Report from the Commission to the Council and the European Parliament - Third article 14 report on the application of Council Regulation (EEC) No 218/92 of 27 January 1992 on administrative cooperation in the field of indirect taxation (VAT) and Fourth report under article 12 of Regulation (EEC, Euratom) No 1553/89 on VAT collection and control procedures
Date: 2000-01-28
Institutions: European Commission
Subjects: VAT, administrative cooperation, exchange of information, fraud, member country

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 28.01.2000
COM(2000) 28 final

REPORT FROM THE COMMISSION TO THE COUNCIL
AND THE EUROPEAN PARLIAMENT

THIRD ARTICLE 14 REPORT ON THE
APPLICATION OF COUNCIL REGULATION (EEC) No 218/92 OF 27 JANUARY 1992 ON
ADMINISTRATIVE COOPERATION IN THE FIELD OF INDIRECT TAXATION (VAT)

AND

FOURTH REPORT UNDER ARTICLE 12 OF REGULATION (EEC, EURATOM) NO
1553/89 ON VAT COLLECTION AND CONTROL PROCEDURES

TABLE OF CONTENTS

1.

EXECUTIVE SUMMARY ..................................................................................... 5

2. BACKGROUND ..................................................................................................... 7

3.

PREREQUISITES

THE
TRANSITIONAL VAT SYSTEM........................................................................... 8

FUNCTIONING OF

FOR THE

THE

3.1. The transitional VAT arrangements ................................................................ 8

3.2. The control implications of the transitional VAT arrangements ....................... 8

3.3. Special schemes.............................................................................................. 9

3.4. The Central Liaison Offices ............................................................................ 9

3.5. The challenge of fraud .................................................................................. 10

4. DEVELOPMENTS SINCE THE SECOND ARTICLE 14 AND THIRD

ARTICLE 12 REPORTS ....................................................................................... 10

4.1. Reaction from the European Parliament and the Council............................... 10

4.2. Actions at Member State level ...................................................................... 11

4.3. Actions at Community level.......................................................................... 11

4.4. Actions within the Anti-Fraud sub-Committee (SCAF) of the Standing
Committee on Administrative Co-operation in the field of Indirect
Taxation (SCAC) ......................................................................................... 12

4.5. Court of Auditors reports ............................................................................. 13

4.6.

Investigations in the Member States.............................................................. 14

5.

THE FUNCTION OF VAT CONTROL IN MEMBER STATES .......................... 14

5.1. Primary function of VAT control.................................................................. 14

5.2. The organisational structure of VAT control in Member States and its

impact on VAT control................................................................................. 15

5.3. Control objectives, strategies and targets defined by central or local

control programmes ..................................................................................... 15

5.4. The role of multilateral controls in Member States control systems ............... 15

5.5. Member States allocation of control resources and the correlation

between control resources and control activity.............................................. 16

2

5.6. Traditional and new control methodologies................................................... 17

5.6.1.

The role of the VAT declaration for control purposes ..................... 17

5.6.2. Risk analysis ................................................................................... 18

5.6.3. Computer auditing .......................................................................... 18

5.6.4.

Investigation and intelligence services ............................................. 19

5.7. The role of penalties to achieve voluntary compliance................................... 19

6.

THE FUNCTION OF ADMINISTRATIVE COOPERATION AND
MUTUAL ASSISTANCE IN THE FIELD OF INDIRECT TAXATION
(VAT) ................................................................................................................... 19

6.1. Background.................................................................................................. 19

6.2. The organisation of administrative cooperation and mutual assistance........... 20

6.3. The use of the tools of administrative cooperation by Member States............ 20

6.3.1. Central Liaison Offices and their role in meeting deadlines............... 23

6.4. The integration of administrative cooperation into controls and the

accessibility of the tools available.................................................................. 24

6.5. The exploitation of information exchanged for the purposes of control

and its impact on the detection of fraud ........................................................ 24

6.6. The use of present legal instruments and their effect on the fight against

fraud ............................................................................................................ 25

6.7. Obstacles to the efficient use of the existing legal bases................................. 26

6.7.1. One single legal framework in VAT matters .................................... 26

6.7.2. Obstacles to spontaneous exchange of information .......................... 26

6.7.3. Obstacles hampering co-ordination and technical assistance

from the Commission services ......................................................... 27

6.7.4. Bilateral arrangements providing for automatic or intensified

spontaneous exchange of information.............................................. 27

6.7.5.

Level of possibilities for direct contact between anti-fraud
units and between controllers .......................................................... 28

6.7.6. Obstacles to the presence of officials of the tax administration

of the other Member States. ............................................................ 29

6.7.7. Obstacles hampering exchange of personal data............................... 30

3

6.7.8. Notification to the taxable person of

the exchange of

information ..................................................................................... 30

6.7.9.

Interference with criminal procedures.............................................. 31

6.7.10. Lack of legal base to exchange of information with or from

third countries................................................................................. 31

7. CONCLUSIONS AND RECOMMENDATIONS.................................................. 31

7.1. Conclusions.................................................................................................. 31

7.2. RECOMMENDATIONS ............................................................................. 35

8. ANNEX - GRAPHICS .......................................................................................... 37

4

1. EXECUTIVE SUMMARY

This report describes the functioning of administrative cooperation and the structure of
the underlying control arrangements.

The transitional VAT arrangements have been in place for more than 6 years. During this
period, one would have expected that the implementing problems should have been solved
and that the system should be running smoothly. However, this does not appear to be the
case. The 6 years appear to have given the fraudsters time to appreciate the possibilities
offered by the transitional VAT arrangements to make money, while, generally speaking,
Member States have not met the challenge posed by fraud.

The transitional VAT system is designed so that intra-community supplies of goods are
exempted from tax in the Member State of origin of the goods and instead taxation takes
place in the Member State of destination. In addition to this “normal” system, several
complex special schemes have been set up in areas where Member States still wanted to
maintain additional control over taxation. The exemption mechanism makes the VAT
system prone to fraud as goods can circulate tax-free and therefore it is necessary that the
Community instruments for administrative cooperation together with national control
systems are used to their fullest extent.

The examination by the Commission of Member States’ control efficiency in respect of the
transitional system has revealed certain lacunae. VAT control is today hampered by a
range of organisational and administration problems in some Member States. VAT control
is still based on purely national objectives and there is a lack of an intra-Community
perspective. The creation of the internal market has apparently not resulted in a change in
national VAT control methodology nor in the allocation of sufficient resources to the
control task. The only significant change was the setting up of the VAT Information
Exchange System (VIES), but this information system is not optimally used and therefore
it does not provide the efficiency foreseen when it was initially conceived.

There are indications that the level of serious fraud in intra-Community trade is growing.
The number of carousel frauds being discovered by national
tax administrations is
increasing. The Community has implemented a VAT system that has made it possible to
implement the single market, but VAT is still controlled on a purely national basis and
with resources that have not taken the new control challenges into account. The result is
that fraudsters can operate in a single market while control is still limited by national
borders.

Furthermore, the imperfect functioning of VAT control within the community is a result
of the overall function and structure of national control systems. Even though Member
States have strong control powers, the lack in many cases of control strategies with clear
objectives and control plans gives a confused picture of Member States’ VAT control.
The low priority given to the control of intra-Community trade is significant and it seems
that purely national priorities take precedence.

Nevertheless, it is significant to note the small amount of resources that are devoted to tax
control by Member States in general, and especially to VAT control. On average, only
about 8% of tax administrations’ staff are engaged in on-the-spot controls, and for VAT
there is an indication that it will take about 40 years to control the 24 million taxable
persons in the Community by visiting them. These traders also provide around 100 million

5

VAT declarations per year, which is a significant administrative burden for both traders
and administrations. However, it seems that less and less resources are devoted to the
control of declarations and that they only fulfil the role as a document for the settlement
of the tax.

The control task is enormous and it is quite clear that Member States have allocated far
from enough resources to make it possible to control all traders. Therefore the choice of
control methodology is important. Limited human resources should have forced tax
administrations to use risk analysis to a great extent. However only a few Member States
have adopted risk analysis. Due to their organisational structure, internal administrative
structure, technical facilities and sometimes legal obstacles, many Member States will not
be able to operate risk analysis systems within the short or medium term as it will not be
possible to establish the necessary infrastructure. Therefore, many Member States will still
have to control the VAT system in a conventional manner, which demands an increase in
resources.

The developments in the field of new electronic technology, where traders will use
electronic invoicing and self-billing on a daily basis will put specific demands on Member
States’ tax control systems. The technology is already operational. However, it seems that
Member States in general are very badly prepared to meet the new environment, despite
the fact that the Commission, in 1996, arranged the first seminar in this field, followed by
several others. Currently, only 3% of the auditors are skilled in computer auditing and this
may cause great problems for the control in the future. Nevertheless, it is also obvious
that auditing by electronic means provides a possibility for administrations to increase
control efficiency and to lower control costs.

Whilst all Member States have penalty systems in place which are applied to traders who
do not fulfil their VAT obligations, the level, scope and practical application of these
penalties varies between Member States, leading to different treatment of traders for the
same offences.

Administrative cooperation and mutual assistance is a core part of
the control
arrangements of intra-Community trade and a prerequisite for its proper functioning.
Exchange of information between tax administrations in the Community is a key element
for the success of these arrangements. However, such success cannot be achieved if
national organisation of control has not been arranged to meet this new situation. There is
therefore a close relationship between the function of national control and intra-
Community administrative cooperation.

As a general conclusion, the examination of Member States shows a very low activity in
the field of administrative cooperation. Apart from the automatic exchange of VIES data
the number of exchanges is very low, in both spontaneous information as well as specific
requests. The number of multilateral controls, especially those being funded by Member
States themselves, is extremely low. This could be justified were it clear that no serious
fraud situation existed; however, the opposite is the case. The reason for the relatively low
activity seems to depend on the national control priorities in combination with lack of
control resources.

As concerns VIES data, many control officials still have no direct access to this data, even
if the situation has improved. In too many cases VIES data is still not integrated into the
national control system and the control of intra-Community trade is regarded as a side

6

issue. It has positively been noted that some Member States refine the use of VIES data
into new tools used in the fight against serious frauds, such as carousels.

It is significant that administrative cooperation is hampered by extreme slowness of
response to requests for information. There are several reasons for this, but cumbersome
internal procedures to process exchanges of information, often due to inappropriate
internal structures, appear to be the main ones. Another is the availability of control
resources to undertake rapid control, but also the procedures involved to undertake it. As
it is clear that VIES data is useful for the control of the transitional system, it is at the
same time clear that some fraud types, specifically the most serious like carousel and
phoenix frauds, demand administrative cooperation in a rapid way. The special anti-fraud
units that some Member States have set up are intended to overcome this shortcoming,
but it will not be efficient within the Community as long as all Member States do not have
similar arrangements.

