Report from the Commission to the Council and the European Parliament - VAT collection and control procedures applied in the Member States - Third Commission report [Article 12 of Regulation (EEC, Euratom) No 1553/89]
Date: 1998-09-03
Institutions: European Commission
Subjects: EU Member State, VAT, fraud, tax evasion, tax inspection

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 03.09.1998 
COM(1998) 490  final 

REPORT FROM THE COMMISSION 

TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

VAT Collection and Control Procedures 
applied in the Member States 

Third Commission Report 
[Article 12 of Regulation (EEC, Euratom) No 1553/89] 

CONTENTS 

1. 

INTRODUCTION. 

1  ou 

2.  FRAUD AND IRREGULARITIES 

2.1  Fraud types 

2.2  The risk sectors 

3.  CONTROL 

3.1  Background  and definition 

3.2  Control: a basic deterrent to 

fraud 

3.3  The management of control 

: 

3.3.1 

,  Risk analysis 

3.3.2  Ways of preventing 

fraud 

3.4  Control and investigation methods 

3.4.1 

Control techniques 

3.4.2 

Sectoral approach 

3.4.3 

Powers of control 

3.4.4 

Investigations into organised 

fraud 

3.5  Recovery 

4.  CONCLUSIONS 

: 

2 

3 

5 

6 

6 

6 

8 

8 

11 

12 

12 

13 

15 

16 

17 

19 

A 

1. 

INTRODUCTION 
Article  12(3)  of  Regulation  (EEC)  No  1553/891  states  that  "the  Commission  shall 
produce  a report  every  three  years  on  the procedures  applied  in the Member States 
and on any improvements  contemplated". 

This report  is the third  one produced  by the Commission: the first  was published  in 
1992 and the second in  1995.2 

In  recent  years,  the  various  authorities  which  deal  with  VAT  management 
procedures have focused  their attention in particular on the problems connected with 
the activities of controlling and combating fraud. 

The interests at stake are very important: VAT is the main source of revenue for  the 
Community budget,  although  its'relative share is falling  steadily.  It also represents 
one of the most important  sources of revenue for the Member States.  It was  already 
stressed in the second report that a revenue shortfall  and, therefore,  a shortfall  of the 
VAT  resource,  had  to  be  offset  by  an  additional  call  on  the  GNP  resource,  thus 
altering  the relative  shares  of the VAT  and the GNP resources.  The additional  call 
on  the  GNP  resource  is  financed  by  all  the  Member States.  Lack  of  efficiency  in 
collecting VAT in just one Member State has an impact on the other Member States. 

The Member States and the Commission  are therefore  obliged to pay close attention 
to the development  of  fraud,  and  to promote  measures  to  improve  and  enhance  the 
prevention of and the fight against tax fraud. 

No  categorical  conclusions  can  be  drawn  on  tax  fraud  -  in  particular  in  terms  of 
quantity  - but  the  information  available  does nevertheless  give  some clue  as to  the 
scale and importance of fraud, and indicates certain general principles for combating 
it. 

After  a brief survey of the basic features  of VAT fraud today, the report  summarises 
the  experiences  and  the  basic  principles  underlying  control  systems  and  describes 
how they are moving towards finding  solutions which will improve and enhance the 
methods  of  combating  a  problem  which  attacks  the  very  integrity  of  the  VAT 
system at Community and national levels. 

In  dealing  with  the  VAT  collection  and  control  procedures  applied  in  the 
Member States,  this  report  takes  account  of  a  wide  range  of  work  and  activities 
which have been carried out by various bodies. 

1  Council Regulation (EEC, Euratom) No  1553/89 of 29 May  1989, OJ L  155 pp 9-13, 7.12.1989. 

2 

The  first  report  (SEC(92)280  final)  was  produced  in  February  1992;  the  second  (COM(95)354 final) 
was published  in July  1995. 

Of these activities, the main sources for drafting  this report have been: 
1.  the  VAT  seminars  organised  by  the  Commission3  in  response  to  the  Second 
Article  12 Report  recommendations  on  setting  up  special  programmes  to  tackle 
the  most  relevant  risks;  their  conclusions  are  given  in  detail  in  the  specific 
working  document; 

2.  the  work  of  the  Committees  provided  for  by  Regulation  (EEC)  No 219/924 

(SCAC and SCAF); 

3.  the seminars organised under the Matthaeus Tax programme.5 

2. 

FRAUD AND IRREGULARITIES 

Any reference  to combating  fraud  implies that at least basic information  is available 
concerning the problem  facing  the national  supervisory  services.  But, in the case of 
tax  fraud,  it  is  first  necessary  to  clarify  the  coverage  of  the  word  "fraud",  mainly 
because  of the different  definitions  used  in the Member States6 and  difficulties  of a 
linguistic  nature  (one  example  will  suffice:  "evasion"  in  English  indicates  illegal 
non-payment  of  tax,  whereas  "évasion"  in  French  corresponds  to  "avoidance"  in 
English). 

In this report, fraud means any activity which, in direct breach of the law or through 
unlawful  abuse of such standards, leads to a deliberate evasion of proper compliance 
-  with  tax  obligations,  and  consequently,  to  the  non-taxation  of  any  taxable  amount 

and/or to non-payment of tax. 

Since tax systems are generally based on a number of obligations (registration of the 
taxable  person,  keeping  of  accounts,  invoicing,  returns,  etc.),  the  main  purpose  of 
which  is  to  prevent  fraudulent  behaviour  (potential  or  probable),  the  form  and 
content of tax fraud differs  and its seriousness varies widely, from the simple  failure 
to  comply  with  formal  obligations  to  criminal  acts  of  "suppression",  forgery, 
concealment, etc. 

"VAT  control  and  audit  procedures  in  high  risk  sectors"  (construction,  retail  trade,  hotels, 
restaurants,  cafés),  Helsinki,  8  and  9  June  1995; "Control  and  audit  problems  in  the  car  sector", 
Brussels,  11 and  12 December  1995;  "VAT  collection  and  control  of  phoenix  companies,  shadow 
companies,  and  companies  involved  in  the  use  of  contrived  insolvencies",  Vienna,  13  and 
14 June  1996. 

Council  Regulation  (EEC) No  218/92  of  27  January  1992, OJ L 24,  1 February  1992.  Article  10(1) 
provides  that  the  Commission  shall  be  assisted  by  a  Standing  Committee  on  Administrative 
Cooperation  in  the field of  Indirect  Taxation  (SCAC)  within  which  an  "Anti-Fraud  Sub-Committee" 
(SCAF)  has  been  established  to  deal  more  directly  with  questions  connected  with  tax  fraud  and  the 
fight against such  fraud. 

In particular the following  Matthaeus Tax seminars: 
"VAT control  and the textile sector", Crawley, United Kingdom, October  1995; 
"Computer audit for VAT control", Malmô, Sweden, February  1996; 
"Invoice control  and invoice-related  fraud", Madrid, Spain, December  1996; 
"Planning VAT control and audit", Luxembourg, September  1997. 

See Annex  16 to the Second Article  12 Report. 

Leaving  aside  cases  of  petty  irregularities  or  errors  (which  nevertheless,  taken 
together, can generate substantial tax losses for the Treasury), the  following 

paragraphs  concentrate  on  the  activities  which  are  designed  to  obtain  an  improper 
tax advantage (by the unlawful  diminution of the taxable amount). 

