a
the 
significant number of taxpayers do not submit summaries
of  the  intracommunity  deliveries  that  have  gone  into  the
VIES  system (35).  In  December  1996,  one  of  the  Member
States audited was not yet in a position to carry out these
reconciliations  for  1995  because  the  taxpayers  still  had
time  within  which  to  submit  their  VAT  returns.  Another
Member  State  audited  planned  to  carry  out  these
reconciliations  for  the  financial  year  1994  in  March
1997.

3.19. Moreover, 
these  reconciliations  may  produce
significant  discrepancies  (of  up  to  85 %),  which  means
that  the  national  authorities  have  to  carry  out  a
considerable  amount  of  research  work  in  order  to
establish  the  reasons.  Such  discrepancies  may  actually
lead to an abandonment of this type of auditing method,
which  is  sometimes  considered  too  expensive,  especially
in terms of human resources, and unsuitable for revealing
which  economic  sectors  involve  the  greatest  risks  of
fraud.

3.20. The  Member  States  audited  do  not 
share
information  on  fictitious  companies.  In  1995,  one  of  the
Member  States  audited  proposed  that  all  Member  States
should  exchange  information  that  could  be  of  use  in  the
two
fight  against 
Member  States  were  in  favour.

fraudulent  reimbursements.  Only 

(34) Doc. SCAC No 178, 7 November 1997 and Doc. SCAC No

39,  16  February  1998.

(35) In  chapter  2.2.2  of  its  second  report  under  Article  14  of
Regulation  (EEC)  No  218/92,  the  Commission  gives  a  95 %
compliance  rate  for  1994  and  1995  for  the  summary
statements  of  the  Member  States  as  a  whole.

In  the  Member  States  audited,  contacts  with
3.21.
officials 
from  other  Member  States  are  generally
restricted  to  the  central  level.  Bringing  in  officials  from
the tax authorities of other Member States occurs only to
a  limited  extent,  although  there  is  a  draft  agreement  on
this  between  two  of  the  Member  States  audited (36).

Action  taken  by  the  Commission

Periodic  reports

Reports  on  the  national  systems

3.22.
In accordance with the requirements of Regulation
(EEC)  No  1553/89,  the  Commission  has  drawn  up  two
reports  on  the  procedures  applied  in  the  Member  States
for  the  recovery  and  auditing  of  VAT (37).  These  reports
are  no  more  than  summaries  of  information  provided  by
the  Member  States.  The  data  on  VAT  irregularities
communicated to the Commission were not analysed and
the  differing  structures  of  the  two  reports  make  it
impossible 
the
phenomenon.

the  development  of 

evaluate 

to 

3.23. The  absence  of  regular  monitoring  of 
the
effectiveness  of  national  management  and  auditing
procedures,  by  means,  for  example,  of  a  management
chart,  along  with  the  lack  of  information  on  fraud  and
irregularities,  reduced  the  impact  of  these  reports.  In
addition,  the  Commission  does  not  examine,  for  each
Member State, the auditing methods used and the results
achieved by their audit systems. This being so, it is not in
for
a  position 
improvements.

forward  any  proposals 

to  put 

3.24.
In  the  draft  version  of  its  third  report,  the
Commission does carry out an analysis of VAT fraud and
irregularities.  However,  it  limits  itself  to  making  general
suggestions  regarding  audit  procedures  likely  to  prevent
fraud  without  providing  any  indication  of  the  Member
States  concerned.

the 

future, 

the  Commission 

3.25. For 
to
examine, together with the authorities responsible, all the
control procedures in force in each Member State so as to
identify  possible  improvements.  It  intends  to  give  an
account  of  these  in  a  fourth  report.

intends 

if  the  Commission  feels  that  this
3.26. However, 
examination  can  be  carried  out  with  its  current  powers,
this  invites  the  question  why  it  was  not  possible  before.
If,  on  the  other  hand,  it  needs  greater  powers,  it  should
state  what  new  factors  have  come  into  play  since  1996,

(36) In  application  of  Article  6  of  Directive  77/799/EEC.
(37) SEC(92)  280  of  24  February  1992  and  Doc.  COM(95)  354

of  20  July  1995.

C  356/10

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when,  due  to  opposition  from  the  Council,  it  withdrew
proposed  legislation  that  would  have  enabled  it  to  carry
out  on-the-spot  checks  on  the  national  authorities  with
the  aim  of  drawing  up 
recommendations  where
necessary (38).

The  Standing  Committee  on  administrative  cooperation
(SCAC)  and  its  anti-fraud  subcommittee  (AFS)

The  work  of  the  anti-fraud  subcommittee

Reports  on  administrative  cooperation

in 

the  Court’s  view, 

3.27.
In  1994  and  1997,  the  Commission  published
reports on the operation of Council Regulation (EEC) No
218/92  concerning  administrative  cooperation  in  respect
of VAT (39). The first set out the administrative structures
introduced  at  the  Community  and  national  levels  and
described  the  operation  of  the  VIES  system.  It  concluded
that  the  system  had  been  implemented  successfully,  even
though, 
there  were  certain
shortcomings  (discussed  in  the  latter’s  Annual  Report
concerning  the  financial  year  1994 (40)).  In  particular,  it
noted  that  no  new  types  of  fraud  had  been  identified
since  the  implementation  of  the  internal  market.  The
Commission  also  set  out  the  prospects  with  regard  to
mutual  assistance.  The  development  of  the  ‘SCENT’  tax
computer  network,  allowing  the  targeted  exchange  of
anti-fraud  messages  between  audit  authorities,  was
presented  as  an  effective  tool  in  the  future  fight  against
fraud.  Furthermore,  it  envisaged  more  frequent  use  of
Directive  76/308/EEC  on  mutual  assistance  in  respect  of
the  recovery  of  sums  owed.