2. BACKGROUND

To date, the Commission has produced two reports in accordance with Article 14 of
Regulation (EEC) No 218/92. The first report1 dealt with the setting up of the VAT
Information Exchange System (VIES), the second2 examined the use Member States were
making of the possibility to exchange information under the Regulation, and this report,
the third, will further develop the theme of the second report, but looks in more detail at
VAT control and the interaction between control and administrative cooperation and
mutual assistance between Member States.

The Commission is also obliged to produce a report every three years on VAT collection
and control procedures in accordance with Article 12(3) of Regulation (EEC, Euratom)
No 1553/893. Because of the close relationship between administrative cooperation and
VAT control, the Commission has decided to cover both in this report. Accordingly, this
is a joint report under Regulation (EEC) No 218/92 and Regulation (EEC, Euratom)
No 1553/89.

So that the Commission could base this report soundly on up-to-date information, a series
of bilateral visits was arranged with Member States. These visits, which took place
between October 1998 and February 1999, were centred on a questionnaire sent to
Member States during the summer of 1998. During these visits, Member States were
given the opportunity to explain how they had implemented the recommendations
contained in the second report; how their tax administrations were organised and how
they organised and conducted VAT control. The Commission received full cooperation
during these visits from all Member States and the discussions were open and
constructive. However, in several aspects of the examined areas Member States had
difficulties in providing complete information or were not able to provide any information
at all.

1

2

COM(94) 262 final of 23.6.1994.
COM(96) 681 final of 8.1.1997.

3 OJ L 155, 7.6.1989, p. 9.

7

This report takes a close look at the relationship between administrative cooperation as
conceived in Regulation (EEC) No 218/92, and mutual assistance in Directive
77/799/EEC in the context of the fight against VAT fraud.

3. THE PREREQUISITES FOR THE FUNCTIONING OF THE TRANSITIONAL VAT SYSTEM

3.1. The transitional VAT arrangements

In order to achieve the removal of border controls for tax purposes inside the Community
from 1.1.1993,
the Council decided in 1991 to establish the transitional VAT
arrangements4. These arrangements provide that intra-Community operations between
taxable persons continue to be taxed at the rate and conditions of the Member State of
destination. An exemption for supplies of goods destined for another Member State was
introduced to replace the exemption for exports and the taxable event of “importation”
was replaced by “acquisition” in the Member State of arrival of the goods.

3.2. The control implications of the transitional VAT arrangements

Abolishing border controls resulted in the integration of the control of taxation of intra-
Community trade into domestic VAT control.

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

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

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

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

However, the VIES data transmitted between Member States is dependent on declarations
from traders making exempt intra-Community supplies. Where these declarations are
missing, incomplete or incorrect, the data cannot be depended upon by the Member State
controlling the trader. Furthermore, the VIES data only relates to intra-Community
supplies of goods, and therefore do not cover the supplies of services, particularly those
services provided in accordance with Article 9(2)(e) of the 6th VAT Directive.

By its nature, VIES data is historical, being transmitted to the Member State of the
taxable person making intra-Community acquisitions at least three months after the date
of the transaction, during which time the trader making the acquisition may already have
disappeared, with the consequent loss of VAT revenue. This potential risk of fraud was

4

Council Directive 91/680/EEC supplementing the common system of value added tax and amending
Directive 77/388/EEC with a view to the abolition of fiscal frontiers (OJ L 376, 31. 12. 1991, p. 1).

8

pointed out in the proposals5 for the legal framework on administrative cooperation and
mutual assistance before 1993, but Member States did not evaluate this risk as being high,
and therefore the Council “watered down” the initial Commission proposal.

As an addition to the VIES, the Commission set up in 1993 a secure method of exchange
of information between Member States, known as Fiscal SCENT. However, the use of
this tool is disappointing. For instance, from 1997 to mid 1998 as many as 13 of the
30 terminals had not been used for sending any message.

One of the difficulties identified by Member States in their explanation for the low use of
the Fiscal SCENT tool is the lack of a clear legal basis for providing information
spontaneously in respect of cases of suspected fraud.

3.3. Special schemes

In additional to the changes introduced by the transitional VAT arrangements described
above, special arrangements in respect of the taxation of new means of transport, distance
sales and sales to non-taxable legal entities were introduced. The purpose of these special
schemes was to maintain the Member States’ tax revenue. However,
these special
schemes also need special control. Generally speaking, to ensure correct taxation, it is
necessary for there to be a flow of information between Member States. During its visits
to Member States, the Commission noted that many control administrations had no
systems in place to provide such information spontaneously to other Member States, or
had not taken the revenue risk into account when forming control plans. One major reason
seems to be that the special schemes arrangements are too complicated and therefore
require control resources that cannot be mobilised. Member States therefore did not
follow through with the control commitment for these special schemes, which they
considered to be essential.

The control of the special scheme for sales of new means of transport is sporadic in some
Member States while most do not have any control, which is worrying as increased fraud
using this scheme is reported. The Commission concedes that control of new means of
transport
is difficult, particularly as VAT rules can depart from normal commercial
practice, whereby a second-hand car can still be classified as new for VAT purposes.

3.4. The Central Liaison Offices (CLOs)

The role and functions of the CLOs were examined in detail in the 2nd Article 14 report.
The Commission does not intend to repeat those criticisms in this report, but rather re-
iterate that there is a continuing and growing problem regarding the number of requests
for assistance to which replies have not been given within the 3 month deadline permitted
by Regulation (EEC) No 218/92 (See Chapter 6 for more details). Furthermore, Member
States also appear to be generally unwilling, with the exception of certain Member States,
to use the possibilities offered by Article 12 of Regulation (EEC) No 218/92 to delegate
power to operational level. While it is clear that a balance must be maintained between the
needs of local offices and central administrations, CLOs must be used as a conduit, rather
than act as a bottleneck. Furthermore, in some Member States there was some uncertainty
about the operational role of CLOs and about the relationship between CLOs and special
control and anti-fraud units, which might cause confusion. The CLOs also have a greater

5

COM(90)183 final - SYN 275.

9

role to play in informing control officials of the possibility of exchange of information,
particularly as regards the control of special schemes, refunds under the 8th Directive and
services provided in accordance with Article 9(2)(e) of the 6th Directive. However, several
CLOs said that they were not powerful enough and were not equipped with enough
resources to fulfil that role. On a positive note, some Member States have, however,
appointed CLO correspondents as contact points at regional and local level.

3.5. The challenge of fraud

The transitional VAT arrangements themselves present fraud possibilities, because of the
fact that there are goods in circulation upon which tax has not been charged. There is
therefore a high incentive to divert such untaxed goods into the black market.

In this context it must also be recalled that the Commission already, when this transitional
regime was to be introduced, warned of the potential for an increase in certain types of
fraud, especially carousel fraud, and that it was likely that there would be a greater
volume of fraud-related requests for co-operation6. In this context
the Commission
therefore proposed the necessity of a comprehensive system for administrative
cooperation and mutual assistance. However, this proposal was not adopted by the
Member States, as they believed it was sufficient to meet this risk by implementing VIES
and the other more limited cooperation arrangements that are set out in Regulation No
218/1992.

4. DEVELOPMENTS SINCE THE SECOND ARTICLE 14 AND THIRD ARTICLE 12

REPORTS

4.1. Reaction from the European Parliament and the Council

The Second Article 14 report was communicated to both the Council and the European
Parliament. That report concluded that administrative co-operation is an increasingly vital
link in the VAT control chain and that failure to make the fullest possible use of it would
pose an unacceptable threat to the integrity of the VAT system itself. Therefore the report
made eight recommendations with the aim of improving administrative co-operation and
reinforcing the fight against fraud. These recommendations concerned both actions to be
taken at Community level as well as in Member States.

The Commission’s Third Article 12 Report7 on the VAT control procedures applied in the
several
Member States
recommendations on the best way to tackle fraud based on the best practices hitherto
identified by Member States and communicated to the Commission.

on any improvements

contemplated

also made

and

However, neither report was discussed by the European Parliament or the Council. The
Commission is surprised at this lack of reaction from the other Institutions, and their
apparent indifference to the lacunae identified in the reports and to the damage being
caused to the financial, economic and employment interests of the Member States and the
Community.

6

7

COM(90)183 final – SYN 275.
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] /* COM(98)0490 final */.

10

4.2. Actions at Member State level

The recommendations contained in the Article 14 report concerning Member States’ work
in the field of administrative cooperation and fraud prevention were discussed by
Directors General of Customs and Indirect Taxation8. Directors General reaffirmed their
to the principle of administrative cooperation, and agreed with the
commitment
Commission's analysis of the necessity for Member States to improve its performance and
use. They also agreed that it would be necessary to set measurable targets to ensure this
improvement and expressed their willingness to give it the priority it deserved in terms of
organisational and human resources.

Therefore, at the 28th SCAC meeting9, the Commission asked Member States to agree on
certain standards in order to achieve the recommendations. However, Member States
were unable to agree on any of the action points proposed by the Commission and
delegations were unwilling to commit themselves to the principle of targets.

The matter was therefore brought to the ECOFIN Council10 where the Commission
reminded Ministers that Directors General of national fiscal administrations had agreed on
the need to set clear targets for the improvement in their use of administrative cooperation
arrangements, but regrettably it had not yet been possible to agree on what those targets
should be.

It was only at the 29th SCAC meeting11 that some standards were agreed. Although the
standards proposed were set as minimum targets, some Member States asked for
derogations, either permanent or temporary, due either to lack of human or technical
resources or both.

4.3. Actions at Community level

At Community level, the 2nd Article 14 report identified a need for Community action to
provide Member States with the necessary tools for cooperation and to stimulate their use
by officials on the ground. The Commission in 1997 accordingly proposed the Fiscalis
programme. This programme was applied from 199812 and will run for five years.

The Fiscalis programme, and its predecessor, the Matthaeus-Tax programme, has acted as
a focal point for administrative cooperation through exchanges of officials between the
administrations of Member States, the organisation of seminars which tackle clearly
defined subject areas, and the organisation of multilateral controls in the field of indirect
tax. During 1998, seven seminars were held of which one was specifically dedicated to
VAT fraud investigation and one specifically to deal with risk analysis.
In 1998
13 multilateral controls, each of them involving in average 6 countries, were also initiated.