Because  of  the  way  VAT  actually  works,  we  find  that  fraud  is  generally  aimed  at 
reducing  or  suppressing  the  tax  owed  on  sales  and/or  at  increasing  or  creating  a 
deductible tax on purchases, so as to "distort" the final  (debit or credit) tax balance. 

2.1 

Fraud types 

The  methods  of  achieving  fraudulent  results  may  be  fairly  simple,  e.g.  the 
non-invoicing  of  sales  or  the  deduction  of  non-deductible  purchases,  but  may  also 
be  the  result  of  more  complex  activities  (creation  of  false  tax  subjects,  abuse  of 
special taxation schemes, abuse of the rules of international  trade, etc.), or may  even 
involve several taxable persons, as in cases of "carousel" frauds. 

According  to  the  information  available,  in  particular  the  study  carried  out  by  the 
Anti-Fraud  Sub-Committee  (SCAF),7 the  following  points can be made  about  VAT 
fraud: 

1. The principles  underlying  the  transitional  arrangements  (in  particular  the  exempt 
movement  of  goods  in  intra-Community  trade)  have  facilitated  or  increased 
certain  types of  fraud.  The  three  special  sets of  arrangements  under which  tax  is 
levied  at  the  place  of  destination  (new  cars,  distance  sales,  .purchases  by 
non-taxable  legal  persons  and  exempt  taxable  persons)  are  also  complex  and 
difficult  to monitor;  this opens the way for  abuse or types of  fraud  which  did not 
previously  exist. 

2. the most  frequent  types of fraud  are the "suppression" of output tax and the  abuse 
of  deduction  rules,  in  their  simplest  and  most  direct  forms  (in  the  SCAF  study 
they  account  for  57% of  the  sample  concerned).  On  the  sales  side,  this  fraud  is 
represented  by  failure  to  issue  invoices,  no  registration  of  sales, non-payment  of 
the  invoiced  VAT;  on  the  purchases  side,  the  most  frequent  fraud  is  deduction 
without  any evidence  of an invoice (increase in the deductible VAT declared) and 
deduction  by  use  of  falsified  invoices;  the  latter  fraud  uses  a  wide  range  of 
mechanisms,  with  fraudsters  continually  seeking  new  control-proof  systems: 
falsified 
invoices  of  true  companies  (copies,  composite  photographs,  etc.), 
creation  of  invoices  from  non-existent  suppliers  and  for  fictitious  goods,  creation 
of  invoices  from  genuine  suppliers  who  know  nothing  about  the  transaction, 
double use of the same invoices appropriately amended, etc.; 

3. the types of fraud  which generate the highest  amounts of evaded  tax  for  each case 

are those which are referred  to in this report as "major organised fraud"  i.e.: 

The  SCAF  has,  inter alia,  carried  out a full  study  on VAT  fraud  in  Europe.  It covers  479  fraud  cases 
(chosen  by  the  Member  States  from  among  the most  important  in terms of  amounts  evaded  and  fraud 
mechanisms)  representing  in total  evaded  tax  of  ECU  573 million.  The  examination  of  these  cases  is 
particularly  detailed  and  it  is  based  on  several  parameters  (information  on  the  taxable  person,  fraud 
types and mechanisms, detection  method, cooperation, etc.) which give a significant  overview. 

(a)  the creation  of bogus  companies  or entities  (which  are known by  a variety  of 
names8)  with  the  sole  aim  of  evading  the  tax  due  by  means  of  a  variety  of 
mechanisms  (creation  of  new  companies  which  operate  lawfully  but  which 
disappear  before  the  first  date  for  submitting  returns  and  paying  the  tax,  or 
after  obtaining refunds  on the basis of fictitious  activities or false  documents, 
the disposal  of  assets  before  contriving  insolvency  to  escape  the payment  of 
taxes, the creation  of customers/suppliers  to simulate transactions,  etc.); such 
false tax subjects  are found  at both domestic and international level; 

(b) "carousel" fraud,  in which  commercial  transactions  are carried  out by  a chain 
of companies  (real  or  fictitious)  with  a view  to  obtaining,  for  each  company 
involved,  a  number  of  improper  VAT  advantages  (improper  deduction  or 
refund)  and, at the same time, covering the tracks of goods (real or  fictitious) 
which are finally  declared  for export but which in reality are sold on the black 
market. 
These  types  of  fraud  are  connected  with  international  and 
intra-Community trade for two main reasons: 

(i) 

(ii) 

the  system  of  taxation  at  destination  enables  fraudsters  to  take 
advantage  of  the  exemption  from  VAT  for  intra-Community 
supplies or for exports; 

the  greater  difficulties  of  the  tax  administrations  in  detecting 
fraudulent  schemes "organised" abroad. 

4. some of the other most frequent types of fraud are: 

(a)  failure to register (the administration  is unaware of the activity conducted and 

it therefore  forms part of the underground  economy); 

(b)  application of the wrong VAT rates; 

(c)  the abuse of intra-Community  and import/export rules; 

(d)  contrived  insolvencies  (a  company  disposes  of  its  assets  before  going  into 

insolvency to escape payment of VAT due). 

5. limited  to  the  sample  studied  by  the  SCAF,  other  interesting  inferences,  in 

particular for control and risk analysis (see Chapter 3), can be drawn; 

(a)  a very small percentage of traders were totally unknown to the tax  authorities 
(traders not identified  for VAT) at the time when the fraud was detected; 

(b)  the  (voluntary)  deregistration  of  taxable persons  is often  close  to  the year  of 

fraud; 

(c)  almost  half  the  taxable  persons  involved  in  carousel  fraud  or  fictitious 

companies were registered  after  1992; 

(d)  most  of  the  taxable  persons  had  less  than  5  employees  and  20%  were  sole 

traders. 

A variety  of names are used  to describe  this type of company  which  is created  for  fraudulent  ends but 
which  at  the  same  time  has  to  look  like  a  normal  company:  phoenix  companies,  front  companies, 
ghost companies, taxi companies, dormant companies, filter companies, letter-box companies, etc. 

2.2 

The  risk  sectors 

Since  fraud  is an activity which  is continually  adapting to the different  situations  in 
which it operates and which always tries to take advantage of new ones, it appears in 
many  guises.  Fraud  mechanisms  change  and  adapt  in  response  to  several  factors, 
such  as  the  sector  involved  (construction,  clothing  and  textiles,  motor  car  sales, 
hotels/restaurants/cafes),  the  type  of  activity  (production,  retailing  or  wholesaling, 
services, large-scale distributive trades, etc.), and the legal designation  and nature of 
the  taxable  person.9  Nevertheless,  it  is  possible  to  identify  certain  sectors  which 
seem to be more exposed to the risk of fraud. 
The  construction  industry  is  considered  to be  a high-risk  sector, because  of  its  size 
and  the  mobility  of  traders,  which  make  it  difficult  to  control.  One  of  the  main 
features  of  the  construction  industry,  which  includes  the  maintenance  of  property 
and  all  other  activities  complementary  to  construction,  is the  failure  to  register  and 
the  suppression  of  the  tax  on  supplies  of  goods  and  services,  in  particular  by 
individual  small  or  micro  firms  whose  customers  are  private  individuals.  Three 
methods have been developed to camouflage  receipts and undeclared  turnover: 

•  work  "in the black" which  is attractive  to customers who are not taxable  persons 
because  of  the  price  discount  offered  (generally  tempting  for  customers  who  in 
any case are not entitled to apply for VAT  refunds); 

•  manipulation  by  means  of  subcontractors  (including  falsified 

fictitious 
transactions,  non-itemised  or  non-transparent 
subcontractors by non-resident companies without registering for VAT); 

invoices  for 
invoices,  use  of 

•  manipulation  by  means  of  the  equipment  used  and  the  prices  charged  (e.g. 
discounts on purchases not recorded in the accounts, fictitious  inventories, claims 
and thefts). 

