Report from the Commission to the Council and the European Parliament on the use of administrative cooperation arrangements in the fight against VAT fraud
Date: 2004-04-16
Institutions: European Commission
Subjects: VAT, administrative cooperation, fraud against the EU, tax harmonisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.4.2004 
COM(2004) 260 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on the use of administrative cooperation arrangements 
in the fight against VAT fraud 

EN 

   EN 

 
 
 
  
Table of Contents 

1. 

2. 

3. 

3.1. 

3.2. 

4. 

4.1. 

4.2. 

4.3. 

4.4. 

5. 

5.1. 

5.2. 

6. 

6.1. 

6.2. 

6.3. 

7. 

7.1. 

7.2. 

Summary ...................................................................................................................... 3 

Background .................................................................................................................. 4 

The challenge of fraud in the present system of VAT ................................................. 4 

The present system of VAT and its control implications............................................. 4 

The fraud situation ....................................................................................................... 5 

Community initiatives to tackle the problem of VAT fraud ........................................ 6 

A new legal framework on administrative cooperation ............................................... 7 

Fiscalis 2003-2007 programme.................................................................................... 8 

A future Community initiative: VIES II ...................................................................... 9 

A future Commission intitiative on mutual assistance in combating fraud ............... 10 

Changes at national level in response to the Council’s recommendations ................ 10 

Major progress has been made................................................................................... 11 

The need for further progress..................................................................................... 12 

Additional initiatives to be taken to meet the specific challenge of “missing trader” 
fraud ........................................................................................................................... 14 

Adapting the control system to “missing trader” fraud.............................................. 14 

Or adapting the VAT system itself ............................................................................ 15 

The Commission’s view............................................................................................. 17 

Conclusions and recommendations............................................................................ 18 

Conclusions ................................................................................................................ 18 

Recommendations ...................................................................................................... 19 

2 

 
 
  
 
1. 

SUMMARY 

The transitional VAT arrangements are designed so that intra-Community supplies of goods 
between  taxable  persons  are  exempt  in  the  goods’  Member  State  of  origin,  with  taxation 
taking  place  in  the  Member  State  of  destination.  These  “normal”  arrangements  have  been 
supplemented  by  many  special,  often  complex  arrangements  in  areas  in  which  the  Member 
States wanted to maintain more extensive control over taxation. 

This  exemption  mechanism  exposes  the  VAT  system  to  fraud,  and  in  particular 
intra-Community “carousel” fraud. Since goods can move without being taxed, it is important 
that  the  Community  administrative  cooperation  arrangements  be  used  as  effectively  as 
possible and that national control systems be adapted to these challenges. 

In its last report on administrative cooperation and VAT control procedures the Commission 
regretted  that  these  conditions  had  yet  to  be  fulfilled.1  Accordingly,  the  Council,  at  its 
ECOFIN meeting of 5 June 2000, called on the Commission and the Member States to launch 
a  series  of  measures  aimed  at  stepping  up  action  against  tax  fraud  under  the  current  VAT 
arrangements. 

Many  initiatives  have  been  taken  in  follow-up  to  these  recommendations  and  have  been 
coordinated by the Standing Committee on Administrative Cooperation (SCAC). 

At  Community  level,  the  Council  has  recently  adopted  Regulation  (EC)  No 1798/2003,2 
which considerably reinforces the legal framework for mutual assistance; it has also adopted a 
decision  on  the  Fiscalis  2003-2007  programme,3  which  provides  funding  for  greater 
day-to-day  cooperation.  The  Commission  has  also  announced  its  intention  to  overhaul  the 
VIES system in the medium term.4 

The Member States have, for their part, made appreciable progress towards more modern and 
effective  VAT  controls,  and  they  are  beginning  to  integrate  administrative  cooperation  into 
their day-to-day control practices. However, this is not enough; more is required, especially 
with  regard  to  providing  the  national  departments  responsible  for  mutual  assistance  with 
adequate staffing. 

There has recently been much discussion aimed at identifying what further measures could be 
taken to combat carousel fraud even more effectively. 

One solution is a radical reform of the way VAT control is organised. A list of good practices 
has been drawn up. The Member States which have gone down this road are already recording 
considerable successes. 

Some  national  authorities,  professionals  and  academics  have  proposed  another  solution, 
namely  to  reform the working of the VAT  system itself. Various  options exist, but all have 
disadvantages which far outweigh the potential benefits. 

1 
2 
3 

4 

COM(2000) 28 final of 28.1.2000. 
OJ L 264, 15.10.2003, p. 1. 
Decision 2235/2002/EC of the European Parliament and of the Council of 3 December 2002 (OJ L 341, 
17.12.2002). 
VAT Information Exchange System. 

3 

 
 
  
 
                                                 
The  report  therefore  concludes  that  fraud  can  be  fought  effectively  within  the  current  VAT 
system, provided efforts continue to strengthen administrative cooperation and make national 
control  systems  more  effective.  The  early  successes  recorded  by  some  Member  States  bear 
this out. 

2. 

BACKGROUND 

The  Commission  is  required  to  draw  up  regular  reports  on  the  working  of  administrative 
cooperation in the field of VAT. 

Three  reports  were  submitted  under  Article  14  of  the  previous  administrative  cooperation 
regulation,  Regulation  (EEC)  No  218/92.5  The  first  report  dealt  with  the  VAT  Information 
Exchange  System  (VIES).6  The  second7  examined  the  exchange  of  information  under  the 
Regulation.  The  third  report  covered  both  administrative  cooperation  and  controls;  it  was 
submitted  under  both  Article  14  of  Regulation  (EEC)  No 218/928  and  Article 12(3)  of 
Regulation (EC) No 1553/89.9 

The  recommendations  in  the  third  report  provided  a  basis  for  discussions  in  the  Council 
working group on tax fraud. On the basis of the working group’s discussions, the Council, on 
5 June 2000, adopted a series of recommendations to the Commission and the Member States 
(see  Annex 1).  The  Standing  Committee  on  Administrative  Cooperation  (SCAC)  was 
instructed to follow up the recommendations concerning VAT. 