3.28.
In its second report, the Commission evaluated the
operation  of  administrative  cooperation  and  mutual
assistance in 1994 and 1995. It noted that insufficient use
was  being  made  of  these  systems  to  enable  satisfactory
monitoring  of  intra-Community  transactions  in  all  the
Member  States  and  put  forward  recommendations  for
specific  action  at  both  Community  and  national  level.
The  report  also  recognised  the  absence  of  a  Community
strategy  for  the  fight  against  fraud.  This  was  attributed,
on the one hand, to the limited character of the mandate
originally  given  to  SCAC’s  anti-fraud  subcommittee  and,
on  the  other  hand,  to  the  unwillingness  of  certain
Member  States  to  cooperate  in  multilateral  inquiries  into
supposed  cases  of  fraud.  The  Commission  felt  that  the
assistance that it was able to provide in the coordination
of the Community’s work in this field was limited by the
absence of an adequate legal basis, of the sort that exists
in  the  fields  of  Customs  and  Agriculture.

(38) Doc.  COM(94)  283  of  14  July  1994.
(39) COM(94)  262  final  of  23  June  1994  and  COM(96)  681

final  of  8  January  1997.

(40) OJ  C  303,  14.11.1995,  paragraphs  1.90  to  1.111.

evasion’ (41).  During 

3.29. The  AFS,  which  is  chaired  by  the  Commission,  is
responsible  for  pooling  ‘the  Member  States’  experience,
in particular that concerning new means of tax avoidance
and 
this
subcommittee  concentrated  its  activities  on  setting  up  an
electronic  communications  network  with  an  anti-fraud
content  known  as  ‘tax  SCENT’  (see  paragraph  3.27).
However,  this  system  has  hardly  ever  been  used  by  the
Member  States,  which  are  very  unwilling  to  exchange
information  on  fraud.

years, 

early 

its 

3.30. The activities of the anti-fraud subcommittee were
only  relaunched  by  SCAC  in  1996.  Its  mandate  was
broadened  and  a  new  work  programme  was  adopted.  A
survey  was  introduced  to  try  to  evaluate  the  extent  of
VAT  fraud  in  the  European  Union.  The  Member  States
were  asked  to  provide  data  on  the  most  important  cases
of fraud discovered in 1995, with the aim of establishing
a  typology  based  on  various  criteria  (such  as  the
turnover, the sector of activity and the number of people
employed by the companies concerned) (42). Slightly fewer
than 500 cases were analysed but, for several reasons, the
representativeness  of  the  sample  examined  is  still  to  be
demonstrated. The fact is that the latter depended on the
national  audit  systems,  the  degree  of  efficiency  of  which
had  not  been  tested  by  the  Commission  (see  paragraphs
3.22 
their
adaptability  to  new  fraud  risks  (see  paragraphs  1.6  to
1.9).  Moreover,  the  information  gathered  was  often
incomplete  and  heterogeneous.

in  particular 

in  relation 

to  3.25), 

to 

3.31. Subject  to  these  provisos,  the  study  reached  the
following  conclusions:

(a)  a  significant  proportion  of  the  tax  dodgers  were
isolated  traders  or  traders  with  fewer  than  five
employees  who  had  been  registered  for  VAT  for
several years;

(b) the  two  most  widespread  types  of  fraud  out  of  the
nine  listed  in  the  survey  were  the  failure  to  declare
VAT collected on sales (32 %) and misuse of the right
to deduct VAT on purchases (25 %). In the categories
of  fraud  involving  transactions  between  Member
of
the 
States, 

consisted 

14 % 

cases 

of 

(41) Article  11  of  Regulation  (EEC)  No  218/92.
(42) Following this study, the AFS Committee decided to launch a
second  study  concerning  cases  of  fraud  detected  during  the
first  half  of  1998.  The  aim  of  this  exercise  was  to  gain  a
better  knowledge  of  the  systems,  frequency  and  amounts
involved 
fictitious  companies,  on
roundabout  devices  and  on  intra-Community  transactions.

fraud  based  on 

in 

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infringements  of  the  rules  of  the  intra-Community
scheme, 9 % of infringements of the rules on imports/
exports  and,  finally,  3 %  of  the  cases  involved
so-called  ‘roundabout’  fraud (43);

(c) almost  half  the  taxpayers  involved  in  roundabout
fraud  or  fictitious  companies  had  been  registered  for
VAT after 1992. The highest amounts evaded seemed
to  concern  fraud  of  this  type (44);

(d) similar  fraud  mechanisms  were  identified  throughout

the  Community;

(e) routine  VAT  checks  always  played  an  important  role
in  the  detection  of  fraud.  These 
involved  the
cross-checking  of  invoices  in  order  to  uncover  abuses
of  deduction  rights  and  the  exchange  of  information
with  other  Member 
to
intra-Community  trade.