The  non-declaration  of  sales  and  the  suppression  of  the  corresponding  VAT  is 
frequent  throughout  the retail  trade,  in which  there  are a large number  of  traders, a 
huge  number  of  small  transactions,  cash  payments,  and  customers  who  are 
particularly  sensitive to the final  price, irrespective of the VAT.  But the situation  is 
not the same throughout the category: distinctions have to be drawn on the basis, for 
example, of the vendor's  sales  structure  (large  stores or small  shops)  or the type  of 
goods  (goods  for  which  the  purchasers  ask  for  the  sale  to  be  recorded  or  for  a 
supporting document for non-tax reasons, such as being eligible for the guarantee). 

A widespread  fraud  in the retail trade consists of the manipulation of rates: this type 
of  fraud  is particularly  pronounced  in the "HORECA"  sector  (HOtels,  REstaurants, 
CAfes),  especially  in the Member States which  apply  different  rates  for  supplies  of 
goods  (take  away  meals)  and  supplies  of  services  (meals  consumed  in  situ).  The 
failure  to  keep  accounts  in  particular  concerns  itinerant  traders,  seasonal  trade  and 
the trade in second-hand cars. 

The  wholesale  trade  is  particularly  exposed  to  "major  organised  fraud"  (false  tax 
subjects,  carousel  fraud,  etc.)  because  its  purpose  is  to  provide  goods  which  are 
"tax-free"  and consequently  at more competitive prices on the market.  These  frauds 
are sometimes on a very large scale and can even cause real distortions of 

The  decision-making  process  of  an  individual  firm  differs  from  that  of  a  public  limited  company 
which has management  and supervisory  departments  within  its structure). 

competition.  Some very important cases at Community level have been detected in 
the  following  sectors:  wholesaling  of  meat  and  live  animals,  textiles,  portable 
telephones, audio-visual equipment and motor vehicles, and electronic components, 
which are very high value added, easily transportable goods. 
Motor car sales are particularly vulnerable to fraud.  The differences  between VAT 
rates  and  prices  on  the  national  markets,  and  the  relatively  high  level  of  the 
investment for purchasers, make it worthwhile for fraudsters to devise schemes with 
the  aim  of  shifting  the  place  of  taxation.  The  sector  is  also  affected  by  serious 
carousel fraud (three refunds of VAT on the same vehicle'can be enough to cover its 
total cost). 

3. 

CONTROL 

3.1 

Background and definition 

The Member States' various control systems stem from different  experiences and a 
variety  of  factors  such  as  organisation10  and  administrative  procedures,  the 
legislative  framework,11  technical  equipment,  the  structure  of  the  Member States' 
economic and social fabric, etc. 

Nevertheless  the  experiences  of  the  Member States  in  control  mean  that  certain 
general  principles  can  be  identified  which  should  guide  them  in  their  efforts  to 
improve  the  effectiveness  of control  methods  and  to  adapt  their  procedures  more 
closely to a rapidly evolving situation. 

The activities taken into account in this report are not merely verification procedures 
as such (on-site inspection, investigations, etc.), but cover a broader range of earlier 
activities (prevention, risk analysis, planning, setting of priorities and other activities 
designed  to  increase the  level of voluntary  compliance),  and  subsequent  activities 
(actual  recovery  of the  adjusted  tax, which  is the natural  corollary  of control  and 
fundamental  for guaranteeing the deterrent effect,  and evaluation of the performance 
of administrative action). 

3.2  Control: a basic deterrent to fraud 

The  obligation  to  pay  tax  has  always  conflicted  with  the  individual's  interest  in 
being able to keep as much as possible of the income and wealth produced by his 
work  net of taxes, in an eternal opposition between  the interests of taxpayers and 
those of the tax  authorities.  But today, a broadly  accepted principle in relation to 

10  Some Member  States have  integrated  their VAT control  functions  with those of other taxes or closely 
aligned  them  on  those  taxes,  e.g.  direct  taxes,  taxes  collected  by  means  of  assessment  books,  excise 
and  customs duties.  This can  facilitate  the detection  of any VAT fraud  that stems from  fraud  in other 
sectors.  The  administration  of  VAT  is  increasingly  integrated  with  that  of  direct  taxes  in  most 
Member  States, as indicated in the earlier Article  12 reports. 

11  The  current  system  is  marked  by  wide  differences  in  the  application  of  the  VAT  rules  in  the 

Member States. 

taxation  is  that  the  key  purpose  of  every  tax  system  is  to  promote  voluntary 
compliance12  with  tax  obligations,  namely  self-assessment,  declaration  and  correct 
payment  of  the  tax  without  first  being  subject  to  administrative  control.  The  basic 
idea  is the  existence  of  an  implicit  "contract"  under  which  the taxable  person  pays 
his taxes and the State provides  quality  services, including the efficient  detection  of 
taxable persons who do not comply with their obligations. 
The  decision  to  commit  fraud  can  be  partly  but  not  exclusively  related  to  the 
likelihood  of detection,13 i.e. the nature and severity of sanctions.  In any  event, tax 
control, or rather the risk of a tax  control, remains  a fundamental  deterrent  in  order 
to maintain an acceptable  level of compliance with tax obligations  and  consequently 
of revenue. 

If the  problems  of  tax  fraud  are  to  be  approached  properly  the possibility  of  being 
detected must therefore  become  a "virtual certainty" and control procedures must be 
reliable  and  effective  (and  accompanied  by really  fair  and  deterrent  penalties14  and 
by efficient  and rapid disputes procedures). 

Faced with a very large population of taxable persons, a growing number of returns, 
and  limited  resources, the authorities have to select those taxable persons  which  are 
to be controlled.  This involves two stages: 

1.  first,  an  acceptable rate  of  coverage  for  inspections must be  decided  (percentage 
of  taxable  persons  inspected  during  the  reference  period).  What  must  not  be 
allowed to happen is for verifications  to be reduced to perfunctory,  purely  formal 
controls  as  a result  of  an  increase  in  their  frequency  (e.g.  to  inspect  all  taxable 
persons  every  two  years).15  Such  a  system  would  sharply  reduce  the  deterrent 

12 

13 

It  must  be  pointed  out  that  the  recommendations  which  follow  will  not  fill  all  the  gaps  in  the 
frequently  very complex mechanisms  of the VAT system and that only new VAT arrangements  based 
on  the  principles  set  out  in  the  Commission's  work  programme  (A  common  system  of  VAT  -  a 
programme  for  the  single  market  (COM(96)  328  final))  will  significantly 
improve  voluntary 
compliance with obligations and the controllability of the system. 

In  fact,  a  variety  of  complex  factors  influence  the  non-compliance  decision.  For  example,  from  an 
economic point of view, the amount which might possibly be involved, in the future,  if this fraud  were 
detected  determines  whether  the  immediate  benefit  of  the  fraud  is  acceptable.  Other  obstacles  to 
voluntary  compliance  may  be  the  general  pressure  of  taxation,  the  complexity  and  fairness  of  the 
taxation  system,  the  relations  between  the  tax  authorities  and  taxable  persons,  the  weaknesses  of 
control and sanctions, and the perception  of how the public authorities use taxes. 