This report summarises the action taken in follow-up to the Council’s recommendations and 
seeks to examine whether this action was sufficient to cope with the challenge of VAT fraud. 
It also examines what additional action should be taken in the future. 

This  report  is  part  of  the  work  programme  announced  by  the  Commission  in  its  recent 
communication on VAT strategy.10 

3. 

THE CHALLENGE OF FRAUD IN THE PRESENT SYSTEM OF VAT 

3.1. 

The present system of VAT and its control implications 

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 arrangements.11 
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.  The  yearly  value  of  those  goods 
circulating  within  the  Community  without  VAT  is  now  more  than  1  500  billions  of  euros 
(which represents 150 to 200 billions of euros of VAT receipts). 

5 
6 
7 
8 
9 
10 
11 

OJ L 24, 01.02.1992, p. 1. 
COM(94) 262 final of 23.06.1994. 
COM(96) 681 final of 8.1.1997. 
OJ L 24, 01.02.1992, p. 1. 
OJ L 155, 7.6.1989, p.9. 
COM(2003) 614 final of 20.10.2003. 
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). 

4 

 
 
  
 
                                                 
Abolishing border controls resulted in the control of taxation of intra-Community trade being 
integrated into domestic VAT control, which 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 since they were no longer able to obtain information about 
the  flow  of  goods  into  their  territory  by  the  use  of  traditional  customs  controls  at  their 
frontiers. 

This information, which form an input into Member States’ methodology to control VAT on 
intra-Community transactions, is provided by the VIES which is a common computer network 
giving detailed control information about all exempt intra-community transactions. 

In addition 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 by taxing at destination specific supplies of goods 
other than supplies between taxable persons. These special schemes, which are not dealt with 
by  the  VIES,  also  need  special  control.  Generally  speaking,  to  ensure  correct  taxation,  it  is 
necessary  for  there  also  to  be  a  flow  of  information  between  Member  States  in  respect  of 
transactions under these schemes. 

Special  arrangements  also  exist  in  relation  to  certain  intra-community  services,  particularly 
those  services  covered  by  Article  9(2)(e)  of  the  6th  VAT  Directive,12  which  are  taxed  at 
destination and subject to a “reverse charge” mechanism.13 Again, in order to make absolutely 
sure that the correct amount of tax is declared by the client in the country of destination, it is 
necessary for there to be a flow of information between Member States. However, the VIES 
data  only  relate  to  intra-Community  supplies  of  goods,  and  therefore  do  not  cover  these 
supplies of services. 

3.2. 

The fraud situation 

3.2.1.  VAT fraud has become a real worry in many Member States 

Against this background, it has become clear to the Commission and to Member States that 
administrative cooperation as well as national control systems were still not fully adapted to 
this new situation created in 1993. 

Though  the  detection  rate  of  fraud  is  uncertain  and  the  exact  amount  of  money  involved 
difficult  to  quantify,  the  amounts  are  undoubtedly  considerable.  Some  Member  States  have 
estimated such losses as up to 10 % of net VAT receipts. VAT fraud has therefore become a 
real  worry  in  many  Member  States.  In  addition  to  the  loss  of  national  revenue,  this  fraud 
jeopardises legitimate trade in certain economic sectors and distorts competition to the benefit 
of dishonest traders. 

3.2.2.  “Missing trader fraud” is a particular threat to the VAT system 

One  fraud  pattern  which  seems  to  have  grown  over  the  past  few  years  and  which  now 
represents  a  major  concern  for  Member  States  is  missing  trader  fraud  in  intra-community 

12 

13 

OJ L 145, 13.6.1977, p. 1. Directive as last amended by Directive 2003/92/EC (OJ L 260, 11.10.2003, 
p. 8). 
This  means  that  the  service  is  invoiced  without  VAT  and  that  the  tax  is  declared  by  the  client,  in  a 
similar way to intra-community supplies and acquisitions of goods. 

5 

 
 
  
 
                                                 
trade  (the  so-called  “carousel  fraud”).  This  fraud  pattern  might  very  well  take  advantage  of 
the forthcoming enlargement to spread to the new Member States. 

It works as follows. A so-called “conduit company” (A), makes an exempt intra-community 
supply  of  goods  to  a  “missing  trader”  (B)  in  another  Member  State.  This  company  (B) 
acquires  goods  without  paying  VAT  and  subsequently  makes  a  domestic  supply  to  a  third 
company  (C),  called  the  “broker”.  The  “missing  trader”  collects  VAT  on  its  sales  to  the 
“broker”, but does not pay the VAT to the Treasury and disappears. The “broker” (C) claims a 
refund of the VAT on its purchases from B. Consequently, the financial loss to the Treasury 
equals  the  VAT  paid  by  C  to  B.  Subsequently,  Company  C  may  declare  an  exempt  intra-
community  supply  to  Company  (A)  and,  in  its  turn,  (A)  may  make  an  exempt  intra-
community supply to (B) and the fraud pattern resumes, thus explaining the term “Carousel 
fraud”. 

In order to distort VAT investigations, the goods will often be supplied from (B) to (C) via 
intermediary  companies,  called  “buffers”.  It  may  happen  that  the  buffer  is  unaware  of  the 
fraud but in most cases he is conscious that he is involved in an irregular type of transaction 
(because of the unusual nature of the commercial transaction). 

In practice, these kinds of fraud are constructed in a complex manner involving transactions 
between several Member States and several companies in each Member State. The underlying 
mechanism  of  missing  trader  fraud  in  intra-community  trade  can  however  be  illustrated  as 
follows: 

Company D 
“Buffer” 

Member State 1 

Company B 
“Missing trader” 
Receives VAT from 
Company D but does 
not pay it to the 
Treasury 

Company C 
“Broker” 
Deducts VAT or claims 
a refund for VAT not 
paid by B 

Company A 
“Conduit company” 
(sells goods without 
charging VAT) 

Member State 2 

4. 