States  with 

regard 

Other  work  carried  out  by  SCAC

A d m i n i s t r a t i v e   c o o p e r a t i o n

In  order  to  evaluate  the  effectiveness  of  the
3.32.
instruments  provided  for
administrative  cooperation 
the  control  of
for 
under  Community 
multinationals, 
in  1994  and  1995  SCAC  used  the
Directive  on  mutual  assistance  between  competent
authorities  to  carry  out  coordinated  checks  with  other
Member  States (45).

legislation 

It  turned  out  that  these  instruments  could  be  used
3.33.
to keep a better check on the activities of multinationals,
but a number of practical and legal obstacles were found
to  lie  in  the  way  of  the  establishment  of  fully  effective
cooperation.

in 

In 

to 

1997, 

implement 

3.34.
the
order 
recommendations  set  out  in  the  second  report  on  the
operation  of  administrative  cooperation  (see  paragraph
3.28),  the  committee  discussed  a  series  of  specific
measures to be implemented by the Member States. These
involved,  for  example,  defining  minimum  levels  for  the
use  of  the  VIES  database  by  the  officials  responsible  for
auditing  VAT,  guaranteeing  the  participation  of  the
Member  States 
in  multilateral  audit  exercises  and
shortening  the  periods  allowed  for  replies  to  requests  for
information  from  other  Member  States.  All  of  the
Member  States  except  three  adopted  these  objectives  in

(43) ‘Roundabout  fraud’  uses  a  chain  of  companies  (real  or
fictitious)  in  order  to  obtain  a  series  of  undue  VAT  benefits
(deductions  or  refunds).  At  the  same  time,  it  aims  to  make
the authorities lose track of the goods, by declaring them for
exportation  when  they  are  actually  sold  on  the  black
market.

(44) Doc.  SCAF  26  rev  1  of  20  October  1997.
(45) See  Article  4(2)  and  (3)  of  Directive  77/799/EEC.

their  entirety  and  are  to  submit  a  regular  report  on  the
progress  achieved  as  of  the  first  quarter  of  1998.

Mutual  assistance  in  debt  collection

in  debt
3.35. The  question  of  mutual  assistance 
collection  in  the  field  of  indirect  taxation  has  been
discussed  several  times  at  the  SCAC.  It  quickly  became
clear  that  this  system  suffered  from  several  defects.  A
survey carried out in 1995 by the Commission, identified
five  categories  of  problems:

(a)  the  significant  differences  between  Member  States  in

terms  of  debt  collection  powers;

(b) the  fact  that  national  laws  treated  tax  debts  between
one  Member  State  and  internal  tax  debts  differently;

(c)  the  low  priority  granted  to  the  recovery  of  debts  on

behalf  of  other  Member  States;

(d) the 

slowness,  complexity  and 

the 

insufficient

understanding  of  the  mutual  assistance  procedures;

(e)  the  difficulty  involved  in  merely  locating  certain

debtors.

3.36.
It  was  officially  recognised  some  time  ago  that
mutual  assistance  in  debt  collection  was  working  poorly.
The  Commission  is  currently  preparing  draft  legislation
to  reform  the  existing  agreements.

Administrative  cooperation  programmes

3.37.
In April 1997, in order to improve the working of
the  internal  market’s  systems  of  indirect  taxation,  the
Commission proposed the ‘Fiscalis’ (46) action plan to the
European  Parliament  and  the  Council  with  three  aims:
the  acquisition  of  a  high 
level  of  knowledge  of
Community  law  on  the  part  of  officials  in  charge  of
indirect  taxation,  effective  cooperation  among  Member
the
States  and  between 
Commission  and,  finally,  an  ongoing  improvement  of
administrative  procedures.  This  programme,  announced
as  a  component  of  the  first  phase  of  the  new  common
VAT system (see paragraphs 1.10 to 1.15) was essentially
a  renewal  for  five  years  (from  1  January  1998  to  31
December 2002) of the old Mattheus Tax (47) programme
and  a  reorganisation  and  perpetuation  of  various
pre-existing  measures  financed  under  various  headings
(e.g.  the  VIES  system,  ‘tax  SCENT’  and  the  multilateral

the  Member  States  and 

(46) Doc.  COM(97)  175  of  23  April  1997.
(47) Council  Decision  of  29  October  1993,  OJ  L  280,

13.11.1993,  p.  27.

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audit  measures).  SCAC  was  to  be  its  management
committee, whereas, under Regulation (EEC) No 218/92,
it acts as an advisory committee (see paragraphs 3.2. and
3.3). The Commission felt that the various administrative
cooperation  measures  at  both  Member  State  and
Commission  levels  would  contribute  significant  added
value.  This  proposal  nevertheless  met  with  reservations
on  the  part  of  certain  Member  States.  After  an  amended
proposal  had  been  drafted (48),  the  programme  was
finally  adopted  on  30  March  1998 (49).

Unit  on  Coordination  of  Fraud  Prevention  (UCLAF)

In  1995,  following  a  reorganisation  of  UCLAF
3.38.
aimed  at  improving  its  effectiveness,  some  officials  who
had  previously  been  responsible  for  the  fight  against
fraud  in  various  Commission  Directorates-General  were
brought  together.  With  regard  to  VAT,  this  change
resulted  in  no  more  than  the  transfer  of  one  official  to
UCLAF.  Currently,  two  temporary  members  of  staff  are
assigned  full-time  to  the  fight  against  VAT  fraud  under
the  supervision  of  the  Head  of  the  unit  responsible  for
own  resources.

3.39. As  an  explanation  for  the  inadequacy  of  the
resources invested in the coordination of the fight against
VAT  fraud,  UCLAF  cites  the  absence  of  an  appropriate
legal  basis  and  the  unwillingness  of  certain  Member
States  to  accept  a  Community  operational  measure,  in
contrast with the fields of customs and agriculture, where
the Member States are required to notify the Commission
of  the  amounts  involved  in  any  irregularities  that  they
uncover.  Furthermore,  at  least  one  Member  State  feels
that  it  is  unable  to  cooperate  with  UCLAF  because  there
is  no  legal  basis  for  this  at  a  national  level.

3.40.
Information available from other sources was not
exploited.  For  example,  the  IRENE  database,  which
records  the  amounts  involved  in  customs  frauds,  has  not
been used for estimating, even approximately, VAT fraud
on imports from countries outside the Union. Despite the
Member  States’  responsibility  for  tax  collection,  there
was  also  no  systematic  Commission  monitoring  to  verify
the  methods  and  the  rate  of  recovery  of  the  VAT  in
question.