14  The  Matthaeus  Tax  seminar  "Sanctions  applicable  in 

the  field  of  VAT",  Viterbo,  Italy, 
December  1996, stressed  the  role  of  the  system  of  sanctions  (which  should  be  flexible,  effective  and 
proportionate)  in order to encourage taxpayers  to fulfil  their obligations  spontaneously. 

15  The  problem  is  more  complex  since  it  concerns  the  general principles  underlying  the  control  system 
and  in particular  the  methods  of  control  adopted.  The  average  length  of  an  inspection  and  therefore 
the number  of them, assuming  that  there  is no change in the resources available,  is heavily  influenced 
by  whether  or  not  they  are  combined  with  the  control  of  direct  taxes,  the  period  taken  into  account 
(one or more years), the thoroughness  of checks, the physical controls  of stocks, accounting  analyses, 
formal  controls, and so on.  This  is why some Member States have developed  flexible  procedures  with 
the  aim  of  optimising  the  use  of  resources  by  tailoring  the  method  and  the  thoroughness  of  the 
inspection  to the particular case. 

effect  of the inspection, in particular  as regards frauds  which can be detected  only 
by more thorough  inspections; 

2.  Once  the  number  of  taxable  persons  to  be  controlled  has  been  decided,  it  is 
necessary  to  determine  those  who  should  actually  be  controlled  and  which 
priority  should  be  used.  The  better  the  choice,  the  more  effective  the  control 
action  will  be: traders  must  be  made  to  feel  that  it  is "virtually  certain" that  the 
fraud  will  be detected.  The  choice  is mainly  influenced  by  risk  analysis  which, 
by  defining  certain  tax  "risk"  indicators,  allows  the  administration  to  target  its 
efforts  and define control priorities. 

Moreover,  the  effectiveness  of  the  control  is  not  measured  solely  in  terms  of  the 
number  of  taxable  persons  actually  controlled,  but  also  by  its  multiplier  effect: 
traders  who  follow  the  rules  are  bound  to  welcome  a  control  which  restores  the 
fairness  of taxation and the conditions of fair competition, which are upset by  fraud; 
fraudsters  (and potential  new  fraudsters  from  the same sector, or the same region  or 
town) will become more  aware of the vigilance  exercised  by the authorities  and  the 
risk  that  their frauds will  be detected.  This  explains  why  an  accurate evaluation  of 
the  effectiveness  of  control  should  go beyond  the mere  sums  involved  in  the  fraud 
detected and attempt to take account of the deterrent  effect. 

Several  national  administrations  widely  publicise  their  control  activity  and  in 
particular the results obtained. 

the  Commission  feels 

the 
In  conclusion, 
administrations  of  the  Member States  must  undertake  to  attain  the  following  two 
objectives: 

in  the  present  situation  all 

that 

to maximise voluntary  compliance with tax obligations; 

to  enhance  the  deterrent  effect  of  control,  which  means  increasing  the 
perception  that  fraud  is "virtually  certain" to be  detected;  the key  elements 
in  this  objective  are  the  selection  of  taxable  persons  on  the  basis  of  risk 
parameters, and the multiplier effect  of action which is genuinely and visibly 
effective  and  efficient. 

3.3 

The management of control 

3.3.1  Risk analysis 

The  purpose  of  risk  analysis  is  to  determine  the  indicators  which  can  improve  the 
targeting  of  controls  and  to  put  them  in  order  of  priority.  The  Member States  are 
making  increasing  use of risk analysis  and  of the other  analytical  techniques  which 
enable  them  to  determine  in  advance  where  fraud  is  most  likely  to  be  found  and 
therefore  to establish an order of priority for control activities. 

This means the systematic and organised collection of all available information  so as 
to  determine  the  general  reference  framework  and  the  risk  indicators.  As  regards 
sectors,  analysis  is  based  on  macroeconomic  data  (markets,  commercial  flows, 
imports,  etc.),  refined  and  completed  by  data  concerning  the  traders  in  the  sector 
(size, organisation, net worth, turnover,  economic  and  financial  situation, etc.).  It is 

desirable  to  have  an  overall  assessment  of  the  risks  at  the  same  level  of  fraud 
(regional, local, etc.) so as to target the use of resources in the most effective  way. 

The  analysis  can  also  be  completed  by  any  other  information:  registration, 
examination  of  tax  returns,  control  results,16  cross-checking  of  tax  data  with  that 
from other sources (professional  associations, social security organisations), etc. 

The  dissemination  of  results  to  the  peripheral  levels  and/or  the  inspection  offices 
enables  the  detailed  information  available  for  individuals  to  be  supplemented:  as  a 
rule, any information  directly or indirectly concerning each taxable person should be 
collected  and  kept  in  an  individual  file  established  by  that  person's  inspecting 
department. 

Inspection  results  are  certainly  the  most  important  source  of  information  since  - in 
particular  in  the  case  of  VAT  -  irregularities  concerning  transactions  are bound  to 
have repercussions  for  suppliers  and  customers  (taxable persons).  Other  important 
facts  at  individual  level  may  be  refund  requests,  the  particulars  on  recapitulative 
statements  of  intra-Community  trade,  licences  and  administrative  authorisations, 
newspaper announcements and publicity offers,  etc. 

When  establishing  risk  elements  the  attention  of  tax  inspectors  is  also  drawn  to 
certain points deserving special vigilance, such as: 

• 

trading  activity  in  high  value  added,  easily  transportable  goods  (electronic 
components), or in sectors where there is a high likelihood of carousel  fraud; 

•  companies  generating  huge  sales  after  only  a  short  period  of  trading  or  only 

reduced or non-existent  activity, and ceasing to trade just as suddenly; 

•  companies  declaring  a  high  level  of  sales,  but  without  the  corresponding 
production  facilities.  In this case, as in the previous  one, it can be assumed  that 
these  activities  are  entirely  bogus, but  result  in the  issue  of  invoices  which  their 
clients will use to obtain an unjustified  VAT deduction or  refund;17 

•  companies managed by persons with the profile  of men of straw (persons who are 

too young or too old, poor, with criminal records, etc.); 

•  origin of the possession  of the company  assets and "history" of the company and 
its  directors. 
In  this  case  it  is  necessary,  for  example,  to  check  whether  the 
company  structure  has  emerged  from  another phoenix  company  (whose name or 
trade  name  has  simply  been  changed)  or whether  directors,  managers,  etc.  have 
been involved in previous fraud  cases; 

16  The SCAF fraud  study demonstrated that a good system for recording  fraud  information  is an essential 
tool  which  is  very  important  for  analysing  the  operation  of  the  system  itself,  and  for  evaluating  the 
reasons  for  fraud.  The  heterogeneous  structure  of  national  recording  systems  means  that  it  is  very 
difficult  to obtain a general picture of the fraud  situation  in the Community. 

17 

In the two cases referred  to above, the high level of company activities, although  recent and conducted 
over  a short  period,  may be  real but  stimulated  by  the  increased  competitiveness  obtained  throughout 
the  commercial  chain  because  of  the  improper  VAT  advantages  (reduction  in  cost  prices  and  sales 
prices). 

•  applications  for  large  VAT  repayments,  in  particular  when  the  applicant  is  an 

exporter or is supplying goods within the Community. 