COMMUNITY INITIATIVES TO TACKLE THE PROBLEM OF VAT FRAUD 

The  fraud  situation  was  already  described  as  particularly  worrying  by  the  Commission  in 
January 2000 in its third “article 14” report and by the Council in June 2000. 

The necessity to take certain urgent actions at Community level to tackle this fraud situation 
was stressed both in this Commission report and in the Council’s recommendations of June 
2000. Most of these recommendations have led to concrete actions. 

6 

 
 
  
 
 
4.1. 

A new legal framework on administrative cooperation 

In  June  2001,  the  Commission  made  a  proposal14  for  a  new  regulation  to  strengthen 
cooperation  between  Member  State  tax  authorities  to  combat  VAT  fraud.  The  Council 
adopted  this  proposal  on  8  October  2003,  and  a  new  Regulation  (No  1798/2003)  on 
administrative cooperation in the field of VAT entered into force on 1 January 2004. 

This Regulation sets up a single legal framework merging the legal apparatus of Regulation 
(EEC) No 218/92 and the provisions of Directive 77/799/EEC15 on VAT. This regulation has 
considerably improved the legal framework for administrative cooperation and is therefore to 
be considered as a major tool in the fight against VAT fraud. 

4.1.1.  More efficient rules 

The  new  Regulation  lays  down  clear  and  binding  rules  which  will  facilitate  information 
exchanges. For example, clear and binding rules exist now on how a request for information 
shall  be  made,  on  how  and  when  a  reply  shall  be  provided  as  well  as  on  how  to  handle 
information exchanges with third countries. 

It  also  lays  down  new  rules  enabling  Member  States  to  go  further  than  a  mere  information 
exchange.  For  example,  it  is  now  possible  for  a  tax  administration  to  ask  another  tax 
administration to notify on its behalf a decision to one of its taxable persons established on the 
territory of this other Member State. It is also possible to make a specific request for an audit 
or  even  to  ask  for  the  possibility  to  send  one  its  tax  auditors  to  the  other  Member  State  in 
order to participate to an audit. 

Those  new  tools  will  be  very  useful  in  situations  where  a  taxable  person  is  not  established 
within the territory of the country and does not have any tax representative in this country or 
in  situations  where  a  company  has  all  its  accounting  documents  in  another  country  than  its 
own. 

The  possibility  to  ask  for  a  specific  administrative  enquiry  is  also  a  very  useful  tool  in 
tackling  “Carousel  fraud”.  It  will  enable  Member  States  to  request  other  Member  States  to 
check the authenticity of a taxable person (address, activity, assets, identity of directors…) or 
to collect more evidence concerning suspected irregular transactions. 

4.1.2.  More direct contacts 

The  new  Regulation  also  provides  for  direct  contacts  between  tax  inspectors  of  different 
Member  States  rather  than  always  having  to  pass  via  Central  Liaison  Offices  (CLOs).  This 
will  make  cooperation  faster  and  more  effective.  The  Commission  believes  that  direct 
communication between inspection staff or fraud units is the most effective way to speed up 
the exchange of information. 

CLOs will still have the responsibility for managing administrative cooperation. However, all 
tax administrations may now also designate other liaison departments and competent officials 
who  can  directly  exchange  information.  These  may  be  regional  services  or  specialised 
operational  services  (such  as  anti-fraud  units)  or  individual  tax  inspectors  participating  in 
multilateral controls. 

14 
15 

COM(2001) 294 final of 18.6.2001. 
OJ L 336, 27.12.1977, p. 15. 

7 

 
 
  
 
                                                 
It should be noted that direct exchanges have already been successfully operating in a limited 
framework, notably between local offices in border areas under bilateral arrangements. 

All Member States can now make full use of the possibilities offered by the new regulation in 
this field, in order to facilitate direct exchanges of information between local offices as well 
as  between  national  anti-fraud  offices  for  whom  rapid  access  to  information  coming  from 
other Member States is a precondition to effectively combating intra-community fraud. 

4.1.3.  More information exchanges 

Information exchange between Member  States has  been  until  now  insufficient  since outside 
the  framework  of  VIES,  there  was  little  other  spontaneous  or  automatic  exchange  of 
information.  The  main  reason  for  this  was  the  absence  of  any  decision-making  process  at 
Community level to agree on such data exchanges. Agreements had therefore to be done on a 
bilateral  basis.  This  was  however  not  very  effective  and  it  was  burdensome  for  tax 
administrations to manage different agreements, each one having its own rules. 

The  only  exception  was  the  multilateral  agreement  on  new  means  of  transport,  which  was 
signed  on  27  November  2002  by  14  Member  States.  The  agreement  was  negotiated  in  the 
framework of the SCAC but outside the formal comitology procedure. 

The  new  regulation  therefore  aims  at  intensifying  the  spontaneous  exchange  of  information 
between  administrations  in  order  to  combat  fraud  more  effectively.  The  new  provisions 
provide for an obligation for Member States to exchange information in all cases where this 
could  help  other  Member  States  in  detecting  and  combating  VAT  fraud.  The  precise 
categories  of  information  and  the  way  in  which  the  exchange  will  be  handled  by  each 
Member State will soon be decided in an implementing regulation. 

One  major  area  of  such  information  exchanges  will  be  in  respect  of  missing  trader  fraud, 
where the new regulation makes it compulsory to exchange certain information. This will help 
identify missing trader fraud and prevent registration of companies which are likely to engage 
in such fraudulent activities. 

4.2. 

Fiscalis 2003-2007 programme 

While  the  new  regulation  on  administrative  cooperation  was  a  prerequisite  in  order  to 
improve Member States’ cooperation in the fight against VAT fraud, it was also necessary to 
accompany this legislative initiative by concrete measures enhancing cooperation between tax 
administrations and officials. 