In the 2nd Article 14 report, the Commission also indicated that it was necessary to
improve at Community level the functioning of mutual assistance on recovery. The

8

5th meeting of Directors General of customs and indirect taxation 26 March 1997.

9 Meeting of Standing Committee on Administrative Cooperation, SCAC, 8-9 April 1997.
10 ECOFIN meeting in 12 May 1997.
11 Meeting of Standing Committee on Administrative Cooperation, SCAC, 25 June 1997.
12 The Fiscalis programme was adopted by the decision of the European Parliament and of the Council
of 30 March 1998 (Decision No 888/98/EC) and was followed by the Fiscalis implementing decision
by the Commission on 2 July 1998 (Decision No 98/467/EC).

11

Commission therefore in 1998 presented a comprehensive revision of the present recovery
directive13. The Commission proposed that the scope of the Directive be extended to
cover direct taxes, fines and penalties. Discussion of this proposal is continuing in the
appropriate Council working group.

The Commission has also, in conjunction with Member States, started to look at the
taxation problems involved in electronic commerce. The first report14, which was agreed
in the Council, set out the general principles. The Commission together with Member
States and in international fora is seeking to find solutions to the control, tax avoidance
and tax fraud problems inherent in this area. While it is currently too early to pre-judge the
results of these deliberations, it is clear that to control transactions over the world-wide-
web, Member States will have to depend heavily on administrative cooperation, both with
one another and with third countries.

The Commission, on a number of occasions in meetings of the SCAC, has proposed to
Member States that they should generalise availability for verifying VAT identification
numbers by providing access to this facility of the VIES via the World Wide Web. In
addition to being a trade facilitation measure, it would enable suppliers to determine
whether or not their customers were registered for VAT so that the “reverse charge”
provisions of Article 9 of the 6th Directive, which displaces the place of supply of certain
services to the Member State where the recipient of the service is located, could be
correctly applied. In the SCAC, Member States refused to allow the Commission to
construct such a “Community” gateway, notwithstanding that at least one Member State
already provides such a possibility via its own website. It is regrettable that Member
States could not agree to this proposal.

4.4. Actions within the Anti-Fraud sub-Committee (SCAF) of the Standing
Committee on Administrative Co-operation in the field of Indirect
Taxation (SCAC)

Within the SCAF, the work to identify frauds and mechanisms behind fraud as well as the
general VAT fraud pattern in the Community continued. The Committee undertook this
work by carrying out two major studies based upon around 1000 VAT fraud cases,
provided by Member States. The second study focused especially on frauds abusing intra-
Community trade. The SCAF concluded that the VAT fraud situation is serious and
urgently needs to be remedied. The findings are to be used as a platform for an Action
plan for dealing with VAT frauds.

1300 million
The two studies encompassed around 1000 cases and represented together
of real VAT losses. However, even if the detected amounts were huge, it was estimated
that they only represented the tip of the iceberg. In this context the Court of Auditors
estimated in a Special Report15 that a “gap” exists between actual collected VAT receipts

€

13 COM(98)0364 final, Proposal for a European Parliament and Council Directive amending Council
Directive 76/308/EEC on mutual assistance for the recovery of claims resulting from operations
forming part of the system of financing the European Agricultural Guidance and Guarantee Fund,
and of agricultural levies and customs duties and in respect of value added tax and certain excise
duties.

14 COM(98)0374 final, Communication from the Commission to the Council, the European Parliament

and the Economic and Social Committee - Electronic commerce and indirect taxation.

15 Court of Auditors Special Report 9/98.

12

and the theoretical amount, calculated on macroeconomic figures. This gap was as high as
€
70,000 million, and corresponds to 21% of Member States revenue. Even if this
calculation has been questioned it indicates a serious discrepancy, which might be caused,
at least partly, by fraud.

The analysis of cases made it possible to identify the main techniques used by the
fraudsters. Besides the conventional types of fraud like suppression of output tax and
abuse of deduction rules, which were very frequently used in domestic trade, the main
mechanism behind the construction of intra-Community and international fraud is the
abuse of the exemption rules.

The SCAF has at several meetings discussed the strengthening of cooperation to combat
this VAT fraud. Discussions have centred on the information that it would be useful to
exchange at an operational level. Although the exchange of nominative information is
probably the most helpful in detecting and preventing fraud, this is the category which
raises the most problems. Because of data protection or fiscal secrecy rules several
Member States are unable or unwilling to exchange such data, except with a Member
State that is clearly affected by the fraud.

SCAF has further discussed these legal obstacles to co-operation in the fight against fraud.
The purpose has been to identify and to define what is not possible because of restrictions
in national legislation or because of the lack of a legal base, at a Community level. In this
context some Member States raised the need for a single and firm legal instrument,
merging the existing Directive 77/799/EEC and the Regulation (EEC) No 218/92.
Member States shared the view that legal obstacles need to be abolished and that this
should be achieved through Community legislation rather than by means of bilateral
agreements.

A further conclusion from the VAT fraud case studies is that Member States retain
insufficient records of information from fraud cases, and also have insufficient filing
systems. The Commission therefore raised in SCAF proposals for a systematic and
coherent system for recording fraud case information to be implemented at national level.
However, Member States could not reach any agreement on minimum requirements in this
context.

The main reason why Member States are unwilling or unable to commit themselves in
SCAF appears to be the level of representation. Often delegates claim that their power is
limited to decisions which have no impact on their authorities’ resources and since most of
the actions required will have some impact on Member States’ resources dedicated to
control and administrative cooperation, this means that
the Committee is unable to
achieve meaningful progress and can not take necessary decisions to improve the fight
against fraud, even when delegates in principle agree that proposed actions are necessary.

4.5. Court of Auditors reports

The report by the European Court of Auditors in 199816 pointed out that the fight against
fraud is characterised by the absence of an integrated strategy. For intra-community
transactions it stressed that there is a contradiction, as there exists in practice a single

16 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, OJ C 349 of 17.11.1998.

13

market for fraud but not for law enforcement. The Court of Auditors’ work has revealed
that the overall losses of VAT tax revenue, both internal and intra-Community, were
considerable. The Court of Auditors also observed that the instruments for cooperation
between Member states are not fully used. Slow procedures and even an ignorance of
existing instruments, in particular on the part of the local authorities, was said often to
explain this under-use. It also called upon Member States to set up systems to evaluate the
extent of fraud and to be capable of periodically evaluating the effectiveness and results of
their anti-fraud activities.

The European Parliament Committee on Budgetary Control has during its discharge
procedure for the financial year 1997 examined the Court of Auditors’ Special report 9/98
concerning the financial year 1997 on own resources. Based upon the observations of the
Court of Auditors, the Committee calls upon the Commission to initiate actions of any
nature aimed at encouraging Member States, on the one hand, to set up credible systems
of evaluation of the impact of fraud as well as of the evaluation of the effectiveness and
the results of control actions, and on the other hand, to develop risk analysis techniques
for VAT control. The Commission was also invited to provide an evaluation of the
effectiveness of penalty systems. The Committee also asks the Commission to propose a
control and cooperation strategy for a genuine fight against fraud.

4.6.

Investigations in the Member States

Having taken all
these symptoms of an unacceptable situation into consideration,
especially the evidence of a serious fraud situation in combination with indications of
unsatisfactory control and administrative co-operation systems, the Commission decided
to undertake visits in each Member State in order to examine the functioning and
efficiency of administrative co-operation and mutual assistance in the field of VAT. Most
of the visits, preceded by a comprehensive questionnaire, were undertaken during the last
quarter of 1998. This report is mainly based on an evaluation of the results of those visits.

5. THE FUNCTION OF VAT CONTROL IN MEMBER STATES

5.1. Primary function of VAT control

The primary function of VAT control is to assure that VAT revenue flows into national
treasuries. As VAT is a self-assessment tax, adequate control is required to ensure that
taxable persons are paying the correct amount at the correct time. From a Community
budget perspective, one element of a Member State’s contribution is based on a
percentage of VAT actually collected – the VAT resource. Thus the uneven existence of a
black economy as between Member States creates a certain inequity as regards each
Member State’s contribution to the Community budget. Moreover, from a single market
perspective,
the existence of a black economy creates unacceptable distortions of
competition between legitimate traders and those operating illegally.

A key element of VAT control is the so-called self-policing control system. Not all
Member States allow the tax administrations to make copies of invoices or collect
information from invoices to be used in the control of the counterpart traders. Therefore,
these Member States can not efficiently undertake the necessary cross-checking, which the
VAT system requires.

14

5.2. The organisational structure of VAT control in Member States and its

impact on VAT control

Generally speaking, Member States have organised their tax administration in two
different ways: either based on the type of
tax concerned (i.e. with separate
administrations for different taxes), or based on the concept of a taxable person as a
customer. In the latter case a single tax administration and local office deals with all the
taxable person’s taxable obligations.

is clear that

the integrated approach has two important benefits: an integrated
It
administration can take an overall approach for all fiscal controls and can accordingly
allocate control resources in an optimal and cost efficient way, thus providing improved
control and fraud prevention possibilities.

Member States having integrated administrations have also integrated their tax control and
computer systems and audit files, which gives a better overview of a taxable person’s
activities, while non integrated administrations have, generally speaking, very burdensome
internal administrative problems to overcome to achieve a similar efficiency.

5.3. Control objectives, strategies and targets defined by central or local

control programmes

Looking at Member States’ control objectives and on their strategies to achieve them, it is
quite clear that the control of the intra-Community trade still is a secondary issue. Very
few Member States have a clear control strategy aiming to give intra-Community trade the
same level of control as national trade. The control is mainly limited to checks of VIES
data, but this is almost at a random level. No Member State had a control strategy for the
special schemes.

National control plans are worked out by using different methodologies. Some Member
States make a clear link between the overall objective and the strategies to achieve it, and
some also convert global objectives into individual targets for each control official or local
control office.

However, too many Member States have very vague systems and it is unclear what
objectives, strategies and targets actually drive VAT control. Several Member States draw
up their control plans at regional or local level and in several cases there seems to be no
connection to any overall objective and there is no real feed-back to the central level,
which means that the central level has very little knowledge about the ongoing control
activity and the results. The strategies to achieve the objective of ensuring that taxable
persons actually fulfil their obligations vary between Member States. Most control plans
are based upon a philosophy that a sufficient tax control will be achieved by setting a
target based on the number of audits or audit days that should be performed within a
certain time. Several Member States formulated the overall objective as a revenue target
in monetary terms. The aim was in the first place to raise tax revenue for the treasury and
to justify their control budgets.

5.4. The role of multilateral controls in Member States control systems

The community VAT system has created the need to establish cross-border control
functions. VIES is a part of this control function, but nevertheless it is also necessary to
undertake simultaneous controls on a bilateral or multilateral basis.