The availability of several sources of intelligence and their exploitation by computer 
is  of  paramount  importance  in  this  area18  and  most  of  the national  administrations 
possess  and/or  are  developing  technical  equipment  and  the  necessary  computer 
programmes.19  All  these  data  have  to  be  recorded  in  appropriate  data  banks  and 
compared  in order to determine the trends in sectors and fraud risk indicators. Some 
intelligence  departments  which  collect  all 
Member States  have  set  up  tax 
information  possible  from  any  available  source  (from  the  data  held  by  government 
bodies to anonymous calls) and centralise  it in a single department which examines, 
evaluates, sorts, stores and distributes it. 

Some  Member States  have  set  up  special  information  networks  which  concentrate 
on  tracking  traders  involved  in  earlier  frauds,  information  about  which  is  widely 
disseminated  throughout the national  tax  administration.  One Member State has set 
up a system which assigns to persons previously  involved  in certain  frauds  a unique 
identification  number  under  which  all  relevant  information  concerning  their 
business  and  professional  activities  is  recorded.  Other  data  bases  relate  to  firms 
which  have  issued  or  used  falsified  invoices,  and  fictitious  companies  created 
explicitly  for fraudulent  purposes. 

The  targeting  of  inspections  on  the  basis  of  certain  parameters  should  be 
supplemented  by  random  audits.  As  a result,  first,  the  validity  of  the  criteria  used 
would  be  verified  and  enhanced  and,  second,  taxable  persons  would  not  feel  that 
they were protected from inspection  merely because  they were "artificially"  outside 
the risk parameters. 

The  Commission  considers  that  the basic  elements  of  a risk  analysis  system  which 
can ensure the effectiveness  of control are therefore: 

the  development  of  and  rapid  access  to  all  sources  of  relevant  information, 
from  tax  and  non-tax  sources,  so  that  they  can  be  collected,  exploited  and 
disseminated; 

a specialised department to analyse and refine the  information; 

the  provision  to  all  operational  and  control  departments  of  risk  analysis 
systems  and warning systems  on known  or suspected  fraud, so that  potential 
risk traders can be kept under rapid and permanent  surveillance; 

the maintenance of an appropriate percentage of random audits. 

18  This  need  was  made  very  clear  at  the joint  OECD/HM  Customs  &  Excise  Conference  "Information 
and  intelligence  systems  in the field  of  indirect  taxes", Gatwick, United  Kingdom,  17-19 March  1997. 
The  SCAF  study  confirms  the  usefulness  of  such  external  intelligence:  cooperation  with  other 
administrations  or  departments  (national  or  foreign)  for  purposes  of  tax  control  was  indicated  in  a 
quarter of the cases. 

19  The  conclusions  of  the  Malmô  Matthaeus  Tax  seminar  leave  no  doubt  as  to  the  fact  that  computer 

audit techniques  will become increasingly  important  for  the detection of  fraud. 

10 

3.3.2  Ways of preventing  fraud 

The  Member States  are  devoting  increasing  attention  to  fraud  prevention  by  the 
systematic  collection  of  data  which  can  be  used  to  establish  fraud  risk  evaluation 
indicators. 
The  registration  of  a  new  taxable  person20  is  an  important  moment  for  prevention 
since it provides an opportunity  for establishing initial contact with traders to  inform 
them  of  their  obligations,  to  collect  important  information  for  the  data  bases  on 
taxable persons and to complete the risk analysis.  The population of European  firms 
is  very  varied  and  volatile  because  it  is  mainly  composed  of  frequently  changing, 
very  small  units,  which  require  close  and  constant  monitoring  from 
the 
administrations. 

Depending  on the Member State, registration  can give rise to systematic  controls  or 
just  to information  visits.  Some Member States make "educational  visits" to  advise 
newly  established  traders  of  their  rights  and  obligations,  and  also  to  assess  the 
potential tax at risk. 

In  general  the  data  recorded  is  electronically  available  and  accessible  to  all  the 
national  offices,  but  the  registration  procedures  and  information  requested  vary 
widely according to the Member States, in particular as regards the amount  and type 
of particulars. 

The  preventive  role  of  registration  may  become  crucial  in  cases  of  fraudulent 
schemes based on phoenix companies.  In such cases, registration may help to make 
it more  difficult  to create  and  use this  type of  company.  Registration  can be  made 
subject to the payment  of a security, in particular in cases where the authorities  have 
doubts as to whether  activities  are genuine, or a higher minimum  amount of starting 
capital  can be required;  in the case of contrived bankruptcies,  directors  who, in  the 
past,  have  wound  up  their  companies  on  one  or  more  occasions  may  face  stricter 
conditions  under  common  law  for  setting up a new  company,  such  as the  provision 
of a guarantee. 

Some  Member States  require  the  provision  of  minimum  information  on  their 
activities  from  inactive  companies  whereas  other States have them  deleted  from  the 
register. 

The  Member States  who  implement  such  measures  (not  always  permitted  by  law) 
nevertheless  stress the inherent risks they involve  for the free  creation  of businesses 
and the fact  that too strict  a registration  system would deter traders  from  leaving  the 
underground  economy. 

A  further  key  aspect  of  VAT  fraud  prevention  is  careful  checking  of  VAT  refund 
applications, not only in the case of new taxpayers but also for all other VAT  refund 
claims.  One Member State has developed  a strategy for checking the entire chain of 
enterprises  back  to  the  initial  phase  where  a substantial  amount  of  deductible  VAT 
is  claimed.  The  taxpayer  in  question  is  asked  to  produce  invoices,  which  are 
checked  by  computer  to  establish  whether  the  traders  who  issued  them  are 

20  These  arguments  were  developed  and  expanded  at  the  Matthaeus  Tax  Seminar  "Registration  and 

deregistration" held  in Athens  in June  1997. 

11 

registered. 
acquiring further  information  is carried  out. 

If  a  non-registered  trader  is  discovered,  an  inspection  visit  aimed  at 

The Commission therefore  stresses that: 

with  a  view  to  making  control  more  effective,  the  registration  of  taxable 
persons  is  important  for  voluntary  compliance  and  in  order  to  improve 
prevention, and is a key element in risk analysis. 

a system of checking the chain of companies or transactions be used to detect 
any improper VAT refund  claims. 

3.4 

Control and investigation  methods 

3.4.1  Control techniques 

As  a  rule,  the  purpose  of  control  is  to  check  whether  the  tax  has  been  accurately 
assessed, and whether the activity conducted  corresponds to the one which has been 
declared.  This  involves  a  range  of  research  on  compliance  with  legal  obligations 
(invoicing,  deduction,  registration,  keeping  of  accounts, returns, payment,  etc.)  and 
checks  on  whether  the  accounts  correspond  to  economic  reality  (verification  of 
stocks, did the transactions recorded really  exist? do they really have anything to do 
with the taxable person's activity? do sales match productive capacity? etc.). 

Techniques  may be based  on  internal  research  (monitoring  of  compliance  with  tax 
obligations,  checking  accounts,  examining  the  conditions  in  which  the  firm  is  run, 
etc.). and external  research,  which  is based  on the use of  any  information  available 
elsewhere  than  in the  firm  itself  so  as to be  able to  check  whether  the real  activity 
corresponds with the one recorded  in the accounts.  For example, the  cross-checking 
of  invoices  with  customers/suppliers  or  with  public  or  private  bodies  (see  point 
3.4.4.)  is an external  technique  which  is widely  used because  of its effectiveness  in 
detecting  falsified  invoices, the  abuse  of  the right to  deduct  and  the  suppression  of 
the tax on sales. 