The Fiscalis 2003-2007 programme was therefore adopted by the Council and the European 
Parliament in order to enhance the day-to-day cooperation between officials. This programme 
provides funding for the organisation of seminars for tax officials, exchanges and study visits 
to  other  participating  countries,16  multilateral  controls17  as  well  as  project  groups  where 
officials  of  different  countries  can  work  together  in  specific  areas.  This  programme  is  also 
providing funding for the information technology systems in the area of taxation (mainly the 
VIES). 

16 
17 

Participating countries are Member States, Acceding Countries and Candidate Countries. 
A multilateral control is a simultaneous control, by two or more Member States, of the tax situation of 
one or more taxable persons who are of common or complementary interest. 

8 

 
 
  
 
                                                 
The Fiscalis programme, which is a continuation of a previous programme but with a strong 
focus on the preparation for the enlargement, has a budget of 44 millions of euros over five 
years  (subject  to  additional  funding  in  the  context  of  enlargement).  One  of  its  major 
objectives is to make it possible for the Acceding Countries to adopt as soon as possible the 
same  level  of  cooperation  and  to  reach  the  same  level  of  control  efficiency  as  the  current 
Member States. 

In order to meet this challenge, the Commission has already organised or planned under the 
Fiscalis  2003-2007  programme  a  number  of  specific  actions  for  these  countries.  Several 
intensive  training  seminars  have  been  organised  for  them  in  areas  such  as  risk  analysis, 
computer auditing and Carousel fraud. 

4.3. 

A future Community initiative: VIES II 

Other initiatives will be taken in the medium term to improve Member States cooperation in 
the fight against VAT fraud. In particular, the Commission is currently considering a revision 
of  the  VIES  and  its  possible  extension  to  services,  which  should  help  Member  States  to 
reinforce their controls. 

When VIES was set up in 1993, it was built to last four years, the time the transitional VAT 
arrangements  were  initially  expected  to  last.  However,  it  has  now  been  running  for  much 
longer. Though the system has been successful in providing control information on the bulk 
of intra-community trade, its shortcomings are more and more apparent. 

Since  1993  Member  States’  use  of  the  VIES  has  increased  significantly.  For  example, 
Member States now make around 15 million requests per year for specific information over 
the  VIES  and  the  validation  of  VAT  identification  numbers  over  the  internet  is  currently 
running at more than 3 million validations each month including VIES on the Web. 

However few major improvements of a technical or functional nature have been put in place 
since 1992. The exceptions are the introduction of an electronic exchange of forms between 
CLOs and the exchange of information concerning electronically supplied services by taxable 
persons  not  established  in  the  Community.  Some  efforts  have  also  been  made  in  order  to 
improve the direct access of Member States to each others databases, as well as to anticipate 
the transmission of data. The technology, which was cutting edge in 1992 has therefore now 
become outdated. 

In addition, the VIES has proved itself to be an inadequate tool in the fight against carousel 
fraud, not because of the slowness of the system itself, but because of the length of time that 
elapses  before  information  on  intra-Community  acquisitions  becomes  available  to  Member 
States. There is normally at least three months between the date of the transaction and the date 
of such data transmission, which is often more than what is needed for a “missing trader” to 
disappear. 

Another problem highlighted by Member States since 1993 is the incompleteness of the VIES 
data.  The  quality  of  the  data  sent  over  the  VIES  is  dependent  on  the  completeness  and 
correctness of declarations submitted by taxable persons and the effectiveness of the system 
of  sanctions  for  non-compliance  with  this  obligation  has  often  been  inadequate.  Given  that 
taxable  persons  now  have  the  right  to  submit  recapitulative  statements  electronically,18  it  is 

18 

See Article 22(6)(b) of the Sixth VAT Directive. 

9 

 
 
  
 
                                                 
expected  that  more  traders  will  opt  for  electronic  submission  of  these  statements,  thereby 
increasing the quality of the data exchanged. Nevertheless, more could be done to automate 
the  sending  of  data  from  taxable  persons’  records  which  would  have  the  dual  effect  of 
reducing the burden of obligations on the taxable person and at the same time increasing the 
quality of the data. 

For all of these reasons, the Commission has decided that the time has come to take a fresh 
look  at  the  VIES:  how  the  data  is  captured,  made  available  and  used.  Rather  than  simply 
extending it to cover services, as suggested by the Council ad hoc working party on tax fraud, 
the Commission believes it would be better to replace the existing VIES with a more modern, 
higher-powered and flexible system, able to produce quicker and more precise data. 

The  Commission  will  therefore  carry  out  this  year  a  feasibility  study  with  the  intention  of 
creating  a  new  VIES  within  the  lifetime  of  the  Fiscalis  programme  2003-2007.  This  new 
system should enable the exchange of information on intra-community trade to be carried out 
more rapidly and effectively and at less cost to taxable persons. 

4.4. 

A future Commission intitiative on mutual assistance in combating fraud 

Coordinated  mutual  administrative  assistance  and  the  exchange  of  information  (including 
between  Member  States  and  the  Commission)  are  important  elements  in  the  fight  against 
fraud. The Commission is therefore presently preparing a proposal for a Regulation on mutual 
administrative  assistance  for  the  protection  of  the  Community’s  financial  interests  against 
fraud and other illegal activities. This initiative is intended to cover the fields of VAT fraud, 
laundering of the proceeds from EC fraud, structural funds fraud and other areas of fraud that 
are not yet covered by secondary EC legislation.  

In  the  field  of  financial  crime,  the  initiative  aims  at  using  the  information  obtained  on  the 
basis  of  the  anti-money  laundering  tools  in  first  and  third  pillar  legal  instruments  for  the 
purpose  of  the  protection  of  the  Community’s  financial  interests.  This  means,  in  particular, 
tracing EC fraud through information on suspicious financial transactions. 