15

To facilitate multilateral controls the Community provided funding to undertake
simultaneous control exercises. The 1998 Fiscalis programme reinforced this possibility
and offers to financially assist Member States in organising multilateral controls as an
activity of the programme.

The need for audits under the transitional VAT system is greater than before 1993, when
cross-border transactions were scrutinised by border controls. The examination of
Member States’ activity in this area shows that bilateral or multilateral cross-border
control activity was extremely low. Outside the Community funded controls, Member
States had on their own expenditure only carried out a handful of simultaneous controls,
despite such controls being necessary to ensure compliance with the transitional system as
it is constructed. During 1998, 13 multilateral controls were initiated with on average
6 Member States participating in each one. Some Member States have legal restrictions on
permitting auditors from other Member States to participate in controls in their country,
or have secrecy rules making it impossible to participate in the sharing of information and
therefore are not able to participate even if the taxable persons have no objection. Some
Member States have sais that their priorities are in other fields. To extend these controls
demands further resources, which Member States today cannot mobilise.

5.5. Member States allocation of control resources and the correlation

between control resources and control activity

Control resources should normally be a function of the control required to fulfil the
overall objective, broken down into measurable targets to be achieved by the different
administrations involved in tax control. Control resources are needed both as human
resources as well as technical. The amount of resources required to meet the targets
depends upon the size and nature of the tax system to be controlled, the organisation of
the tax administration, and the structure of taxable persons and their activities. In the
absence of clear control objectives and strategies Member States do not allocate control
resources according to the actual need. It is apparent that most Member States instead
allocate their control activity to the resources available. No Member State could confirm
that their allotment of resources, especially human resources, actually fulfilled what they
believed would be enough for a sufficient control. Moreover,
the levels of control
resources diverge, not only between Member States, but also between different regions
and offices within a Member State. There is no common principle for the allocation of
control resources in the Member States.

€

Member States have to supervise intra-Community VAT exempted transactions to a value
of around
930,000,000,000 - a category of transactions which was subject to formal
border controls before 1993, but now has to be controlled by tax authorities. Member
States have to control around 24 million VAT traders, who deliver annually around 100
million declarations.

To carry out this giant task, Member States have a limited number of controllers available.
Member States today have around 400.000 officials for all types of tax administration.
Due to the different level of integration of tax administrations, however, it has been
difficult to trace a figure of how many tax controllers are available exclusively or partially
for the control of VAT and also the number of VAT controls that have actually been
tax
undertaken. One reason is that,
administrations are different authorities and the central level often has no information
about the real resources available.

in some Member States, central and local

16

Despite these uncertainties, it can be estimated that around 20% of the total number of tax
officials (or roughly 80.000) are involved in tax audits. Based upon the assumption that
integrated administrations use around 30% of their tax audit staff on auditing VAT,
(which some of these Member States have indicated), the total number of VAT auditors in
the Community could be calculated at about 30.000. This is around 8% of the total staff
of tax administrations. (See figure 1 for the proportion of officials engaged in on the spot
VAT control per Member State.)

Even if a couple of Member States have not been able to present any figures on the
number of VAT controls they undertake during a calendar year, it could be assumed,
based on figures from 11 Member States, that the number of on the spot VAT controls
will not exceed 600.000 per year in the Community. Comparing these two figures it seems
that the average VAT audits per VAT auditor is 20 per year. (See figure 2 for the number
of taxable persons per control official.)

The question is what resources are actually needed to control the transitional VAT system
in a proper way? There has been no consideration of the control methodology that should
be adopted to manage it in an efficient way. There seems to have been no significant
increase in control resources in 1993 and no sizeable transfer of controllers from customs
administrations to tax administrations.

The second question is whether Member States actually use the resources available in the
most efficient way. When resources are limited the control methodology will play an
important role. The basic instrument for controls is normally a control plan, whose targets
flow from the overall objective set at a higher level. First it can be concluded that several
Member States do not have real control plans with clearly defined objectives, targets and a
follow-up system. However most Member States have at
least some guidelines for
control. It is not unusual to find detailed control plans worked out at local level, which
then have been agreed at a higher level. Such control plans are sometimes created to fit
the available resources, but they are not reflecting the real control needs. The targets are
almost always quantified either as a number of audits/controls or audit days to be
achieved, or extra revenue to be collected. Several plans set out selection targets, i.e. a
number or percentage of taxable persons within certain characteristics that should be
subject to controls. Most of the control resources are spent in accordance with the control
plan, but there are often some rather limited resources allocated to ad hoc controls.

5.6. Traditional and new control methodologies

5.6.1.

The role of the VAT declaration for control purposes

The design of the VAT declaration differs from one Member State to another, as does its
role. Some Member States have comprehensive declarations collecting a lot of
information for control purposes (and which is cumbersome for the traders to deliver),
while on the contrary there are several administrations which have a very simple VAT
declaration only taking into account a few boxes. In some Member States it is combined
with the collection of other taxes.

It seems that no Member State makes real operational use of all the information collected
in the VAT declaration. Most Member States feed the information into computer systems,
either automatically or by other means. Some Member States have pointed out that they
use it to match data against income tax; however as income declarations are normally
delivered much later, such tests will be rather historical and control will not be up-to date.

17

No Member State claimed that the VAT declaration actually fulfils any strong control
purpose.

All together it seems that Member States spend a great deal of human resources on the
examination and administration of VAT declarations and that these resources could be
better used in more targeted controls, while at the same time a considerable simplification
could be achieved without losing any benefits.

This is particularly the case in those Member States where a large amount of the
information is collected from taxable persons by non-electronic means, and therefore
cannot be further used within the tax administration.

5.6.2.

Risk analysis

Taking into consideration the huge number of controls that
the transitional system
requires, several Member States regard risk analysis to be the only solution to manage the
necessary control level when resources are limited. The problem for many Member States
is that they do not have the structure available for introducing risk analysis. Some Member
States have problems, practical, formal or both, to make use of information from other tax
administrations, or even other national administrations. Some Member States do not have
the technical infrastructure to link together different control sources in order to bring
together data to be matched in an efficient way. Some Member States do not even have a
sufficient technical infrastructure between central, regional and local level to use central
risk analysis, and are therefore limited to building risk models based on a local
information. Control selection models could be improved on the basis of the experience
gained from controls that have previously been undertaken. Unfortunately however,
Member States have, in general, low standards of records both about
their taxable
persons, but also about their controls. Many Member states do not have proper filing
systems and often files are kept at local level. No Member State has a real follow-up of
controls in respect of analysis of the fraud and the mechanisms behind fraud. Some have
follow-ups at local and regional level, but few have a system giving them a total overview
of the fraud situation in their Member State. These therefore have great difficulties in
describing the nature of fraud and the extent of it and in identifying risks.

In the absence of using risk based selection systems, Member States are not using their
resources at an optimum level. Only two Member States are working with risk analysis as
the main control selection tool. Several Member States are working with hybrids of risk
selection. In these circumstances present control resources and methods will not make it
possible to meet the growing fraud challenge unless Member States can adapt their legal,
organisational and technical infrastructures to establish real risk analysis systems within
the near future.

5.6.3. Computer auditing

Member States’ capacity to adopt new technology was also examined. Several Member
States offer their officials this tool, either through access to raw data, or to more refined
products where VIES data are consolidated with other control data to give the controller
a more comprehensive picture of the taxable person’s situation. This type of development
is still in its infancy in many Member States, but the growing use of computer systems
within the business sector will force Member States to adopt the new technology. The
developments in the field of new electronic technology, where traders will use electronic
invoicing and self-billing on a daily basis will put specific demands on Member States’ tax

18

control systems. The technology is already operational. However, it seems that Member
States in general are very badly prepared to meet the new environment, despite the fact
that the Commission, in 1996, arranged the first seminar in this field, followed by several
others. Currently, only 3% of the auditors are skilled in computer auditing and this may
cause great problems for the control in the future. Nevertheless, it is also obvious that
auditing by electronic means provides a possibility for administrations to increase control
efficiency and to lower control costs.

5.6.4.

Investigation and intelligence services

Besides targeted control and selection by risk some Member States have set up specific
investigation and intelligence services to detect tax fraud and criminal activity involving
the tax, excise and customs fields. Even though several Member States have special
investigators it is unclear whether their competence is different from the competence of a
tax auditor. There are only a couple of Member States having such an activity in the tax
field. These units seem to have restrained tax criminal activity. Some Member States had
also set up specific fiscal attachés at their embassies in some Member States to ameliorate
exchange of intelligence information. In most Member States special auditors were
authorised to deal with large enterprises or large groups. This was mainly determined for
income tax control reasons, but VAT control also gained from this arrangement.

5.7. The role of penalties to achieve voluntary compliance

All Member States have implemented penalty schemes, which cover the following
situations: non declaration, non submission or late submission of declarations, non
payment or delayed payment and failure to maintain complete records for tax purpose.
Irregularities, such as suppression of output tax and unjustifiable claims of input tax are
also penalised in all Member States.

Member States were asked to indicate how much tax was paid in time, and how much was
paid late. More than half of the Member States were not able to give figures at all in this
respect, which shows that Member States have very little follow-up on the payments and
lack of evaluation of the efficiency of their penalty systems. The examination showed,
from those Member States who were able to answer the question, that normally 92-94%
of the tax was paid in time, even if two Member States had clearly lower figures (72-
76%). Those, very few Member States, giving any figure on how much VAT that was not
paid at all indicated figures between 1-2%.

6. THE FUNCTION OF ADMINISTRATIVE COOPERATION AND MUTUAL ASSISTANCE IN

THE FIELD OF INDIRECT TAXATION (VAT)

6.1. Background

The purpose of administrative cooperation is to permit Member States to properly control
the
traders who engage in intra-Community trade.
information regarding the counterpart of the activities being controlled is located in
another Member State. Therefore, to properly control that a trader has made an exempt
intra-Community supply, it is necessary to first have information that the goods were
supplied to a taxable person in another Member State. The prima facie evidence for this is
an entry on the recapitulative statement, but this is not a prerequisite for exempting (see
Chapter 2). Without administrative co-operation, the tax administration controlling the

In such business relationships,

19

business can only have an incomplete picture of its traders, and can only concentrate on
formal details supplied, without proper means of cross-checking the veracity of the
transactions.

The Commission, in its role as guardian of the Treaties, is responsible for the control of
Community law. Efficiency and good use of administrative co-operation and mutual
assistance tools by Member States is a key point for the Commission in the VAT field.
This should contribute to the fight against fraud and tax evasion, which also creates
distortions of competition in the single market.