The  relationship  between  the  two  types  of  research  and  their  content  and  direction 
depends  on  the  situation  found  in  each  case, but  first  and  foremost  it  is  connected 
with  the  nature  of  the  taxable  person  under  examination,  namely  whether  he  is  a 
"true  taxable  person"  or  a  "false  taxable  person"  that  was  created  with  the  sole 
purpose  of committing  fraud.  A concealment  of activity  cannot  be detected just  by 
examining  accounts  and  returns  (possibly)  signed,  or  by  internal  research  on  a 
structure  which  is  virtually  non-existent.  In  this  case  inspectors  are  faced  with  a 
much  more  vague  and  indefinite  reality  (no  registered  office  or  no  fixed  place  of 
business, no accounts,  difficulty  in  finding  the real people  in  charge/directors,  etc.) 
which becomes more difficult  to reconstruct  and to verify  after  the event, i.e. after  a 
lapse of time. 

Tax  audits  have proved  to be  the  most  effective  procedure  for  observing  and  really 
verifying  the  genuineness  of  the  taxable  person  and  for  comparing  this  with 
accounting  documents. 
It  becomes  indispensable  to  verify  the  actual  situation 
directly  whenever  control  requires  the  verification  of  stocks  or  flows  of  goods  (in 
particular  to establish  the  turnover  of  retail  businesses  whose  takings  are  mainly  in 
the form  of cash).  According  to the experience of one Member State, the yield  from 
documentary control  is half that  from  tax audits, particularly  in the case of VAT. 

12 

The checking of invoices is one of the priority controls: the invoice is one of the key 
elements  in  the  accounts,  representing  the  formal  proof  of  activity  and  the  basis 
underlying the accounts.  A thorough  analysis of this aspect21  shows the desirability 
of  concentrating  on  forms  of  controlling  selected  invoices  (on  the  basis  of  risk 
analysis or other criteria) instead of the systematic control of all invoices. 

One  Member State  has  experimented  with  a  new  form  of  control  designed  to 
monitor  the  degree  of  compliance  with  tax  obligations  by  on-site  observation:  the 
business is informed  of an impending control visit (but not of the exact date), and on 
arrival  at  the  trader's  premises  the  controllers  collect  several  types  of  information 
(including  data on employees) which  will  later be compared  with that  shown  in  the 
periodic  returns.  The  likelihood  of  irregularities  can  thus  be  assessed  and  prompt 
action  can be taken.  The results  obtained  by this technique  are reflected  in the  fact 
that such visits now comprise  10% of all visits to taxable persons. 

Several  Member States  have  developed  specific  VAT  controls  based  on  rapid  and 
immediate  visits;  others  pay  prompt  attention  to  the  control  of  companies  which 
trade over a short period. 

Most  of  the  Member States  are  making  increased  use  of 
intra-Community 
cooperation.22  Directive  77/799/EEC  on  mutual  assistance  and  Regulation  (EEC) 
No  218/92  on  cooperation  offer  a  variety  of  possibilities  for  exchanges  and 
information:  assistance  on  request,  spontaneous  or  automatic,  interrogating  the 
VIES  system  and  "Article  5"  requests  (requests  for  information  on  specific 
transactions),  and  direct  contacts  between  competent  authorities  or  other 
departments delegated by the latter, in cases of bilateral interest. 

In conclusion, the Commission suggests that: 

preference  should  be  given 
to  control  procedures  based  on  on-site 
observation  because  they  have  proved  more  effective  for  a  full  and 
exhaustive  assessment  of  the  activity  really  carried  on  by  the  taxable 
persons; 

control  procedures  should  be flexible  enough  to  adapt  to the various  control 
requirements,  so that  specific  VAT  problems  can  be  dealt  with  immediately 
and  rapidly; 

systematic  and  increased  use  be  made  of  the  opportunities  provided  by 
current  legislation  on administrative  cooperation  between  Member  States. 

3.4.2  Sectoral approach 

Some Member States have developed  specific  control programmes and methods based on 
a sectoral  approach.  They vary according to a number of factors, such as the sector being 

21  Matthaeus Tax seminar, "Invoice control and invoice-related  fraud",  Madrid, December  1996. 

22  See  the  Commission's  first  two  reports  pursuant  to  Article  14  of  Regulation  (EEC)  No  218/92 

[COM (94)262 final, of 23 June  1994 and COM(96) 681 final,  8 January  1997]. 

13 

controlled,  the size of the firm  and the nature of the taxable person  (industry,  agriculture, 
liberal  profession). 

Experience shows that such an approach: 

•  enables  inspectors  to  acquire  a  thorough  knowledge  of  the  machinery  and  specific 
features  of  the  sector  and,  therefore,  the  latest  developments  and  trends  in  fraud;  the 
control procedures are particularly well-adapted and  refined; 

•  makes it easier to collect specific data for risk analysis and prevention purposes and, at 
the  same  time,  to  check  the  validity  of  previous  analyses  and  the  results  already 
obtained; 

•  enables  stricter  relations  to  be  established  between  the  representatives  of  the  sector 

and the  administration. 

This  approach  enabled  one  Member State  to uncover  30% more  irregularities  in  the  car 
industry  in the  1994-95 period. 

To  assist  with  these  measures,  some  Member States  issue  audit  guides,  handbooks  or 
monographs  summarising  and  explaining current practices  in the sector which may be of 
interest  to  investigators:  market  trends,  standard  margins,  modus  operandi,  specific 
accounting  documents,  output,  working  procedures,  the  percentage  of  wastage,  etc. 
These  guides  and  handbooks  should  be  available  on-line  and  constantly  updated  to 
include  the latest  developments.  Some Member States organise  training  courses  or issue 
newsletters to keep their control departments up-to-date. 

Some  very  important  information  requiring  distribution  relates  to the  practical  means  of 
detecting certain types of fraud,  e.g.: 

• 

indicators  which  have  made  it possible  to  identify  false  invoices  (poor-quality  paper, 
vague  details  in  addresses,  telephone  numbers,  etc.,  photocopied  or  hand-written 
invoices, constant use of round figures, etc.); 

•  analyses  of the  flow  of goods  and  cash  in order to check  for  the  incorrect  application 

of VAT rates in the case of large retailers. 

Increasing  use  is  being  made  of  specialist  units  to  carry  out  controls  on  account  of  the 
specific  characteristics  of  the  taxable  persons  operating  in  these  areas.  Such  units 
endeavour,  in  collaboration  with  all  the  departments  concerned,  to  control  the  entire 
commercial chain concerned. 

If  controls  on  very  large  firms  and/or  multinationals  are  to  be  efficient,  administrations 
must  try  to  adapt  their  procedures  to  the  real  situation  prevailing  in  these  circles.  The 
complexity  of company  structures (which are often  spread  out over a number of sites and 
in  several  Member States)  and  of  their  accounting  and  financial-control  systems,  their 
degree  of  computerisation,  the  amount  of  tax  involved  and  the  scale  on  which  tax 
avoidance  is perpetrated  in addition to fraud  in the strict  sense of the term  have  led some 
to  monitor  firms 
Member States 
continuously. 

to  set  up  special  departments  or  programmes 

Some Member  States have developed  specific techniques  for detecting  fraud  in individual 
sectors, such as  "test-eating" in the catering trade. 

14 

In  the  light  of  experience  of  employing  the  sectoral  approach,  the  Commission  calls  on 
Member States to: 

•  develop and reinforce  the sectoral  approach; 

•  draw up and widely distribute audit guides and handbooks; 

•  exchange details of experience in this area; 

•  develop  more  specialist  techniques  for  detecting  fraud,  especially  in  the  more 

complex sectors. 