This  new  initiative  is  complementary  to  existing  legislation,  in  particular  Regulation  (EC) 
No 515/9719  providing  for  mutual  assistance  in  respect  of  customs  and  agricultural  matters, 
and also Regulation 1798/2003 on administrative cooperation in the field of value added tax. 

5. 

CHANGES  AT  NATIONAL  LEVEL 
RECOMMENDATIONS 

IN  RESPONSE  TO  THE  COUNCIL’S 

Besides  the  many  Community  initiatives,  the  Member  States  have  themselves  made 
appreciable  progress 
the 
recommendations made by the Council in June 2000. Most of these national measures have 
been coordinated at Community level in the SCAC framework.  

the  matter  of  VAT  control,  following  up  many  of 

in 

Some reforms or advances nevertheless remain necessary for optimal cooperation between the 
Member States in their joint effort to counter fraud. 

19 

OJ L 82, 22.3.1997, p.1.  

10 

 
 
  
 
                                                 
5.1.  Major progress has been made 

5.1.1.  Greater use of the administrative cooperation machinery 

The Member States are making ever greater use of the administrative cooperation machinery. 
Statistics  kept  by  SCAC  on  recourse  to  the  mutual  assistance  arrangements  (see  chart  in 
Annex 2)  show  an  appreciable  increase  in  exchanges  on  request,  be  it  under  Article 2  of 
Directive 77/799/EEC or Article 5 of Regulation (EEC) No 218/92. The year-on-year increase 
in the total number of requests was 18% in 2000 and 29% in 2001. These figures stabilised in 
2002. 

The growth is attributable to growing awareness among the Member States of the importance 
of mutual assistance in VAT control and to the growing need for mutual assistance to counter 
fraud with a European dimension. 

These efforts must be continued to make mutual assistance a routine instrument of tax control. 
This calls for a Community culture to be inculcated at every level of the tax administrations. 
Substantial efforts must therefore be made to bring home to auditors the importance of mutual 
assistance  in  VAT  control.  Considerable  efforts  are  also  needed  to  train  auditors  in 
Community  tax  law  and  other  Member  States’  rules  and  practices.  Ideally,  auditors  should 
have  a  good  knowledge  of  at  least  one  other  Community  language,  which  entails  both  a 
change in recruitment practices and increased training. Take-up of the support available under 
the new Fiscalis 2003-2007 programme must therefore be maximised. 

5.1.2.  More effective, more modern control 

The Member States have embarked on a major modernisation of their control methods. 

Two areas have received special attention: the setting-up of national risk-analysis systems and 
the development of computerised auditing. 

5.1.2.1.  Risk analysis 

Risk analysis is an approach aimed at selecting businesses and sectors for control on the basis 
of  the  potential  “risk”  they  represent.  Scarce  resources  make  such  a  system  crucial  to  more 
efficient control. For instance, this system enables judicious use to be made of the voluminous 
data received from VIES. 

All  Member  States  have  built  a  risk-analysis  system  into  the  organisation  of  their  VAT 
control.  Some  have  also  developed  dedicated  VAT  registration  or  refund  systems.  These 
systems serve to reduce to a minimum the time it takes most taxable persons to obtain a VAT 
identification number or refund. They also enable control to be focused on high-risk operators 
or sectors. 

The  Commission  has  consistently  supported  these  developments,  organising  a  number  of 
seminars  and  financing  many  exchanges  of  officials  via  the  Fiscalis  programme.  It  has  also 
worked  with  the  Member  States  to  identify  good  practice  and  developed  a  common 
methodology for identifying risk factors in order to help Member States construct their own 
systems. It will continue to support these efforts via a new risk-management project group. 

11 

 
 
  
 
5.1.2.2.  Computerised auditing 

Computerised  auditing  is  a  necessary  response  to  the  increasing  use  by  businesses  of 
electronic media for transmitting and storing accounting data (orders, delivery notes, invoices, 
accounts, etc.). 

This  modernisation  of  control  methods  entails  both  changes  to  the  law  to  permit  computer 
files to be used for control purposes (in those Member States where this is not yet the case) 
and  efforts  to  acquire  the  requisite  hardware  and  software  and  to  train  staff  in  the  new 
methods. 

In partnership with the Member States the Commission has drawn up recommendations aimed 
at modernising control methods in this way. Recent work in the SCAC has thus been aimed at 
helping the Member States move in this direction by providing them with guidelines. 

These  efforts  seem  to  bearing  fruit  in  so  far  as  most  Member  States  are  now  making  a 
particular effort to develop their computerised auditing capacities. Some Member States  are 
also developing particularly innovative dedicated search engines for auditing e-commerce.  

However,  some  Member  States  and  a  good  many  acceding  countries  still  have  no 
computerised auditing capacity. Community efforts in this area will therefore continue under 
the  Fiscalis  2003-2007  programme,  especially  since  the  growth  in  e-commerce  is  bound  to 
bring  a  commensurate  increase  in  the  use  of  computers  for  VAT  invoicing  and  accounting. 
The  adoption,  on  20 December 2001,  of  Directive  2001/115/EC20  to  permit  harmonised 
cross-border electronic invoicing has made this even more urgent. 

5.2. 

The need for further progress 

5.2.1. 

Still inadequate coordination of national control plans 

Though the Member States are apparently starting to make routine use of mutual assistance 
for control purposes, there is still no real coordination of their control policies. 

One of the key instruments of such coordination is the organisation of multilateral controls, 
i.e.  coordinated  controls  of  the  tax  situation  of  one  or  more  taxable  persons  of  common 
interest. 

The Commission cannot but be alarmed at the fall in the number of such controls, which was 
already low, despite their being financed by the budget of the Fiscalis programme. Only three 
controls were organised in the whole European Union in 2003, four in 2002 and eight in 2001 
(compared with 15 in 2000, a figure which was already low when set against the 1 500 000 
businesses engaged in intra-Community transactions). 