6.2. The organisation of administrative cooperation and mutual assistance

introduced with effect

transitional VAT arrangements were

from
When the
1 January 1993, Regulation (EEC) No 218/92 provided for a common system for the
exchange of information on intra-Community transactions, supplementing Directive
77/799/EEC17 concerning mutual assistance by the competent authorities of the Member
States in the field of direct and indirect taxation. The scope of this Directive had been
extended to VAT in 1979 by Directive 79/1070/EEC18. Originally the Directive set up
structures for the exchange of information between tax administrations in relation to direct
taxation. However, with the introduction of the transitional VAT arrangements, this
valuable legal instrument on its own was no longer fully adequate to meet the new and
more specific needs for co-operation between national tax administrations for the control
of VAT in the single market. This explains the existence of two different legal instruments
providing for cooperation between Member States in the field of VAT. There are different
provisions regarding the time limits applying to requests under the Directive and the
Regulation, and also regarding the use to which information received can be put. In
accordance with the requirements of the Regulation, Member States have set up Central
Liaison Offices that have primary responsibility for the exchange of information under the
Regulation. However, some Member States have a different entity responsible for the
exchange of information under the Directive. This means that the synergy between the
Regulation and the Directive for VAT control purposes intended by the Council as
highlighted in the recitals19 has not been achieved. Some Member States are, for instance,
fairly strict on the type of information VAT authorities may ask according to the
Regulation and to the Directive, and thus these Member States reject some assistance
procedure on formal grounds. The Commission believes that this has a negative impact on
the use of the possibility for cooperation in VAT control between Member States and
considers that control officials making requests for assistance should not be put in a
position whereby they have to be aware in advance of the legal base that they are obliged
to use to get information.

6.3. The use of the tools of administrative cooperation by Member States

The purpose of the Community arrangements for administrative cooperation put in place
by Regulation (EEC) No 218/92 is to avoid tax revenue losses for Member States due to
fraud and tax evasion. Under Article 4(2) of the Regulation, a Member State can be

17 OJ L 336, 27.12.1977, p. 15.
18 OJ L 331, 27.12.1979, p. 8.
19

“Whereas this Regulation provides for a common system for the exchange of information on intra-
Community transactions, supplementing Directive 77/799/EEC, as last amended by Directive
79/1070/EEC, and intended to serve tax purposes”

20

provided on request with information about whether one of its traders has made intra-
Community purchases during a particular quarter. Article 4(3) of the Regulation can be
used to identify the suppliers from whom the purchases have been made. The aggregated
form of Article 4(2) data is also exchanged automatically between Member States at the
end of each quarter by the VIES. Member States can also, under Article 2 of Directive
77/799/EEC and under Article 5 of the Regulation, make more specific requests for
information, for the purpose of control of particular traders, relating for example to the
invoice numbers, dates and values of individual transactions. The use of Articles 4(2), 4(3)
and 5 of the Regulation by Member States are the key elements in the control of traders
engaged in intra-Community trade. Figure 3 in the annex indicates the proportion of
taxable persons in Member States that make intra-Community acquisitions the proper
control of whom require tax administrations to depend on administrative cooperation.

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

Notwithstanding the purpose of Regulation (EEC) No 218/92, Member States are still,
generally speaking, unwilling (or unable) to provide details of additional tax discovered as
a result of the information exchanged over the VIES. Accordingly, the Commission can
the administrative cooperation
only evaluate the Member States' exploitation of
framework by examining their use of its key elements which consist of requests made
under Article 5 of the Regulation or Article 2 of the Directive, and enquiries made under
Articles 4(2) and 4(3) of the Regulation. Figures 3 and 4 in the annex show the evolution
of the use of these possibilities.

Figure 5 is a cause for concern as it indicates that Member States’ use of the possibility to
request information from other Member States has not increased significantly in recent
times. The number of requests that have been made is only a fraction of the tens of
thousands of requests per annum that Member States themselves estimated in June 1993.
To put this data in context, on the basis of information supplied to the Commission by
there are of the order of 1,500,000 taxable persons making intra-
Member States,
Community acquisitions and approximately 30,000 VAT officials in the Community
engaged in VAT control. Therefore, over the 3-year period between 1996 and 1998,
requests for administrative cooperation were made in respect of only 2% of traders
making intra-Community acquisitions. Per VAT control official, this works out at less
than 1 request each in 3 years. This is a clear indication of inadequate control of intra-
Community trade generally. The Commission believes that it is absolutely necessary in the
context of the fight against fraud that Member States make more use of the possibility to
request information from other Member States.

Figures 6 to 9 put the total number of requests made under Article 2 of the Directive and
Article 5 of the Regulation over a three-year period into context. The number of requests
is analysed per Member State; per control official; per control and as a proportion of the
intra-Community trader population.

21

Although there has not been a significant increase in the number of Article 2 and Article 5
requests, the number of enquiries made under Article 4 of the Regulation, as can be seen
from figure 4, continues to increase. As a prerequisite to making a request under Article 5
of the Regulation, Member States must first use the possibilities provided by Article 4.
This increase in the number of Article 4 requests is to be welcomed, and indicates that
Member States may have taken into account at least some of the recommendations made
in the 2nd Article 14 report. Many of the requests made under Article 4 of the Regulation
are made to confirm that the trader in the requesting Member State did not make any
intra-Community acquisitions. This is also a valid method of exploiting the VIES data.

The conclusion that can be drawn from figure 4 is that, while the use of the VIES data is
certainly increasing, there is no corresponding increase in the use of requests made under
Article 5 of Regulation (EEC) No 218/92. This may be due to the length of time taken to
answer requests for information, as evidenced by the number of requests made for which
replies are outstanding after expiry of the deadline (see figures 10 and 11). Member States
have consistently complained about the quality of the VIES data, so it is difficult for the
Commission to understand how VAT control of intra-Community acquisitions can be
properly controlled using incomplete data. The low number of requests made per control
official as indicated in Figure 7 and the low number of requests made per control as
indicated in Figure 8 indicates that Member States still have a lot of work to do to ensure
that control officials make the best use of the possibilities made available to them for the
purpose of controlling taxable persons making intra-Community acquisitions. Figure 9
demonstrates the low likelihood of intra-Community traders having their transactions
verified.

The low use of the possibility to request information in accordance with Article 5 of
Regulation (EEC) No 218/92 and Article 2 of Directive 77/799/EEC and the apparent
reduction in the number of requests being made could be due to the following:

(1)

(2)

(3)

Control officials’ experience to date which shows that requests made to other
Member States do not result in an additional tax yield, and therefore they have
reduced the number of requests being made;

Tax administrations perceptions that traders making intra-Community supplies and
acquisitions are fully compliant and therefore transactions need not be verified;

The perception of controllers that if a request is made to another Member State, a
reply will not be received in sufficient time to be of use in solving a case.

In the Commission’s view, the first two scenarios are unlikely, because of the challenge of
fraud as outlined at 3.5;
likely reason for this
phenomenon.

the third scenario being the most

A high standard of VAT control requires the use of administrative cooperation to be more
widespread in the Member States and thoroughly integrated into national control strategy.
Administrative cooperation should not be a specialist function. Information about the
intra-Community purchases of a trader should be seen as another piece of the national
control jigsaw, without which control is incomplete. This approach entails extensive use
by ordinary VAT control officials of the specific enquiry and request opportunities
provided by the Community. Member States that make little use of the opportunities
provided by the tools of administrative cooperation can not have a complete picture of

22

their traders. It is clear that the control of traders making intra-Community acquisitions is
far from sufficient.

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

6.3.1. Central Liaison Offices and their role in meeting deadlines

Regulation N° 218/92 EEC provides for the setting up in each Member State of a Central
Liaison Office (CLO). The legislation does not lay down detailed requirements for the
constitution of CLOs, but in 1993, the Commission and the Member States agreed a set of
guidelines setting out their main functions and objectives. These were principally to act as
the normal channel of communication between competent authorities; to manage the flow
of cooperation and assistance between Member States;
to monitor the quality and
pertinence of requests for assistance and of the responses to them and to supervise the
respect of deadlines. In short, the CLO should act as a single point of contact, through
which other Member States can rely on obtaining effective and timely assistance with any
matters relating to VAT control and cooperation. It is important that CLOs should have
the resources, powers and the expertise needed to provide that service. The Commission
underlines that even if under Directive 77/799/EEC the competent authorities may be
different from the CLO in certain Member States, it is obvious that in VAT matters at
least some direct link should exist between the two administrative services within a single
Member State.

Article 5 of Regulation (EEC) No 218/92 states that “The requested authority shall
provide the information [requested by another Member State] as quickly as possible and in
any event no more than three months after receipt of the request”. No such deadline exists
for requests under Directive 77/799/EEC, but in 1994 the SCAC, for practical reasons,
agreed informally that requests made under Article 2 of the Directive would be subject to
the same time limit of three months which applies to requests made under Article 5 of the
Regulation. This decision provided for a streamlining of procedures applying in Member
States to the management of requests and replies under the two legal bases. There has
been a steady increase in the number of requests made under these legal bases, for which
the maximum 3 months deadline has expired. This is extremely worrying, particularly as
the number of requests outstanding now exceeds the number of requests made each
quarter.

In practice, differences between Member States in the organisation and staffing levels of
CLOs and the service provided to CLOs by outfield staff have led to a variation in the
level of service they are able to provide which can create difficulties for the smooth
operation of administrative cooperation. There are strong indications that, rather than
acting as a conduit, some CLOs at
to be causing bottlenecks in
communication as can be seen from figure 11. A further problem is created in certain
Member States by the fact that different parts of the administration are competent in
respect of requests made under the different legal instruments, and while the CLO may be

least appear

23

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

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

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

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

6.4. The integration of administrative cooperation into controls and the

accessibility of the tools available

While it is clear that Member States have generally made progress since the last Article 14
report, the low number of Article 5 requests is still giving cause for concern. It is not clear
that all control officials have, as a first instinct, the inclination to request information from
other Member States to help them with a case, or to supply information spontaneously to
another Member State, which may be of help to the latter. The ease of access to the VIES
data is still poor in some Member States, where officials must first contact the CLO to
obtain information about presumed intra-Community acquisitions. The Commission
believes that ease of access to information is a determining factor in control officials’ use
of the administrative cooperation and mutual assistance possibilities.

One Member State has introduced a procedure whereby as an addition to the information
obtained over the VIES, bilateral arrangements have been entered into to permit
additional questions to be asked regarding a taxable person’s general compliance. The
Commission considers that this is a welcome initiative, and is currently in the process of
re-designing the forms currently in use for the purpose of the exchange of information so
that this aspect could become a standard question between Member States.