3.4.3  Powers of control 

The  powers  of  the  inspection  departments,  which  are  in  principle  strictly  delimited  in 
order to safeguard  the rights of taxpayers, vary extremely widely from  one Member  State 
to another. 

Conducting  searches  for  accounting  documents not made available is, for  example,  often 
prohibited;  access  to  a private  domicile  generally  requires  the  prior  sanction  of  a  legal 
authority;  unannounced  visits  are  normally  authorised  only  if  there  are  grounds  for 
suspecting fraud and, in some Member States, are not allowed under any circumstances. 

It is important  that  the national  administrations  should have the legal power  to carry  out 
certain  control  methods  and, in particular,  extensive controls providing  them with  access 
to  subsidiary  records  (documentation  which  is  not  of  a  strictly  fiscal  or  accounting 
nature)  and  to  certain  factual  information  and  allowing  them  to  observe  operating 
conditions: such information,  when it may be sought  and used, often  provides  a basis  for 
checking  the  accuracy  of  the  official  accounts  (contracts,  a  diary  in  which  table 
reservations  or  appointments  with  suppliers/customers  are 
records  of 
maintenance work carried out on machinery and motor vehicles, etc.). 

logged, 

Estimated  assessments  may  be  made  only  when  a  firm  has  not  produced  certain 
documents  or filed  tax returns and it is then up to the firm  to show that the assessment  is 
wrong or too high. 

Certain  administrations  may  also  send  out  questionnaires,  which  taxable  persons  are 
obliged  to  answer;  copies  of  documents  may  also  have  to  be  produced.  This  option  is 
often  used  to  carry  out  extensive  cross-checks  without  deploying  or  shifting  important 
control resources. 

The question of control powers is a very delicate matter, because it must strike the correct 
balance between administrations and taxpayers. 

The Commission  considers as priorities in this context: 

striking 
safeguarding  of traders' rights; 

the  optimum  balance  between  control  requirements  and 

the 

adapting  control  powers  in  such  a  way  that  they  are  reinforced  to  the  extent 
demanded  by  suspicions  of  fraud  or  by  the  seriousness  of  a  presumed  or 
recorded  fraud. 

15 

3.4.4 

Investigations  into organised fraud 

Where controls do not involve an actual taxable person, as is often  the case with  carousel 
frauds  and  fraudulent  arrangements,  detection  of  the  fraud  often  requires  complex, 
extensive investigations in order to reconstruct  a situation which is not at all apparent. 

Most  Member States  express  concern  about  such  practices  as  carousel  fraud  and  bogus 
companies since they are generally planned and carried out by entire organisations  whose 
sole  purpose  is  tax  fraud  and  which  are  often  linked  to  fraud  in  other  fields  (direct 
laundering,  counterfeiting, 
taxation)  or  other  kinds  of  criminal  activity  (money 
smuggling, etc.). 

The  extraordinary  difficulties  involved  in  carrying  out  controls  in  this  context  derive 
mainly from the fact that: 

• 

the bogus  companies used  are often  established  in another  Member State or in a third 
country,  which  makes  it  more  difficult  to  carry  out  controls  and  check  on  their  real 
nature;  it  also  enables  them  to  benefit  from  exemption  from  VAT  in  the  case  of 
intra-Community  supplies  and  exports.  A  classic  example  is  the  creation  in  another 
Member State  or  third  country  of  fictitious  taxable  persons  who  are  the  declared 
consignees  of  tax-free  goods  which  never  actually  leave  the  Member State  of  origin: 
this enables the seller to deduct the input tax paid  and to acquire tax-free  goods which 
he can resell on the black market; 

•  bogus  companies, which  are  generally  set  up  in the  form  of  small  and  medium-sized 
tax 
enterprises  or  liaison  offices  of  foreign  undertakings,  use  the  simplified 
arrangements  introduced  by  most  Member States  for  small  businesses.  As  a  result, 
they  are  subject  to  less  stringent  fiscal  or  legal  obligations,  which  makes  it  more 
difficult  for  the  national  tax  administrations  to  keep  tabs  on  them.23  This  is 
particularly true when such companies fail to register; 

• 

transactions are often  split into a large number of smaller transactions which are not in 
themselves of interest in risk-analysis terms; 

•  finally,  in  addition  to  locating  transactions  in  a number  of different  countries  in  turn, 
the commercial  chains involve a large number of companies  or intermediaries with  an 
extremely short lifespan  or period of actual activity. 

In such  a set-up, everything  is designed  to appear normal but,  at the same time, to  avoid 
leaving  any trace: taxable persons  spring up and disappear quickly, change their business 
name frequently,  relocate within a short time, have no proper structure and keep either no 
accounts  at  all  or  only  very  sketchy  and  simplified  accounts.  A prompt  and  immediate 
clampdown on such fraudulent  networks, the seizure of as much evidence as possible  and 
identification  of the real perpetrators is essential both to justify  claims of back tax and  for 
its actual recovery. 
At  intra-Community  level,  operational  departments  have  on  several  occasions24  argued 
for exchange and communication  systems that are swift,  direct, informal  and unhampered 
by red tape. 

23  For  example,  SMEs  are  often  subject  to  a  simplified  tax  regime  whereby  declarations  are  less 

detailed  and need not be submitted  at such  frequent  intervals. 

24  At the  following  meetings  among  others: Helsinki,  SCAF,  European  Conferences  of VAT  Inspectors, 

Mattheus Tax Seminars, OECD/HM  C&E. 

16 

It is of paramount  importance that tax administrations  should have access to data held by 
public or private bodies25 and to information  collected  from  suppliers or customers of the 
firm concerned  (invoices for goods purchased, contracts signed with the firm, etc.) if they 
are to detect concealed  activities.  Most Member States have, therefore,  made it easier  for 
their  tax  administrations  to  gain  access  to  such  information,  which  is  subsequently 
cross-checked with the firm's  tax file. 

In  some  Member States,  this  data  can  be  obtained  through  on-line  connections  to  data 
bases. 

By way of conclusion, the Commission: 

emphasises  that  success  in  investigating  these  types  of  fraud  depends  on  the 
immediate  detection  of  the  fraudulent  scheme  and,  above  all,  in  the  prompt 
implementation  of stricter preventive  measures; 

in view  of the international  and intra-Community  character  of this type of  fraud 
and  in  order  to  prevent  any  escalation  in  the  situation,  it  calls  upon  the 
Member States to step up their cooperation  in this area and to adopt the requisite 
measures. 

3.5 

Recovery 

Effective  recovery  procedures  to  ensure  that  the  tax  owed  is  collected  are  the  natural 
corollary  of  controls.  The  Second  Report  dealt  with  the  problems  deriving  from  VAT 
debt  management  and  made  a  number  of  recommendations  in  this  connection  (see 
Chapter 4 and 6.2(6)). 

As  indicated  above,  in  cases  of  fraud;  the  administrations  run  the  risk  that  the  taxpayer 
will attempt to avoid paying his VAT debt and to remove goods which could be seized if 
the  debt  is  enforced.  This requires  special  attention  and  swifter  intervention  on the part 
of  the  administrations.  This  report  therefore  refers  in  particular  to  the  obstacles 
encountered by Member States in enforcing  VAT claims. 