The clear downward trend is particularly worrying. It is no doubt connected with the practical 
difficulties  of  organising  such  controls.  The  adoption  of  the  new  Fiscalis  2003-2007 
programme  and  the  new  Regulation  on  administrative  cooperation  in  the  field  of  VAT  has, 
however,  reduced  these  difficulties  by  speeding  up  financing  and  making  the  organisational 
rules more flexible, so permitting more frequent use of such controls, for instance to counter 
carousel fraud. 

20 

OJ L 15, 17.1.2002, p.1. 

12 

 
 
  
 
                                                 
This low level of activity must also be due to the low priority given by tax administrations to 
such controls, which mobilise considerable resources and demand multilingual staff. 

It  is  also  the  result  of  the  failure  to  take  these  multilateral  controls  into  account  when 
designing national control plans. 

5.2.2.  Remaining legal barriers to efficient administrative cooperation 

Efficient use of mutual assistance in combating fraud also presupposes that this assistance is 
not  hampered  by  national  legislation  that  slows,  blocks  or  complicates  the  exchange  of 
information. This is why the Council identified certain specific obstacles and called for them 
to be removed. 

Many of these obstacles have now been removed by the adoption of the new Regulation on 
administrative cooperation in the VAT field. This Regulation no longer requires the taxable 
person to be notified before any exchange of information, a procedure felt to be particularly 
unhelpful in fraud cases. 

There remain, however, a number of obstacles, especially in the area of legislation on secrecy. 
Some  Member  States  are  denied  access  to  certain  information  on  legal  grounds.  They  are 
therefore unable to transmit such information to any other tax administrations that might need 
it.  This  remains  a  major  obstacle  to  effective  administrative  cooperation  against  fraud,  and 
one that the Member States concerned must remove. A further obstacle is the fact that in most 
cases,  a  given  Member  State  cannot  take  legal  action  against  a  debtor  whose  fraudulent 
activities only affect the tax receipts of another Member State. This is particularly deleterious 
in the effort to combat carrousel fraud. For this reason and to remedy the existing problem, 
the Commission is planning by early 2005 to propose a Framework Decision in the third pillar 
context for subsequent transposition into national law. 

5.2.3.  An increasingly worrying lack of resources to meet new challenges 

Lastly,  making  mutual  assistance  a  routine  instrument  of  tax  control  calls  for  sufficient 
resources to be allocated for handling the increasing number of requests for assistance. 

Though some Member States have striven to give CLOs more resources, SCAC’s statistics on 
exchanges  of  information  (see  table  in  Annex 3)  suggest  that  more  needs  to  be  done.  The 
number of late responses is still too high and is rising all the time. The year-on-year increase 
in  the  number  of  late  responses  was  27%  in  2000,  24%  in  2001  and  17%  in  2002.  If  these 
figures are compared with the number of assistance requests each year, it emerges that more 
than half of responses are late. 

So,  the  appreciable  increase  in  recent  years  in  the  number  of  mutual  assistance  requests  is 
threatening  to  overload  the  system  either  at  the  level  of  the  departments  responsible  for 
assistance (in particular the CLOs) or at that of the control departments working under them. 
The  next  few  years  are,  moreover,  likely  to  see  even  faster  growth  owing  to  the  entry  into 
force  of  the  new  administrative  cooperation  Regulation  and  the  EU’s  enlargement  to  25 
Member States in 2004.  

There  is  therefore  an  urgent  need  for  all  Member  States  to  address  this  trend  by  increasing 
staffing  for  mutual  assistance  (in  CLOs  and  the  new  decentralised  mutual  assistance 
departments and in the control departments working under them). 

13 

 
 
  
 
6. 

ADDITIONAL  INITIATIVES  TO  BE  TAKEN  TO  MEET  THE  SPECIFIC  CHALLENGE  OF 
“MISSING TRADER” FRAUD 

6.1. 

Adapting the control system to “missing trader” fraud 

In addition to what has already been achieved at Community and national level as a response 
to  the  Council’s  recommendations,  additional  initiatives  have  been  taken  in  order  to  find 
appropriate solutions to the specific problem of “missing trader” fraud. 

The Commission has, together with the Member States, carried out an in-depth examination 
of VAT fraud in intra-community trade and has identified the various measures that have been 
taken  at  national  level  and  which  have  given  the  best  results  in  the  fight  against  “missing 
trader  fraud”.  These  “best  practices”  are  based  on  an  enhanced  and  quicker  use  of  mutual 
assistance and on an adaptation of national control systems in order to disrupt “missing trader 
fraud”.  While  the  first  aspect  has  already  been  addressed  with  both  in  the  Council 
recommendations and in the new regulation on administrative cooperation, the second aspect 
requires  additional  efforts  from  individual  Member  States.  Examples  of  the  types  of  “best 
practices” which have been identified are set out below. 

6.1.1.  Measures to prevent “missing traders” from entering into the VAT system 

It is in the first instance important to do everything possible to prevent missing traders from 
entering  into  the  VAT  system.  In  order  to  do  so,  tax  administrations  should  identify  bogus 
companies  that  are  applying  for  VAT  registration  with  the  sole  objective  of  carrying  out 
fraudulent operations. To achieve this requires enhanced control at the time of registration of 
potentially  suspect  traders.  This  is  normally  accompanied  by  a  combination  of  measures 
allowing  the  tax  administration  to  impose  financial  guarantees,  monthly  VAT  returns  or 
special visiting programmes on suspect new traders. 

6.1.2.  Control techniques to detect “missing traders” 

Despite  these  preventive  measures,  suspect  traders  may  still  slip  through  control  at 
registration. It is therefore also necessary to set up specific intelligence and risk assessment 
systems  in  order  to  achieve  an  early  detection  of  potential  missing  traders.  Central  risk 
assessment, such as analysis of VAT returns and VIES mismatches, should be complemented 
by  operational  intelligence,  providing  ‘real-time’  information  derived  for  example  from 
administrative cooperation. 