In  specific  cases  of  transnational  fraud,  UCLAF
3.41.
does  organise  coordination  meetings  between  the  various
departments  responsible,  such  as  customs,  the  police  and
the  tax  authorities.  Also,  seminars  are  organised  to
encourage  contacts  and  discussions  between  anti-VAT

(48) Doc.  COM(97)  621  of  24  November  1997.
(49) European Parliament and Council Decision No 888/98/EC of

30  March  1998,  OJ  L  126,  28.4.1998,  p.  1.

fraud  specialists  on  practical  methods  of  identifying  and
fighting  VAT  fraud.

3.42. Since the recent revival of the activities of SCAC’s
anti-fraud  subcommittee,  co-chaired  by  UCLAF  (which
uses  it  to  make  its  own  activities  more  widely  known),
the  latter  feels  that  its  efforts  of  persuasion  have  reached
their limit. It believes that it is vital for Member States to
agree  to  exchange  the  information  in  their  possession  in
respect  of  VAT  fraud  and  thinks  that  an  amendment  of
the  legal  basis  is  essential  to  its  activities  at  Community
level.

Fraud  risks  in  connection  with  certain  exceptional
arrangements

Distance  sales

3.43. For  distance  sales (50)  to  private  individuals  inside
a  Member  State  by  companies  situated  outside  the
Member State in question, VAT is applied at the point of
origin  where  the  seller’s  turnover  does  not  exceed  a
certain  threshold  established  by  the  Member  State  of
destination  and  where  it  involves  products  that  are  not
subject  to  excise  duties.  Beyond  this  threshold  (ECU
35 000  or  ECU  100 000  according  to  the  Member  State
concerned),  a  special  system  of  exemptions  applies.
Sellers  are  required  to  be  registered  for  VAT  in  the
Member  State  of  destination  and,  where  appropriate,
have  a  tax  representative  there  in  order  to  submit  the
necessary  tax  returns.

3.44. The  monitoring  of  this  threshold  and,  where
applicable,  the  requirement  to  submit  a  VAT  return,  is  a
delicate  matter.  In  some  of  the  Member  States  audited,
traders  are  not  required  to  declare  taxable  turnover
relating  to  distance  sales  to  other  countries  of  the  Union
separately.  The  lack  of  regular  exchanges  of  information
between  the  Member  States  and  the  limited  number  of
checks  carried  out  means  that  there  are  real  possibilities
of  non-taxation.

3.45. Furthermore,  in  cases  where  a  seller  exceeds  the
threshold  in  question  and  the  VAT  of  the  Member  State
of  origin  is  lower  than  that  of  the  Member  State  of
destination, he has no interest in pointing out that he has
actually  exceeded  it.  If  he  were  to  do  so,  he  would  be
subject  to  complicated  administrative  and  declarative
requirements  that  differ  from  one  Member  State  of
destination  to  another.  The  revenue  authorities  under
whose  jurisdiction  the  seller  falls  also  have  no  interest  in
verifying the threshold, in that exceeding it would entail a
loss  of  revenue  for  them.

(50) Distance  sales  (for  example,  mail  order)  are  defined  as  any
supply  of  goods  for  which  shipment  is  carried  out  by,  or  on
behalf  of,  the  seller.  The  buyers  must  be  private  individuals,
taxpayers  with  no  right  to  deduct  VAT  or  legal  entities  that
are  not 
(Article  28(b)  of  Directive
77/388/EEC).

for  VAT 

liable 

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Intra-Community  tax-free  sales

3.46.
Intra-Community  tax-free  sales  should,  in  theory,
have  ceased  with  the  completion  of  the  internal  market
on  1  January  1993,  but  in  fact  the  Council  of  Ministers
granted  a  transition  period  (until  30  June  1999)  so  that
the  sectors  of  the  economy  concerned  could  prepare  for
the  disappearance  of  intra-Community  tax-free  sales.  In
order  to  ensure  that  travellers  do  not  exceed  the
allowances  established  in  terms  of  quantity  and  value,
Member  States  agreed  on  a  minimum  level  of  checks (51)
to  be  carried  out  by  the  sellers,  compliance  with  which
had to be ensured by the national tax authorities. Finally,
the  Commission  was  instructed  to  ‘review  the  operation
of  Member  States’  controls  ...  in  the  light  of  practical
experience  [and]  ...  report  ...  as  soon  as  possible  on  the
operation of these controls and, if necessary, propose any
appropriate  measure  for  adoption  at  the  earliest  possible
date  and  in  any  event  not  later  than  31  December
1993’.

dispersion  of  efforts  and  an  inefficient  use  of  available
funds.  This  is  particularly  the  case  where  the  fraud  has
no  budgetary  effects  in  a  Member  State  and  that  State
therefore has no reason to take action (see, in particular,
paragraphs  2.2  to  2.8,  3.12,  3.15  to  17,  3.20  to  3.21,
3.28,  3.35  to  3.37,  3.39,  3.44  to  3.45,  3.47  to  3.8).