6.5. The exploitation of information exchanged for the purposes of control

and its impact on the detection of fraud

While the VIES information is transmitted in a timely fashion between Member States,
there are still delays in answering requests made under Article 5 of the Regulation or
Article 2 of the Directive. Some of the reasons given by Member States for delayed replies

24

are that the case may be under investigation by the Member State receiving the request or
that the requests may be for insignificant amounts. Other reasons include the lack of
priority associated with requests received from other Member States, and the
disproportionate amount of time that was necessary to answer the requests, without any
apparent result or feedback from the requesting Member State. The provisions of
Regulation (EEC) No 218/92 were never intended to deal with individual fraud cases,
which by their nature are happening in the here and now, but many Member States are
reporting the discovery of fraud cases which have happened in the past (see 4.4).
Nevertheless, one Member State (the Netherlands) has already entered into bilateral
arrangements with certain other Member States to put in place a “fast stream” approach
for cases of suspected fraud. This is effective for bilateral actions, but is not a solution at
Community level for combating and preventing widespread frauds that potentially affect
all Member States.

The natural reaction of control officials when they receive requests for assistance from
other Member States is to accord them low priority on the assumption that any additional
tax arising as a result of their actions will accrue to another Member State. It is all the
more regrettable therefore, that many Member States use the criteria of additional tax
discovered to assess the quality of the work done by control officials. The setting of
local office militates against good
monetary targets, either per official or per
administrative cooperation. Even at central level, certain Member States complain about
the frequency and low value of requests for assistance that they receive from other
Member States. On receiving a request, some Member States always initiate an inspection
of the trader’s records. Other Member States initiate a written procedure, whereby the
trader himself is asked to reply to the query raised by the other Member State. In the
Commission’s view, a “written procedure” is acceptable only in respect of those cases
where the trader from whom the information being sought is above reproach, because
otherwise, the answer given to the requesting Member State is at best doubtful, and can,
in the worst case scenario i.e. collusion between traders for the purpose of perpetrating
fraud, be counter-productive, as it warns both traders that their affairs are subject to
investigation, and they can then successfully throw both administrations “off the scent”.

6.6. The use of present legal instruments and their effect on the fight against

fraud

While it is clear that, with the exception of the excessive amount of time taken by some
Member States to answer requests received from other Member States, the general
consensus among Member States, and control officials (reported, inter alia in Fiscalis
seminar evaluation forms) is that the VIES and administrative cooperation are good tools
for control. The main problem is that control a posteriori happens too late in many cases,
which means that while information received is useful, it would have been more useful if
received earlier. Requests under Article 5 of Regulation (EEC) No 218/92 can only be
made after the quarterly delivery of the VIES data, which could already provide a
fraudster 6 months of breathing space. Experience has shown that fraudsters move
the Regulation should be
quickly, and the Commission is therefore convinced that
amended to provide for the quicker exchange of information between Member States.
However, the evidence points to the slow response time to requests, rather than the legal
instruments themselves as obstacles in the fight against fraud. While a fraud case in a
requesting Member State may be top priority for the investigating official there, he is at
the mercy of his counterpart in another Member State, over whom he has no control. In
an effort to create a fast-track approach to fraud cases, the SCAC decided to have a

25

shorter time limit of one month for replies to requests where the requesting Member State
could justify using this procedure. However, certain Member States consider that most of
their cases are fraud cases, and the problem becomes circular. The Commission believes
that amendment of the Community legislation is necessary to provide for better
possibilities for Member States to tackle fraud quickly.

6.7. Obstacles to the efficient use of the existing legal bases.

There is consensus among Member States that Regulation (EEC) No 218/92 is not a
suitable instrument either to deal with specific fraud cases which are known to exist, or to
exchange information to detect fraud, since the information covered by the Regulation is
not available early enough and cannot be exchanged as quickly as needed. In addition, its
scope does not cover all transactions that could be affected by fraud. The Regulation only
relates to intra-community supplies and acquisitions, and not, for instance, to domestic
supplies or to supplies of services. Since most VAT-fraud mechanisms combine intra-
Community with domestic transactions, tax-administrations are obliged to exploit other
legal instruments.

For these reasons, Member States mainly use Directive 77/799/EEC as a legal basis for
co-operation in fraud matters. However, as Directive 77/799/EEC was originally designed
for the exchange of information in relation to direct taxation, it has not been adapted for
coping with the specific need for strengthened co-operation between national
tax
administrations for the control of VAT after the introduction of the transitional VAT
arrangements from 1.1.1993.

6.7.1. One single legal framework in VAT matters

Since administrative co-operation in the Community is based on these two legal
instruments, the use of the instrument will depend either on the transactions covered or on
the nature of the information requested. Therefore some Member States claim that these
thus providing clear and
instruments should be merged for VAT control purposes,
efficient rules for mutual assistance for all VAT transactions. The Commission welcomes
this idea and is, in the light of the experience under the current legal framework, in favour
of amending Regulation No 218/92, which is specific to VAT transactions, and
reinforcing its functioning. The aim is to create a suitable unique legal framework to deal
with the need for strengthened co-operation to tackle VAT fraud and evasion in the Single
Market.

6.7.2. Obstacles to spontaneous exchange of information

An effective fight against fraud requires a very significant increase in the spontaneous
exchange of relevant and targeted information in order to facilitate the prevention,
detection, investigation and punishment of fraud and tax evasion. Fraudsters move easily
between Member States, and ruthlessly exploit the weaknesses in controls and systems. If
one Member State tightens its grip on fraud, experience has shown that the fraudsters
simply move their operations to other Member States. This means that if the exchange of
information is to be effective in combating fraud it is not enough simply to exchange
information between Member States that are known to be directly affected by a specific
fraud. Other Member States need to be alerted to the danger so that preventative
measures can be taken or investigations begun. Such exchanges will allow trends to be
discerned. However, a few Member States claim that the current legal instruments do not
provide a legal base for exchanging information with Member States not directly affected

26

by the fraud, since it is stated that the information shall be made available only to the
persons directly involved in the assessment or the control.

The Commission sees no legal evidence for such a restrictive interpretation of the possible
use of mutual assistance tools. On the contrary, article 4 of the Directive shows firstly that
in certain cases, broadly when fraud or tax evasion is suspected, Member states have to
communicate all relevant information (paragraph 1), and secondly, in other occurrence, it
is clear that Member state may give information to any Member State if such may enable
the competent authority to effect a correct assessment (see Article 4 (3)) according to the
objective of Article 1 of the Directive. Nevertheless, the Commission takes the view that
Regulation No 218/92 may profitably be amended.

6.7.3. Obstacles hampering co-ordination and technical assistance from the

Commission services

VAT fraud is indeed a problem at Community level. Co-ordination and technical
assistance from the Commission services could reinforce the effectiveness of the fight
against international fraud. It is impossible for individual Member States to see the whole
picture of fraud in the Community. The Commission, if it received relevant information
from the Member States, could provide an overview and could, depending on the
resources available, eventually identify fraud trends and threats in association with the
Member States’ own intelligence activities. To achieve this requires case-related and other
fraud information to be made available to the Commission by the Member States. The
Commission would also circulate information and help to co-ordinate subsequent action in
appropriate circumstances. Since the current legal framework has not been conceived to
take account of anti-fraud developments that have been included in other more recent
legislation, the Regulation No 218/92 should be amended to put beyond doubt
that
information can be received and disseminated by the Commission to other CLOs of
Member States.

6.7.4.

Bilateral arrangements providing for automatic or
spontaneous exchange of information

intensified

the idea that

Most Member States support
in order to increase the possibilities of
detecting and preventing fraud in intra-Community trade, Member States should also
exchange at a Community level other information than the VIES data. Since the
Regulation does not provide a suitable legal base, a few Member States make use of the
possibilities offered by Directive 77/799/EEC. Under Directive 77/799/EEC, Member
States can make bilateral arrangements in order to exchange information automatically or
to intensify the spontaneous exchange of information. Although Directive 77/799/EEC
does not provide a clear definition, these types of exchange can be described as follows.
Firstly, spontaneous exchange is the non-systematic transmission of information by a
Member State that it supposes to be of interest to another Member State. The information
will be only exchanged if and when it becomes available. Secondly, automatic exchange is
the systematic transmission of information to another Member State. It is characterised by
regularity and does not require an individual evaluation of the interest of that information
for the other Member State. The exchange does not demand a case-related decision of the
transmitting Member State.

Recently a few Member States, under Directive 77/799/EEC, concluded bilateral
arrangements to exchange information automatically or to intensify the spontaneous

27

exchange of information. The categories of information which are covered by these
arrangements can be summarised as follows:

a) cases where taxation is deemed to take place in the Member State of destination and
where any efficient control-system has to rely on the information provided by the Member
State of origin;

b) specific cases were there is suspicion of fraud in the other Member State;

c) categories of information relating to operations which generally represent a higher risk
for fraud or avoidance in the other Member State.

The Commission became aware that, although most Member States support the idea of an
intensified exchange of relevant information, this information is still rarely exchanged.
Even for those Member States having bilateral arrangements, the Commission is only
aware of one Member State having implemented administrative instructions to ensure that
in practice spontaneous exchanges take place.

In order to increase the possibilities of detecting and preventing fraud in intra-Community
trade, Member States should agree to start exchanging at least the above-mentioned
information at a Community level. But much more could be exchanged. The Commission
takes the view that all relevant information available within the administration could be
exchanged automatically or spontaneously. In addition, relevant information that is only
available from the taxable person should be exchanged if and when it becomes available.
Bilateral arrangements are only partial solutions and are not the most effective way of
ensuring that all relevant information is available to those who need it. It is a waste of
resources for each Member State to make bilateral arrangements with each of the other
there will be differences between the
Member States, and it
arrangements, which add to the administrative burden. Indeed, most Member States
indicate that they would prefer to see better legislative solutions at Community level. The
Commission agrees that such solutions would be beneficial and that Regulation No 218/92
should be amended in order to provide for suitable legal obligations ensuring that all
relevant information is exchanged at a Community level.

is more likely that

6.7.5.

Level of possibilities for direct contact between anti-fraud units and
between controllers

In principle, all exchange of information should go through the competent authority in the
sense of Article 2 of Regulation (EEC) No 218/92 or Article 1 of Directive 77/799/EEC.
If this procedure is not respected the information exchanged will not be considered as
valid, and can not be used against the fraudster.