6.1.3.  Measures to stop detected “missing trader” fraud 

Successful strategies to tackle “missing trader” fraud demand that early detection is combined 
with  withholding  of  VAT  refunds  to  the  purchaser,  awaiting  the  outcome  of  further 
legislation  and 
investigation.  Therefore,  some  Member  States  have  adapted 
administrative procedures relating to VAT refunds. 

their 

In  addition,  VAT  numbers  of  missing  traders  simulating  economic  activities  should  be 
cancelled  immediately  in  order  to  withdraw  the  possibility  to  continue  acquiring  goods 
without VAT payment and thereby stopping the fraud mechanism. 

6.1.4.  Recovery of VAT in cases of detected “missing trader” fraud 

Once the fraud mechanism has been stopped, efforts have to be made to recover the unpaid 
VAT.  Since  there  is  no  real  possibility  to  recover  the  VAT  from  the  missing  trader,  an 

14 

 
 
  
 
effective  approach  is  to  refuse  the  deduction  or  exemption  of  VAT  to  the  other  parties 
involved in the fraud. 

In order to ease the burden of proof in complex fraud mechanisms, some Member States have 
recently  enhanced  their  anti-fraud  legislation  by  introducing  a  fiscal  “joint  or  several 
liability”.  Introducing  such  a  liability  implies  that  if  a  taxable  person  knew  or  should  have 
known of the fraudulent activities of his co-contractor, he will be accountable for the payment 
of  the  VAT  due  by  his  co-contractor.  In  some  Member  States  the  introduction  of  joint  and 
several liability has had a clear deterrent effect and seems to be effective. This measure finds 
its  legal  base  in  Article  21  of  Directive  77/388/CEE,  on  condition  that  the  principle  of 
proportionality is respected. 

6.1.5. 

Setting-up anti-fraud units 

In  addition  to  these  measures,  it  is  also  necessary  to  adapt  the  organisation  of  the  tax 
administration  itself,  in  order  for  it  to  be  able  to  detect  and  combat  quickly  and  efficiently 
these types of international fraud. The specific and complex nature of “missing trader” fraud 
requires  the  existence  of  specialised  anti-fraud  and  intelligence  units  with  sufficient 
responsibility to ensure fast and effective action at all levels. These units should be given the 
necessary authority to exchange information quickly with their counterparts in other Member 
States. 

6.2. 

Or adapting the VAT system itself 

6.2.1.  The different suggestions 

National  authorities,  industry  representatives  and  academics  in  several  Member  States  have 
studied the possibilities of a substantial change in the way the VAT regime operates in order 
to tackle the problem of carousel fraud. Several of the suggestions concentrate on eliminating 
the combination of transactions on which VAT is paid and those on which it is not, and aim to 
ensure that transactions inside a Member State and intra-community transactions are accorded 
equal treatment throughout the EU. This can be obtained either by imposing actual payment 
of  VAT  on  intra-community  business-to-business  (B2B)  transactions  or  by  suspending  the 
payment of VAT on domestic B2B transactions. 

Other solutions focus on the fact that Carousel fraud is only possible because taxable persons 
are allowed to recover VAT with no condition tied to the remittance of the tax to the Treasury 
by the missing trader.  

6.2.1.1.  Suspension of payment of VAT on all domestic B2B transactions 

The financial losses caused by carousel fraud are due to non-payment by a missing trader of 
VAT  that  has  been  fully  deducted  by  or  reimbursed  to  another  trader.  Consequently 
suspension  of  payment  of  VAT  on  all  B2B  transactions  offers  certain  advantages  when  it 
comes  to  combating  carousel  fraud,  since  there  will  be  no  deduction  or  reimbursement  of 
VAT anymore. 

Suspension of VAT payment can be achieved either by exemption of B2B transactions, or by 
a reverse charge mechanism whereby the client accounts for and deducts simultaneously the 
tax on his inputs with offsetting of input tax. However all these suggestions have considerable 
drawbacks. 

15 

 
 
  
 
Firstly,  the  effectiveness  of  such  measure  within  the  anti-fraud  context  can  be  questioned. 
Suspension systems  undermine  one  of the basic  principles of VAT, namely the fractionated 
payment mechanism designed to ensure that the tax system is self-policing and clearly shares 
out responsibilities between the buyer and the seller. In a suspension system the entire burden 
of tax collection falls on the retailer. Consequently this generates new opportunities for fraud 
and non-payment risks. Traders can go missing following B2C transactions in the same way 
as  following  B2B  transactions,  supplies  to  final  consumers  can  be  fraudulently  declared  as 
B2B  transactions  and  the  overall  possibility  to  buy  at  net  prices  could  spread  further  the 
underground economy (where sales are simply suppressed). 

Secondly,  it  would  demand  from  tax  administrations  substantial  additional  resources  for 
personnel and technology. All B2B transactions would have to be reported and cross-checked. 
In  addition,  control  of  B2C  transactions  would  have  to  be  reinforced  because  the  entire 
burden of tax collection would fall on the retailer. 

Thirdly, it would entail a considerable extra administrative burden for traders. As under the 
current system for intra-community transactions, all domestic transactions would have to be 
declared to the authorities and traders would have to check their customer’s VAT status. 

6.2.1.2.  Suspension of payment of VAT on certain domestic B2B transactions 

Theoretically,  the  suspension  system  could  be  limited  to  certain  categories  of  traders  or 
supplies. Some tax administrations have suggested applying the reverse charge mechanism to 
certain  sectors  or  suggested  an  optional  suspension  system.  However,  in  addition  to  the 
above-mentioned drawbacks, this would lead to the coexistence of domestic B2B trade with 
and without payment of VAT. Consequently, it could create the potential for purely domestic 
Carousel fraud constructions by combining normal domestic transactions on which suppliers 
charge  VAT  to  their  customers  and  domestic  transactions  which  are  under  the  suspension 
system. 