4.2. As  for  Community  transit,  the  collection  of  VAT
may be affected because ‘the European Union is caught in
a contradiction of its own making: it has a single market
in  which  persons  and  goods  move  freely  across  internal
borders, while the authorities charged with administering
and  policing  that  market  remain  constrained  by  those
same  borders.  In  practice  there  exists  a  single  market  for
fraud  but  not  for  law  enforcement’ (53).  Moreover,  work
carried  out  by  the  Court  on  the  evaluation  of  overall
internal  and
losses  of  VAT 
tax 
losses  are
intra-Community,  has  shown  that  these 
considerable (54).

revenue,  both 

3.47. The  Commission  submitted  its  report  in  July
1996 (52).  It  concluded  that  none  of  the  Member  States
had  established  an  effective  control  system,  that  this
situation  could  lead  to  distortions  of  competition,  not
only  between  traders  but  also  between  modes  of
the
that 
transport,  and 
Community’s  own  resources  base. 
it
observed that the duty-free sector, far from preparing for
the  abolition  of  tax-free  sales,  had  further  developed
them,  in  particular  on  board  roll-on/roll-off  ferries,  by
increasing  the  size  of  their  shops  and  the  variety  of
products  offered.

it  had  probably  reduced 

In  addition, 

3.48. Contrary  to  the  Council’s  guidelines,  no  measures
had  been  proposed  to  rectify  this  situation.  Indeed,  the
Commission  feels  that  it  would  be  useless  to  propose
stricter requirements in view of the lack of a clear will on
the  part  of  the  Member  States  to  apply  a  minimum  level
of  control  and  the  fact  that  this  special  scheme  is  to  end
on  30  June  1999.

4.  CONCLUSIONS

Increasing  the  protection  of  financial  interests  at  the
level  of  the  European  Union

4.1. Generally  speaking,  the  fight  against  fraud 
is
characterised  by  the  absence  of  an  integrated  strategy,
with  the  risk  that  priority  would  be  given  to  a  view  that
is  limited  to  the  national  context,  which  may  result  in  a

4.3. A  comparable  legal  definition  of  cases  that  are
liable  for  prosecution,  procedures  for  taking  legal  action
and  applicable  sanctions  should  result  in  the  same
behaviour  being  punished  in  an  equivalent  way  in  each
Member  State.  Differences  in  the  national  definitions  of
fraud  as  well  as,  consequently,  in  the  punishments
applied  can  reduce 
the
prosecution  of  fraudulent  activities.  The  same  is  true  for
national peculiarities in respect of reductions in fines and
statutes  of  limitation  (see,  in  particular,  paragraphs  2.1
and  2.4  to  2.8).

the  dissuasive 

impact  of 

In  order 

to  make  good 

4.4.
shortcomings  and
incompatibilities  that  adversely  affect  the  fight  against
fraud  and  legal  cooperation  between  Member  States  in
criminal  matters,  a  Convention  has  been  concluded  for
the  protection  of  the  Community’s  financial  interests.
This  Convention,  which  was  signed  in  1995  but  has  not
yet  come  into  force,  was  meant  to  ensure  greater
compatibility  between  the  provisions  of  the  criminal  law
in  the  various  Member  States  by  setting  up  minimum
penal  standards.  The  fact  that  the  VAT  resource  was
excluded  from  its  scope  means  that  there  will  not  be  an
identical  level  of  protection  for  this  resource  in  all  the
Member  States,  even  though  it  contributes  nearly  half  of
the Community budget (see, in particular, paragraphs 2.2
to  2.3).

in 

4.5. The  differences 
legal  and  administrative
frameworks  constitute  a  series  of  risk  factors  that  are
likely  to  be  used  by  tax  evaders  who  know  how  to
exploit the loopholes in the various legal systems. This is
also  true  with  regard  to  the  varying  capacity  of  the
Member  States  to  fight  fraud  effectively.  In  this  context,

(51) ‘Guidelines for checks on tax free sales agreed by the Council
of  Ministers  of  14  December  1992.’  Doc.  COM(06)  245
final  of  26  July  1996.

(52) Report on systems for checks at sales outlets implemented by
the  Member  States.  Doc.  COM(96)  245  final  of  26  July
1996.

(53) Doc.  PE  220.895/def  (A4-0053/97)  of  20  February  1997,

volume  I  paragraph  10.5.2.

(54) See  Special  Report  No  6/98  of  the  European  Court  of
Auditors  entitled: 
‘Assessment  of  the  system  of  own
resources  based  on  VAT  and  GNP’,  paragraphs  4.16  to
4.19.

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an attempt on the part of the national authorities to align
their  inspection  methods  and  strategies  more  closely
would  make  it  possible  to  increase  the  efficacy  of  the
fight against a phenomenon that is becoming increasingly
multinational  (see,  in  particular,  paragraphs  3.6  to  3.8).

4.6. The  Commission’s  responsibilities  with  regard  to
the  application  of  Community  law  in  the  Member  States
and  the  effects  of  VAT  fraud  on  the  Community  budget
require  the  implementation  of  more  incisive  measures.
The courses and other training initiatives that it organises
make  it  possible  to  carry  out  useful  exchanges  of
experiences among national departments. However, these
its  responsibility  for
measures  cannot  relieve 
identifying  malfunctions  in  the  national  systems  in  the
field  of  the  fight  against  fraud  and  putting  forward
adequate  remedies  to  the  Member  States  concerned  (see,
in  particular,  paragraphs  3.22  to  3.26,  3.38  to  3.42  and
3.48).

it  of 

the  smooth  operation  of 

4.7. The  prospect  of 
the  adoption  of  definitive
arrangements  implies  compliance  with  a  number  of
preconditions.  Some  of  these  would  already  be  necessary
the  current  system.
for 
Arrangements  should  therefore  be  made  for  them  to  be
implemented without delay. The fact is that differences in
the  application  of  VAT  legislation  have  created  an
extremely complex situation as well as a total absence of
legal  certainty  for  the  majority  of  traders  (which,
moreover,  may  well  benefit 
tax-evaders).  The
harmonisation of the performance of the various national
authorities  constitutes  another  field  in  which  urgent
action is necessary (see, in particular, paragraphs 1.10 to
1.15).