On the other hand, Member States may, pursuant to Article 12(1) of the Regulation and to
Article 9(2) of the Directive, authorise competent authorities of the Member States to
permit, by mutual agreement, the authorities designated by them to communicate directly
with each other in specific or in certain categories of cases.

Some Member States have, already within the existing legal framework, established some
direct contact. These initiatives can be summarised as follows:

28

a) Some Member States have made their anti-fraud unit a competent authority.
Others have situated their anti-fraud unit in their internal organisation directly beside
the CLO (under the same Directorate and in the same location).

b) Some Member States have fiscal representatives in their embassies in other
Member States also being a competent authority. The fiscal representative operates
as a local interface in the requesting Member State.

c) For multilateral controls some Member States have appointed controllers to
exchange information directly, based on the general concept of (unilateral) delegation
of powers of the competent authority to individual officials.

to authorities
d) Most Member States have by mutual agreement permitted,
designated by them, direct communication with each other. This may cover several
categories of cases such as: direct communication of basic data requested in cases of
suspicion of fraud, direct communication between border areas as well as direct
investigations in the context of bilateral or multilateral
communication in joint
control. However, several of these agreements are of an informal nature. Only a few
Member States have formal arrangements providing for clear procedures to respect
in cases of direct exchange of information.

The Commission takes the view that
there are advantages arising from direct
communication between controllers or between antifraud units: quicker exchange of
information, better mutual understanding of the request for information, better motivation
of the controllers involved and prioritisation of the action requested, no waste of scarce
resources due to useless requests, etc. However, although the existing legal framework
provides for the possibility to establish direct contact between controllers, Member States
have made poor use of this, and the initiatives in this area are often of a very disparate
nature creating different and vague procedures to be followed. Again, an amended
Regulation should create a clear legal framework for direct communication, hereby
simultaneously ensuring that the CLOs are made aware of all direct contacts between
operational officials so that the role of the central office is not undermined.

6.7.6. Obstacles to the presence of officials of the tax administration of the

other Member States.

In practice, the vast majority of Member States only permit the presence of foreign
officials during controls with the permission of the taxable person. However, it is obvious
that granting of such permission by the taxable person is unlikely where the purpose of the
control is to investigate suspected fraud. On the other hand a few Member States do not
allow an official of another Member State to be present at an investigation on the territory
of the other State and claim legal problems. In an internal market eliminating all frontiers
for fraudsters, the question arises whether and to which extent these frontiers still should
be kept for controllers.

Although FISCALIS-programme20 provides for Community funding for Multilateral
controls, Regulation (EEC) No 218/92 does not provide for a legal base for the presence

20 Decision No 888/98/EC of the European Parliament and of the Council of 30 March 1998
taxation systems of

establishing a programme of Community action to ameliorate the indirect
the internal market (Fiscalis programme) OJ L 126, 28.4.1998 p. 1-5.

29

of officials of the tax administration of the other Member States. Again Member States
have to exploit the possibilities offered by Article 6 of Directive 77/799/EEC. Pursuant to
this article, Member States may, under the consultation procedure laid down in Article 9,
authorise the presence of officials of the tax administration of the other Member State.
However,
this possibility has not been implemented in national legislation by most
Member States. Only a few Member States have made bilateral arrangements, in order to
cover the possibility for an official of another Member State to be present at an
investigation on the territory of the other State. These arrangements create a legal base
making the tax administration no longer dependant on the agreement of the taxable
person. At the same time they create a legal structure specifying the rights and obligations
and the procedures to follow for each of the parties concerned.

6.7.7. Obstacles hampering exchange of personal data

Most Member States have difficulties in exchanging personal data because of the
restrictions contained in their national law. They claim that the rules on data protection
seriously restrict the information which can be exchanged and with whom it can be
exchanged. In particular, they claim that the implementation of Directive 95/46/EC on the
protection of individuals with regard to the processing of personal data and on the free
movement of such data21 hampers the exchange of personal data even in cases where
fraud is known to exist, and even more so in respect of information revealing a high risk
that fraud is being committed. In fact, the data protection rules have the effect of
protecting fraudsters and thus damaging the financial and other interests of the Member
States and the Community. In relation to data protection, Member States should make use
of Article 13 of the Directive, which provides exemptions from the normal rules in order
to safeguard the financial interest of a Member State, (including taxation matters). In
addition, there needs to be a clear legal provision that relevant information will be made
available to ensure an effective fight against fraud.

6.7.8. Notification to the taxable person of the exchange of information

The national legislation in force in some Member State provides for notification of the
person concerned of the exchange of information. It is clear that in cases of fraud such
notification hampers control efficiency. The fact that some Member States systematically
notify any request for information to the taxable person, brings about that other Member
States are reluctant to make use of the mutual assistance arrangements in cases of
suspicion of fraud.

The Commission takes the view that since the exchange of information between national
tax-authorities does not give rise to a notification to the taxable person, this should also
not be the case in exchange of information between competent authorities. Article 8 of the
Regulation states that such notification may continue to apply except where their
application would prejudice the investigation of tax evasion in another Member State.
However, for the reasons set out above, Member States mainly use Directive 77/799/EEC
as a legal basis in cases of fraud. Since the Directive does not have the same provision, in
practice some Member States will systematically, even in cases of fraud which are known
to exist, notify the exchange of information to the taxable person.

21 OJ L 281, 23.11.1995 p. 31.

30

6.7.9.

Interference with criminal procedures

When the requested information relates to cases in which representatives of the Member
States' national administrations conduct enquiries with a mandate from, or under the
authority of, the legal authorities; the exchange of any information is often refused or
substantially delayed. As a consequence, the administrative authority in the applicant
Member State is often not capable of launching civil or criminal procedures in due time
against fraud taking place on its territory.

6.7.10. Lack of legal base to exchange of information with or from third

countries.

The current legal framework does not provide a legal base for exchanging information
with third countries. When VAT-fraud is linked to import/export
the
customs cooperation instruments can be used. However there are several loopholes, for
instance for fraud relating to services or for fraud committed in the Community but where
the evidence is located in third countries.

transactions,

7. CONCLUSIONS AND RECOMMENDATIONS

7.1. Conclusions

(1)

(2)

(3)

The Commission should ensure that Member States can properly control intra-
Community trade thanks to a performing and adequate system of exchanges of
information. Incomplete control can only lead to an increase in fraud, a drop in
revenue receipts and distortions of competition in the single market. Currently,
there are no specific exchanges of information taking place regarding distance
sales. Because the special scheme for distance sales is clearly not being controlled
as it should be,
to modify these
the Commission may make a proposal
arrangements.

The Commission is still not convinced that, despite certain improvements, national
administrations have done all they could to improve the efficiency with which
CLOs deal with requests received from other Member States. The role of the CLO
should be further reinforced, and Member States should consider associating the
work of the CLOs and that of specialised anti-fraud units more closely. While it is
clear that at the time of the adoption of the transitional VAT arrangements, the
creation of the CLOs was essential, the Commission considers that the time has
now come to review their effectiveness, and to see whether or not the exchange of
certain information could be made more efficient by creating or supporting other
structures.

The Commission is concerned about the high levels of VAT fraud evidenced by
the work of the Anti-Fraud Sub-Committee (SCAF) of the Standing Committee on
Administrative Cooperation in the field of Indirect Taxation (SCAC), and is not
convinced that Member States are taking all steps necessary to combat this fraud.
Intelligence and investigation units, and also specialised anti-fraud units, have
significantly contributed to the fight against fraud. However, their role in the
control system is not clearly defined nor are their links with the objectives of the
control. At a Community level, the apparent reluctance of Member States to
contribute actively to the work of the SCAF, being either directly as a result of the

31

tacit acceptance of the black economy, or by not ensuring that delegates to the
Committee are given sufficient power to commit national administrations to
courses of action leaves the Commission sceptical regarding their commitment to
fight VAT fraud. The low use of the Fiscal SCENT also leads the Commission to
wonder whether Member States are only paying lip service to the principle of the
exchange of information to help detect fraud.

(4) With the exception of the interest shown by the Court of Auditors, the apparent
reluctance of the other Community institutions to discuss the matters raised in the
Second Article 14 and Third Article 12 reports, and the apparent indifference of
the Member States towards the recommendations contained in these reports
causes the Commission concern.

(5)

The different level of integration between fiscal administrations plays an important
role in the efficiency of tax control and thus in the ability to fulfil community
requirements concerning administrative cooperation. Where internal barriers exist,
and it is mainly in poorly-integrated Member States, they hamper the proper
control of the VAT system of which administrative cooperation between Member
States is an essential part. As there is a strong correlation between control and
administrative cooperation the community control system has less possibilities to
work well in those Member States where such barriers still exist.

(6) While Member States have, generally speaking, very strong control powers, the
overall objective on how to use this control power is absent and no real control
plans with clear strategies are apparent. It is unclear what actually drives tax
control and especially VAT control. Member States do not seem to have
considered the scale of resources they need to control the VAT system properly.
Member States have allocated their control to the resources available instead of
having it based on the real need. Controls are mainly based on traditional control
work and selection by using risk criteria is rare. The VAT declaration plays a
negligible role in control work, even though it consumes substantial administrative
resources, both for administrations and traders. Use of modern technology such as
computer auditing was at a very low level and Member States will have great
problems to meet new challenges, particularly because of the absence of the
infrastructure. Member States still depend on
necessary legal and technical
traditional control means and, due to significant understaffing, controls serving
administrative cooperation will not achieve sufficient levels if there is not a radical
change in control policy.

(7)

(8)

Member States’ use of the possibilities provided for by administrative cooperation
and mutual assistance falls far short of optimal. However, this appears to be due
principally to the low level of VAT control generally. There is a direct relationship
between VAT control and the need to use the administrative cooperation and
mutual assistance arrangements.

The structures which have been set up to deal with administrative cooperation and
mutual assistance deal reasonably well with normal VAT control, where records
are checked a posteriori, sometimes two or three years after the transactions have
taken place. In addition the fact that traders are aware that information about them
is exchanged between tax administrations has a dissuasive effect. However, the
procedures for administrative cooperation and mutual assistance are totally

32

(9)

inadequate when it comes to dealing with fraudsters – those people who
deliberately set out, whether on an organised basis or not, to make money from the
VAT system. For such people, the only hope that a tax administration has is rapid
and efficient action, based on intelligence and good risk analysis.