An  elementary  precondition  for  enforcing  a  claim  efficiently  and  swiftly  is  that  the 
administrations  should  have  adequate  legal  powers, particularly  for  obtaining  a distraint 
order. 
In  this  connection,  Member States  may,  in  general,  levy  a  distraint  on  all  the 
defaulter's  goods  and  chattels.  However,  this  process  sometimes  comes  up  against 
obstacles  of a legal or practical  nature  (e.g. difficulty  in identifying  distrainable  goods or 
in obtaining the information  necessary  to enforce  recovery, particularly where the taxable 
person's  distrainable 
liquid  assets  are  concerned).  While  some  Member States 
experience  major  problems  in  obtaining  information  on  the  existence  of  the  taxable 
person's bank accounts and the money contained therein, others can obtain a distraint 

25  Useful 

information  generally  relates  to  contracts  for  telephone,  fax  and  electricity  supplies, 
records  departments,  professional 
car-registration,  chambers  of  commerce,  customs,  public 
associations  and  any  other data  specific  to  individual  sectors.  In the case  of the building  industry,  for 
example,  information  held by bodies responsible  for  issuing building permits  or that  contained  in land 
or mortgage  registers may prove  useful. 

17 

order  on  the  basis  of  agreements  with  the  banking  organisations. 
It  should  also  be 
pointed  out that the lack of harmonisation  of national  legislation  in this area is one of the 
main  reasons  why  Member States  make  limited  use  of  (cross-border)  mutual  assistance 
for recovery purposes.26 

To  be  effective,  enforced  recovery  measures  must  be  initiated  promptly.  However,  the 
Commission  has  noted  that  in  many  Member States  fairly  long  periods  elapse  between 
assessment of the tax and its recovery. This is partly due to the fact that the tax demand  is 
not  normally  directly  enforceable  on  the  due  date  if  the  tax  is  not  paid  and  a  new 
document must therefore  be drawn up to initiate enforced  recovery.  If the debtor  appeals 
against the enforcement  order, the delay may be even longer. 

Where  recovery  procedures  are  suspended  as the result  of  an  appeal,  Member States  do 
not  always  make  a  sufficient  effort  to  prevent  defaults  on  payment  (e.g.  by  demanding 
securities  or  applying  precautionary  measures)  by  fraudsters,  despite  the  major  risk  of 
default  which they represent. Similarly, when the appeal does not succeed or is obviously 
unjustified,  penalty  interest  running  from  the  date  on  which  the  tax  would  normally  be 
due  and  cancelling  out  the unwarranted  financial  advantage  derived  by  the  debtor  is not 
always  demanded. 

Some  Member States  are  unable  to  take  precautionary  recovery  measures  based  on  an 
estimate of the tax ultimately due, even in cases of tax  fraud. 

The  cumbersome  enforced  recovery  procedure  may  sometimes  be  avoided  by  offsetting 
the  tax  due  against  public  benefits  payable  to  the taxable  person.  In practice,  however, 
this measure, though  effective,  is often  limited  to debts and claims managed  by the  same 
administration  since  there  is  no  systematic  exchange  of  information  between  different 
administrations. 

Finally,  where  it  is  implemented,  mutual  assistance  on  recovery  comes  up  against  a 
number  of  difficulties,  mainly  as a result  of the  fact  that  only  a few  Member States  give 
other Member  States' claims the same priority as their own. 

26  See 

the  Commission's  Second  Article  14  Report  presented 

in  accordance  with  Council 
Regulation  218/92  (COM(96) 681 final  of 8 January  1997, p. 5).  The  Report  identifies  a whole  series 
of  obstacles  to  assistance  in  the  recovery  of  claims:  lack  of  harmonisation  of  legal  or  practical 
restrictions  on distraint procedures, rules making  it possible to extend  the responsibility  for  recovering 
claims  to  the  managers  of  debtor  companies,  time-limits  for  recovery,  rules  on  banking  secrecy,  etc. 
Proposals  aimed  at  remedying  this  unsatisfactory  situation  are  currently  being  prepared  by  the 
Commission,  which  will  shortly  be  proposing  amendments  to  Council  Directive  76/308/EEC  on 
mutual  assistance  for  the recovery of claims. 

By way of conclusion, the Commission  emphasises the importance  of: 

ensuring  that  the  recovery  authorities  have  adequate  means  (information, 
offsetting  against other debts, inter-departmental  cooperation, data bases, etc.) to 
recover the tax  swiftly; 
organising  recovery  action  through  the thorough  computerisation  of procedures, 
so  that  the  period  that  elapses  between  assessment  of  the  debt  and  enforced 
recovery can be reduced; 
preventing  defaults  on  the  payment  of  VAT  debts  more  effectively  by  applying 
precautionary  measures, 
including  precautionary  recovery,  by  demanding 
securities  and charging  penalty  interest when  payment of the VAT debt has  been 
delayed by an unjustified  appeal; 
treating other Member States' VAT claims in the same way as domestic claims. 

4. 

CONCLUSIONS 

Article  12  of  Regulation  (EEC,  Euratom)  No  1553/89  requires  the  Commission  to 
consider  with  the  Member States  what  improvements  can  be  made  to  their  VAT 
procedures to enhance  their effectiveness.  The Commission has to draw up  a report 
on these improvements  every three years. 

This  consideration  of possible  improvements  to VAT  controls  has to be based  on a 
common  analysis  of  the  problems  and  possible  solutions. 
In  Chapter 2,  the 
Commission  analyses  the  common  problems  facing  the  Member States  regarding 
VAT  controls.  In  Chapter 3,  it  sets  out  its  view  of  the  best  way  to  tackle  fraud, 
drawing on acquired  understanding  of the problem  and combining the best  practices 
identified  by Member  States and communicated to the Commission. 

Many  of  these  recommendations  have  already  been  implemented  by  a  number  of 
Member States.  However,  much  work  has  still  to  be  done.  The  Commission 
considers that all the Member  States should examine the recommendations  set out in 
the report, since they would  enable them to improve VAT controls. 

These  recommendations  are  based  on the  determination  to optimise  compliance  by 
taxpayers with their obligations  and to prevent  fraud  through an effective  inspection 
strategy based  on the  application  of risk  analysis to the selection  of the taxpayers  to 
be  inspected.  Such  a  strategy  calls  for  immediate  access  to  important  information 
and  for  the use  of  appropriate  and  flexible  controls  and  recovery  methods  designed 
to  prevent  tax  fraud.  Improved  expertise  in  the  fraud  field,  appropriate  use  of  the 
powers  of 
law  enforcement  authorities,  and  greater  cooperation  between 
Member  States  will  be  essential  if  fraud  is to  be  countered.  The  Commission  will 
make  its  contribution  through  programmes  such  as  Fiscalis  (e.g.  by  pooling 
experience  of measures  taken  to  combat  fraud)  and  other  committees  involving  the 
Member States (e.g. SCAF). 

Over  the  next  three years,  the  Commission  intends  to  examine  with  the  competent 
authorities  in  each  Member  State  how  the  effectiveness  of VAT  control  procedures 
might  be  improved.  To  that  end,  it will  study,  together  with  each  Member State  in 
turn,  all 
The  analysis  and 
recommendations  made  in  this  report  will  serve  as  a basis  for  this joint  assessment 
of potential  improvements.  The  fourth  report will set out the findings  of that  study. 

the  control  procedures  employed  by 

them. 

19 

ISSN 0254-1475 

COM(98) 490  final 

DOCUMENTS 

EN 

09  01  02  17 

Catalogue  number  :  CB-CO-98-518-EN-C 

ISBN  92-78-38892-0 

Office  for  Official  Publications of the European  Communities 

L-29Ë5 Luxembourg 

Z s->