the 

4.8. The current transitional system included exceptional
or  individual  arrangements  which  are  very  difficult  to
audit, and which give rise to possibilities of fraud and the
distortion  of  competition.  The  Member  States  and  the
Commission  should  ask 
these
arrangements are justified and guarantee the setting-up of
in  particular,
systems 
truly  effective  audit 
paragraphs  3.43  to  3.47).

themselves  whether 

(see, 

Improving  administrative  cooperation  and  exchanges  of
information  between  Member  States

4.9. The  instruments  for  cooperation  between  Member
States  are  not  being  fully  used,  despite  the  fact  that  a
study carried out by the Court and certain national audit
institutions  has  shown  that,  when  used,  they  generally
give  added  benefits  in  terms  of  the  prosecution  of  fraud
that  is  detected.  Slow  procedures  and  even  an  ignorance

of  existing  instruments,  in  particular  on  the  part  of  the
local  authorities,  often  explain  this  under-use.  These
instruments  should  therefore  be  made  usable  on  a  wide
scale  and  Member  States  should 
lift  their  current
reservations,  in  particular  with  regard  to  exchanging
information on fraud cases (see, in particular, paragraphs
3.15  to  3.17).

If  it  is  to  be  successfully  used  in  the  fight  against
4.10.
fraud, 
intra-Community  transfers  of
information  on 
goods,  from  any  useful  source,  needs  to  be  considerably
improved  in  terms  of  quality,  in  particular  as  regards  its
exhaustiveness  (see,  in  particular,  paragraphs  3.18  to
3.19).

the 

that 

time 

factor  often  plays  an
4.11. Given 
important  role 
in  fraud  systems,  the  opportunities
available  for  cooperation  between  the  tax  authorities  of
the Member States should be made easier and faster (see,
in  particular,  paragraphs  3.20  to  3.21).

Assessment  tools

4.12. Risk  analysis  enables  the  ranking  of  checks  in
order  of  priority.  However,  in  order  to  fight  effectively
against VAT fraud, Member States should set up systems
capable  of  appraising  the  extent  of  the  fraud  and,  above
all,  capable  of  periodically  evaluating  the  effectiveness
and  results  of  their  audit  measures  (see,  in  particular,
paragraph  3.6).

4.13. The  absence  of  any  evaluation  of  the  system  of
penalties  provided  and 
in
particular  with  regard  to  whether  they  are  effective,
dissuasive  and  proportionate,  constitutes  a  shortcoming
that  needs  to  be  overcome  as  soon  as  possible  (see,  in
particular,  paragraph  2.9).

the  application 

thereof, 

4.14. With  regard  to  the  recovery  of  evaded  taxes,  and
in  order  to  be  able  to  assess  the  efficacy  of  their
verification  procedures  and  appreciate  the  scale  of  the
phenomenon, 
should  acquire
information  on  any  adjustments  that  have  been  carried
out  and  the  amounts  finally  recovered  (see,  in  particular,
paragraph 3.14).

the  Member  States 

4.15. The  reports  that  the  Commission  is  asked  to
submit  ought  to  provide  an  occasion  for  the  assessment
of  the  efforts  and  progress  that  have  been  made  at  both
Community  and  Member  State  level  (see,  in  particular,
paragraphs  3.23  to  3.25).

This  report  was  adopted  by  the  Court  of  Auditors  in  Luxembourg  at  its  meeting  of  2  July
1998.

For  the  Court  of  Auditors

Bernhard  FRIEDMANN

President

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COMMISSION’S  REPLIES

1.  VAT  AND  THE  VAT  RESOURCE

Audits  carried  out  by  the  Court  together  with  certain
national  audit  institutions

1.16. The Commission would agree with the Court both
that  the  VIES  still  suffers  from  shortcomings  and  that
national  control  methods  do  not  sufficiently  take  into
account  the  risks  of  evasion  linked  to  the  abolition  of
fiscal  frontiers.  In  particular  administrative  cooperation
has  still  not  been  integrated  into  day-to-day  national
control  methodology.

Following  the  remarks  of  the  Court  in  its  annual  report
concerning  the  financial  year  1995,  the  Commission  has
taken  steps  to  monitor  more  closely  the  evolution  of
Member States’ VAT revenue. The results of the bilateral
discussions that subsequently took place with all Member
States  were  discussed  at 
the  meeting  of  Deputy
Directors-General  for  Indirect  Taxation  on  24  March
1998.  On  this  occasion,  the  Member  States  concurred
the
the  operational  procedure  proposed  by 
with 
Commission  concerning  the  automatic  transmission  to
the  Commission  of  information  about  VAT  receipts  and
about  the  reasons  explaining  their  evolution.

2.  VAT  FRAUD  IN  INTRA-COMMUNITY  TRADE

No  single  definition  of  fraud

2.3. The Commission regrets that the Council has taken
the position that VAT should be excluded from the scope
of  the  convention,  contrary  to  the  financial  interests  of
the  Community  and  the  Member  States.

3.  THE 

PROTECTION  OF  THE  COMMUNITY’S
INTERESTS  AS  REGARDS  VAT  ON

FINANCIAL 
INTRA-COMMUNITY  TRADE

The  action  taken  by  the  Member  States

Audit  strategies

is  also  a  need  to  check  previous  payments  of  VAT
invoiced  by  suppliers.  One  Member  State  has  pioneered
this  form  of  ‘chain  of  transactions’  control  and  the
Commission  has  recommended  its  wider  use  in  its  third
Article  12  report.