The current Community legislation on administrative co-operation and mutual
assistance in the field of VAT is found in two different legal instruments, unlike in
the Customs area, where such legislation is found in one single instrument –
Council Regulation (EC) No 515/97 of 13 March 1997 on mutual assistance
between the administrative authorities of the Member States and co-operation
between the latter and the Commission to ensure the correct application of the law
on customs and agricultural matters22. The view of the Commission is that, for
VAT purposes, the amendment of Regulation (EEC) No 218/92 is essential in
order to cope with the necessity for strengthened cooperation. In the light of the
experience gained, some supplementary rules should be laid down at Community
level with the aim of strengthening cooperation both among the administrative
the Member States and between those authorities and the
authorities of
Commission. Such Regulation should essentially:

• specify the different kinds of information which may be requested and clarify the

action which is needed to comply with the request for each category;

• ensure the availability on a central level within Member States and the quick

exchange of basic information;

• ensure a widespread spontaneous exchange of information to facilitate detection

and combating of fraud;

• create a clear legal base for co-ordination and technical assistance from the

Commission services as well as for cooperation with third countries.

• offer more possibilities for direct contacts between anti-fraud units and between
controllers in different Member States and for the presence of officials of the tax
administration of one Member State to participate in controls in the other Member
States.

(10) VAT control in the Community has not changed significantly despite the new
challenges created by the internal market. Member States operate traditional tax
control that has, generally speaking, not changed since the introduction of VAT.
There has been no overhaul of the VAT control system to find out the control
needs of the transitional system with its tax-exempted supplies and its special
schemes. When border controls were abolished 1993 and the control was moved
to the control of the accounting, no significant move of customs controllers to
VAT administrations took place. Member States therefore operate VAT control
with unchanged resources, in spite of the fact that the number of potential controls
has increased substantially.

(11) VAT administrations in the Community have to control in the order of 24 million

traders delivering 100 million VAT declarations annually.

22 OJ L 82, 22. 3. 1997, p. 1.

33

• Of these, approximately 3.000.000 are taxable persons making intra-Community

supplies and/or acquisitions.

• Exempt intra-community supplies amount to approximately

€

930,000,000,000,

the tax on which is put at risk.

• Approximately 1,000,000 or 4% of all traders pay 80% of the VAT collected by

Member States.

• About 15,000,000 taxable persons could be classified as small or medium sized

Enterprises.

• Member States, taken together, have about 30.000 VAT control officials (about
8% of their total staff compliment), who carry out around 600.000 on-the-spot
controls annually. This means that there is a theoretical likelihood of a taxable
person receiving an on-the-spot control once every 40 years.

(12) Control is mainly based on targets for revenue to be collected; the number of
controls to be carried out or the number of hours to be spent on control. These
targets are mainly based on plans emanating from the resources available, and
therefore are not based on a consideration of the real control need. Member States
use very traditional selection methods, and few Member States have established
real risk assessment systems for VAT control. Some Member States use some
hybrid methodology using certain risk parameters. Most Member States do not
have the possibility of changing over to a risk assessment system, as they do not
have the necessary infrastructure.

(13) Member States follow up of controls is insufficient and mainly concentrated on
figures. Real analysis of the reasons for irregularities and frauds has not been
undertaken. Member States will have to have better records from their audits and
cases and to store them in a way that makes it possible for the central part of the
administration to continuously evaluate the fraud situation. Many Member States
have bad internal communication systems to communicate information that
is
useful for other officials, for instance to be exchanged rapidly with other Member
States. Such systems could also be used for the dissemination of information to tax
officials on a daily basis.

(14) While penalty schemes are implemented in all Member states, there seems to be no
follow up or evaluation of them. Only a few Member States can give clear figures
of the result of their schemes. It appears that the main objectives of penalties is the
raising of additional revenue, rather than acting as an incentive for voluntary
compliance with their obligations by taxable persons.

(15) Despite administrative cooperation being a reality since 1993, and mutual
assistance being possible since 1979, co-ordination between national
tax
administrations is still in its infancy. The Fiscalis Decision23 provided Community
funding for Member States to engage in the multilateral control of traders, but this

23 Decision No 888/98/EC of the European parliament and of the Council of 30 March 1998
establishing a programme of Community action to ameliorate the indirect taxation systems of the
internal market (OJ L 126, 28. 4. 1998, p. 1.)

34

activity is still at an early state of development, this methodology having been
applied so far to less than 100 of the potential 3,000,000 traders in the Community
engaged in intra-Community trade. Accordingly, Member States still have quite a
long road to travel in this respect.

(16) As far as VAT is concerned, the single market does not exist in practice, as there
are still 15 separate tax areas where national administrations are responsible for the
control of traders to whom they have issued VAT identification numbers. So while
businesses look at the opportunities provided by the single market as a whole in
terms of free movement of goods, a single business trading in all Member States
has to deal with 15 different tax administrations and live with the differences of
interpretation of and application of the 6th VAT Directive. The Council has been
very reluctant to adopt any measures proposed by the Commission to modernise
and harmonise the current VAT arrangements, not wishing to cede any aspect of
fiscal sovereignty. The result is that businesses optimise the possibility for tax
planning available as a result.

(17) Member States are not in a position to meet the new technical development with
electronic invoicing, selfbilling and electronic commerce. Few auditors are
experienced, and Member States urgently have to change over to be able to meet
the challenges of new technology.

7.2. RECOMMENDATIONS

(1)

(2)

(3)

(4)

The Member States, together with the Commission, should urgently consider the
adoption of a common anti-fraud policy to combat the frauds in the current VAT
system, which puts the proper functioning of legitimate trade in the single market
at risk.

Member States should urgently consider a total reappraisal of their VAT
control policy. Such a reappraisal should include an examination of overall control
policy; the developing and implementing of a control strategy with clear control
objectives and an appropriate organisational structure without any internal
barriers. Member States should also develop a control methodology based on risk
assessment and pave the way for such selection methodology. The Commission
and the Member States together will have to consider whether a total overhaul of
the declaration and payment system will be necessary in order to make it possible
for Member States to release resources for the most urgent on the spot controls.
Member States should review the effectiveness of their VAT control effort to
ensure that the lack of control does not create distortions of competition between
traders who comply voluntarily with their obligations and non-compliant traders.

The Commission, together with the Member States, should inter alia consider
community criteria for risk assessment systems.

Member States must reflect on more efficient follow-up and analysis of the
frauds they detect. For its part, the Commission will have to consider how best
use could be made of such information at community level. Member States must
consider how such information could be collected rapidly and how it should be
distributed internally. The Commission will have to consider if this distribution of
information should be extended to intra-Community level.

35

(5)

(6)

(7)

Member States are urged to consider a comprehensive overhaul of their systems
and procedures for administrative cooperation and mutual assistance in the
field of VAT in the light of its current shortcomings and to consider how to
achieve its optional functioning, including the organisation of their CLOs; the
allocation of resources and the removal of all internal barriers, legal as well as
administrative which have any impact on a proper functioning of exchange of
information. The Member States must make better and more intensive use of these
instruments in order to have the same level of cooperation with other Member
States as between two different local departments in their own country. The
Commission therefore recommends that each local office should have at least one
official whose priority work is the servicing of requests received from other
Member States. This official should not have the normal
target criteria of
additional tax discovered applied to him, but should rather be evaluated on the
basis of the proportion of requests he has serviced within the shortest possible
time.

The Commission will soon make a proposal to amend the current Regulation in
order
to improve the operation of administrative co-operation and mutual
assistance in the VAT field and to tackle other barriers to the exchange of
information.

Member States should recognise the challenge of new technology and devote
resources for this purpose,
the
allocation of the necessary technical and legal infrastructure, and training of
officials to raise the general awareness in this field. The Commission will have to
consider the legal framework in this area.

including the training of computer auditors;

36

8. ANNEX - GRAPHICS

Figure 1: Proportion of Tax officials engaged in on-the-spot VAT control per
Member State

25%

20%

15%

10%

5%

0%

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

Figure 2: Number of taxable persons per VAT control official

9000

8000

7000

6000

5000

4000

3000

2000

1000

0

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

37

Figure 3: Proportion of taxable persons making intra-Community acquisitions per
Member State

60%

50%

40%

30%

20%

10%

0%

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

Note: Spain, France or the Netherlands has provided No figures for the number of
taxable persons making intra-Community acquisitions

Figure 4: Overall growth between 1996 and 1998 in the number of enquiries made
under Articles 4(2) and 4(3) of Regulation (EEC) No 218/92

4000000

3500000

3000000

2500000

2000000

1500000

1000000

500000

0

1q96

2q96

3q96

4q96

1q97

2q97

3q97

4q97

1q98

2q98

3q98

4q98

38

Figure 5: Number of requests made per quarter between 1996 and 1998 under
Article 5 of Regulation (EEC) No 218/92 and Article 2 of Directive 77/799/EEC

3500

3000

2500

2000

1500

1000

500

0

1q96

2q96

3q96

4q96

1q97

2q97

3q97

4q97

1q98

2q98

3q98

4q98

Figure 6: Number of requests per Member State made between 1996 and 1998
under Article
of
Directive77/799/EEC

of Regulation (EEC) No

and Article

218/92

5

2

7000

6000

5000

4000

3000

2000

1000

0

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

39

Figure 7: Number of requests made between 1996 and 1998 per Member State
under Article 5 of Regulation (EEC) No 218/92 and Article 2 of Directive
77/799/EEC per control official

9

8

7

6

5

4

3

2

1

0

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

Figure 8: Number of requests made between 1996 and 1998 per Member State
under Article 5 of Regulation (EEC) No 218/92 and Article 2 of Directive
77/799/EEC per VAT control

0,45

0,4

0,35

0,3

0,25

0,2

0,15

0,1

0,05

0

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

Note: No figures for the number of VAT controls undertaken are available in respect of
Germany and Greece.

40

Figure 9: Number of taxable persons making intra-Community acquisitions per
requests made between 1996 and 1998 per Member State under Article 5 of
Regulation (EEC) No 218/92 and Article 2 of Directive 77/799/EEC

800

700

600

500

400

300

200

100

0

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

Note: No figures for the number of
acquisitions available for Spain, France or the Netherlands

taxable persons making intra-Community

41

Figure 10: Trend in overdue replies to requests under Article 5 of Regulation (EEC)
No 218/92 and Article 2 of Directive 77/799/EEC outstanding as at
31 December 1998 per requested Member State

3000

2500

2000

1500

1000

500

0

1q96

2q96

3q96

4q96

1q97

2q97

3q97

4q97

1q98

2q98

3q98

4q98

Figure 11: Proportion of overdue replies to requests under Article 5 of Regulation
(EEC) No 218/92 and Article 2 of Directive 77/799/EEC outstanding as at
31 December 1998 per requested Member State

25,0

20,0

15,0

10,0

5,0

0,0

A

B

D

DK

EL

E

FIN

F

UK

IRL

I

L

NL

P

S

42