The  reconciling  of  data

3.11. The  Commission  shares  the  Court’s  view  of  these
divergences.  The  Commission  emphasised  in  its  third
Article 12 report the need for rapid access to all relevant
sources  of  information.

Access  to  the  legislation  of  other  Member  States

translation) 

3.12. The Commission agrees that it is important for the
Member  States  to  be  well  informed  about  each  other’s
tax  systems  and  administration.  The  Commission  itself
has  a  role  to  play  in  disseminating  this  information.  The
extent of such a massive task (and the consequent burden
of 
underestimated.
Nevertheless a start has been made. In the context of the
the  Commission  has
Matthaeus-Tax  programme, 
tax
the  national 
circulated  basic  guides 
administrations  in  three  languages.  There  is  provision
under  the  Fiscalis  programme  for  manuals  and  guides  to
national  systems  and  administrations  to  be  developed  by
the  Community  in  the  future.

to  all 

should 

not 

be 

Exchanges  of  information  between  Member  States

3.15. The Commission shares the concerns of the Court
that it is unable to reach any agreement with the Member
States  on  the  specific  information  to  be  exchanged.  The
Member  States  continue  to  express  their  commitment  to
the  idea  in  principle  while  simultaneously  refusing  to
agree  to  any  specific  exchanges  of 
information  at
Community  level.

3.17. This  remark  of  the  Court  demonstrates  the
weakness of optional provisions in Community legislation
on  information  exchange.  The  Member  States  rarely
make  use  of  such  provisions,  which  raises  questions
about  their  suitability  in  this  area.

3.6. The  Commission  is  deeply  concerned  about  this
problem,  which  affects  many  Member  States.  Detailed
and  accurate  figures  on  the  results  of  anti-fraud  efforts
are  an  essential  tool,  as  the  Court  says,  in  providing
feedback  to  improve  anti-fraud  methods.

3.18. The  Commission  has  consistently  urged 
the
Member States to remedy these weaknesses. Nevertheless
the  use  of  the  VIES  as  a  control  method  through  such
cross-checking  should  not  be  over-emphasised.

3.7. The  Commission  agrees 
though
verification of repayments of tax is very important, there

that, 

even 

3.19. The  Commission  shares  this  concern  that  the  cost
of  fulfilling  these  research  requirements  will  exceed  the

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benefit in control terms. The Commission also agrees that
the  VIES 
is  unsuitable  for  sectoral  research.  The
Commission  concludes  that  the  limits  of  the  VIES  as  a
control  tool  for  the  future  are  clear.  Community  tools
which  take  into  account  the  cost-benefit  and  which
enable  Member  States  to  prioritise  according  to  risk  are
the  only  long-term  solution.  Community  tools  which
include  a  sectoral  approach  are  also  essential  in  future.

3.20. The  Commission  shares  the  Court’s  analysis.
Sharing  of  information  on  fictitious  companies  and  the
individuals  behind  them  is  indispensable  if  the  internal
market  is  not  to  become  a  haven  for  fraudsters.  The
reluctance  of  the  Member  States  to  do  this,  as  noted  by
the  Court,  is  very  revealing  of  the  fundamental  attitude
of 
administrative
cooperation.

the  Member 

towards 

States 

3.21. The  Commission  shares  the  Court’s  analysis.
Cooperation  between  officials  on  the  ground 
is  a
precondition  of  successful  cooperation.  Provision  for  the
exchange  of  information  between  local  offices  exists
under  Directive  77/799/EEC.  Again  this  is  only  an
optional  provision,  little  used  by  these  Member  States.
The  reluctance  of  central  administrations  in  the  Member
States  to  delegate  the  exchange  of  information  to  the
experts  in  the  field  is  disappointing  and  again  very
revealing  of  the  Member  States’  fundamental  attitude
towards  administrative  cooperation.

Action  taken  by  the  Commission

Only after these prior stages can the Commission proceed
to the delicate and difficult task of studying in detail each
Member  States’  audit  system  and  coming  up  with
recommendations.  As 
the
Commission  intends  to  study  with  the  Member  States
their  audit  procedures  as  a  whole,  using  the  third  report
as  a  starting  point  or  reference.  The  fourth  report  will
contain  the  fruits  of  the  study.

report 

third 

says, 

the 

In  an  area  where  the  Commission  does  not  have  the
power  to  oblige  Member  States  to  change  their  audit
systems, it makes sense for the Commission to develop its
own  expertise  in  the  matter  first.  Recommendations  for
change  based  on  a  deeper  understanding  of  the  very
complicated  business  of  control  are  far  more  likely  to  be
implemented  by  the  Member  States.

The  Standing  Committee  on  administrative  cooperation
(SCAC)  and  its  anti-fraud  subcommittee  (AFS)

The  work  of  the  anti-fraud  subcommittee

3.29. The  Commission  shares  the  Court’s  opinion  on
the use of the fiscal SCENT system. The Commission has
been  trying  for  some  time  to  remedy  this  situation,  but
this is ultimately in the hands of the Member States. The
extremely low level of use of the system by some Member
is  again  revealing  of  their  attitude  towards
States 
administrative cooperation.

Periodic  reports

Mutual  assistance  in  debt  collection

Reports  on  the  national  systems

the 

intentions  of 

future.  Nevertheless 

raises  about 
in 

3.22.  to  3.26. The  Commission  accepts  the  Court’s
criticism  of  the  previous  Article  12  reports  and  the
questions 
the
it 
Commission 
the  Court’s
comments  fail  to  recognise  that  the  Commission  has  had
to  work  within  practical  limitations.  The  content  of  the
first  two  Article  12  reports  was  limited  by  the  fact  that
the  Commission  is  entirely  dependent  on  the  Member
States  for  the  information  on  their  national  control
tax
systems  and 
administration, 
and
detailed 
understanding  of  the  control  process.

the  Commission,  not  being  a 

experience 

lacked 

If  this  is  taken  into  account,  the  Commission’s  position
can  be  better  understood.  For  the  first  two  reports,  the
Commission  had  to  gain  an  overall  understanding  of  the
audit  systems  in  the  Member  States,  which  proved  to  be
to
very 
demonstrate  an  understanding  of  audit  procedures  to  be
taken  seriously.  In  its  third  report,  the  Commission
sought  to  set  out  its  position  on  auditing,  and  this  is
what  the  report  does.

complicated.  The  Commission 

needed 

3.36. On  25  June  1998  the  Commission  adopted  a
proposal  for  a  Council  Decision  amending  Council
Directive  76/308/EEC  on  mutual  assistance  for  the
recovery of claims (COM(98) 364). This proposal widens
the scope of the Directive, eliminates certain limits on its
use,  guarantees  automatic  recognition  of  the 
legal
treatment  between
instrument,  ensures  equality  of 
domestic  and  inter-Member  State  claims  and  provides
greater  transparency  about  each  Member  State’s  track
record  in  using  and  fulfilling  its  obligations  under  this
Directive.

The  Unit  on  Coordination  of  Fraud  Prevention
(UCLAF)

3.39. The  Commission  agrees  that  UCLAF  has  an
important part to play in strengthening action to combat
VAT  fraud.  UCLAF’s  primary  role  is  to  coordinate  and
assist  the  Member  States  in  the  fight  against  VAT  fraud,
since  they  are  mainly  responsible  for  such  action.  The
lack  of  an  adequate  legal  base  and  the  reticence  of  some
Member  States  to  accept  the  legitimacy  of  operational

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action  at  Community  level  to  combat  VAT  fraud  show
why  resources  in  UCLAF  can  currently  be  put  to  more
effective  use  in  other  priority  areas.

3.40. The  use  of  other  available  sources  of  information,
and in particular IRENE, to estimate the amount of VAT
fraud  in  relation  to  imports  from  third  countries  would
be very difficult, if not impossible, and moreover such an
effort  would  be  very  resource  intensive.  In  order  to
calculate the amount of VAT evaded in particular cases it
would be necessary to know the product, the country and
the  rate  of  VAT  for  each  relevant  transaction.  In
addition, it would be necessary to ascertain what type of
irregularity was involved: for example, if goods have been
wrongly  declared  at  import  in  order  to  benefit  from  a
lower  rate  of  customs  duty,  the  only  VAT  which  will
have  been  evaded  will  be  the  VAT  due  on  the  additional
customs  duty  (not  VAT  on  the  full  value  of  the  goods).
Moreover,  the  estimate  could  not  be  complete  because
the  data  only  cover  cases  where  there  are  customs  duties
at  stake.  Since  VAT  on  imports  is  almost  always
recoverable  by  the  importer  when  he  is  registered  for
VAT the real amount of tax loss is even more difficult to
calculate.  Nevertheless,  the  Commission  accepts  that
efforts  should  be  made  to  use  available  data  wherever
practicable  to  estimate  amounts  of  VAT  defrauded,  and
is  seeing  what  can  be  done  in  this  respect.

4.  CONCLUSION

Increasing  the  protection  of  financial  interests  at  the
level  of  the  European  Union

4.1.  to  4.5.,  4.9.  to  4.15. The  Commission  endorses  the
comments of the Court. It is currently reflecting on what
action  needs  to  be  taken  at  Community  level  to  remedy
the  problems.

4.6. The  Commission  shares  the  Court’s  view  that  the
the
Commission  has  a 

responsibility 

identify 

to 

shortcomings  of  national  systems  in  the  fight  against
fraud  and  to  suggest  adequate  remedies  to  the  Member
States.  The  Commission  agrees  that  more  incisive  action
is  required.  As  the  remarks  made  under  3.22  to  3.26
indicate,  the  Commission  is  fully  committed  to  this
action.  The  Commission  is  clear  however  that  the
chances  of  adoption  of  its  recommendations  by  the
Member States depend entirely on their real added-value.
Until  recently  the  Commission  did  not  have  enough
experience  to  make  the  sort  of  profound  evaluation  and
recommendations proposed by the Court. The experience
built up over previous years now enables the Commission
to  carry  out  the  responsibilities  the  Court  identifies.

exceptional  or 

4.8. The 
individual  arrangements
allowing  for  taxation  in  the  Member  State  of  destination
served  two  main  purposes:  to  ensure,  through  the  tax
system, that the tax revenue accrued to the Member State
where  consumption  occurred  and  to  allow  the  Member
States  to  continue  to  apply  different  rates  of  VAT.  It  is
precisely  these  arrangements  that  make  the  current
system  more  complicated  by:

—  encouraging 

traders  not 

tax
obligations  deemed  to  be  too  onerous  and  too
expensive,

to  comply  with 

—  similarly  requiring  more  resources  to  be  deployed  to
ensure  proper  monitoring  of  tax  administrations.

Only a tax system ensuring that all taxes have been paid
on  goods  which  move  between  Member  States  can
eliminate  problems  of  monitoring  connected  with  the
tax-free  movement  of  goods  in  intra-Community  trade.
The  Commission  has  never  made  any  secret  of  its
criticism  of  individual  arrangements  for  taxation  in  the
Member  State  of  destination.  In  its  working  programme
for  the  Single  Market  it  clearly  indicated  its  preference
for  a  system  of  taxation  in  the  Member  State  of  origin,
which would be compatible with a genuine single market
and  would  do  away  with  individual  arrangements  for
taxation  in  the  Member  State  of  destination.