6.2.1.3.  Actual payment of VAT on all intra-community transactions 

Another possibility would be to charge VAT on all intra-community transactions within the 
EU. This would reinstall the mechanism of fractionated payments, which ensures that the tax 
system  is  to  some  extent  self-policing.  If  VAT  were  paid  on  all  incoming  and  outgoing 
transactions, only the difference between input VAT and output VAT could be at stake and 
the financial risks of missing trader fraud would become much less. Consequently, this would 
eliminate the loopholes in the current system that cause missing trader frauds. It is exactly this 
type of system which the Commission has always envisaged as the ideal definitive system of 
VAT within the Internal Market (the so-called “origin system”). 

Imposing actual payment of VAT on all B2B intra-community transactions would ideally be 
at the rate applying in the Member State of origin. 

There  would  however  have  to  be  a  system  of  reallocation  of  revenue  from  the  country  of 
origin to the country of destination. Such a regime would also demand a far greater degree of 
harmonisation  than  currently  exists.  There  would  for  example  have  to  be  a  much  greater 
degree  of  approximation  of  rates.  In  the  short  run,  this  degree  of  harmonisation  cannot  be 
achieved because of differing domestic arrangements in the Member States and because of the 
importance which most, if not all Member States, attach to their fiscal sovereignty in respect 
of fixing the level of their tax rates. 

16 

 
 
  
 
Such a system could also operate by applying the rate of the Member State of destination but 
this would be burdensome for traders as the current exemption system would be replaced by 
the application of VAT at a rate which would differ for each purchaser. All intra-community 
traders would therefore need to know the rate applicable for their products or services in all 
Member States. 

6.2.1.4.  Actual payment of VAT on certain intra-community transactions 

Most  cases  of  carousel  fraud  involve  high  value  goods  which  are  easy  to  transport  such  as 
computer components and mobile phones.21 Theoretically, actual payment of VAT on intra-
community transactions could be restricted to those economic sectors. Charging VAT on the 
intra-community transactions would of course eliminate missing trader frauds using high risk 
goods. However, the same revenue allocation and tax harmonisation issues would arise as in a 
full  origin  system.  Moreover,  other  kinds  of  goods  could  be  used  such  as  cars,  textiles, 
telephone cards, food, soft drinks, metal products, alcohol, petrol, etc. Consequently although 
it  would  tackle  the  fraud  in  the  most  vulnerable  sectors,  the  fraud  could,  at  least  partly,  be 
moved to other sectors. 

6.2.1.5.  Tying VAT deduction to the payment of the tax or its remittance to the Treasury by 

the supplier 

Missing  trader  fraud  is  only  possible  since  taxable  persons  are  allowed  to  deduct  VAT 
independently  of  the  supplier’s  remittance  of  the  tax  to  the  Treasury.  Therefore  certain 
national authorities are studying the possibilities to amend the rules on deduction of VAT by 
linking them to some extent to the supplier’s remittance of the tax. It goes without saying that 
the right to deduct is a basic principle of VAT and all measures restricting this right should be 
strictly in line with the principle of proportionality. 

Another  suggestion  envisages  making  use  of  the  option  provided  by  Article  10.2  third 
paragraph  of  the  Sixth  VAT  Directive  to  enhance  the  rules  on  deduction  of  VAT.  Member 
States  may  for  certain  transactions  or  certain  categories  of  traders  provide  that  the  VAT 
becomes  due  (and  therefore  deductible)  only  at  the  moment  of  the  payment  of  the  price.  In 
order to be really efficient, such a system would be accompanied by a cross-checking system. 

Such a system would however place additional burdensome obligations on traders. 

6.3. 

The Commission’s view 

The Commission welcomes the fact that Member States are reflecting on introducing certain 
legislative measures (e.g. the reinforcement of the rules on VAT deduction) in order to protect 
the VAT system against serious abuses such as missing trader fraud. The Commission will, in 
close cooperation with the Member States continue to pool best practice in this field and in 
the  light  of  the  experience  gained  consider  whether  there  is  a  need  to  modify  Community 
legislation. 

The idea of going further and changing the VAT system itself to tackle VAT fraud may look 
attractive at first sight. However care must be taken not to create any new opportunity which 
may  turn  out  to  be  as  serious  as,  or  even  worse  than,  the  existing  fraud.  This  would 
particularly apply if exemptions were generalised. Furthermore any proposed change needs to 
be examined carefully from the perspective of the potential administrative burdens they might 

21 

However, around 40 different sectors have been identified so far. 

17 

 
 
  
 
                                                 
create for honest traders. Similarly, the demands on tax administrations in terms of additional 
resources for personnel and technology required to establish and maintain databanks, process 
data and perform the necessary controls need to be assessed. 

It should also be stressed that solutions exist to tackle this fraud within the existing system of 
VAT. The Commission indeed notes that those Member States (notably the Netherlands and 
the  United  Kingdom)  which  have  already  implemented  the  specific  detection  and  control 
measures referred to under paragraph 6.1 to tackle “carousel fraud” have been successful. 

All these measures, together with the other initiatives recently taken by Member States in the 
area  of  control  plus  the  legislative  initiatives  recently  taken  at  Community  level  (the  new 
regulation  on  administrative  cooperation,  Fiscalis  2003-2007  programme  and  VIES  II), 
should represent appropriate and sufficient measures to meet the specific challenge of missing 
trader fraud. 

In addition to what has recently been initiated in this field, there is also a need to explore the 
establishment  of  a  common  and  comprehensive  EC  concept  of  fiscal  fraud  and  the 
harmonisation of penal sanctions. 

Consequently  before  any  radical  change  is  made  to  the  VAT  system,  the  Commission 
considers  that  further  efforts  should  be  made  to  tackle  fraud  under  the  current  system  by 
continuing  to  work  for  the  improvement  of  administrative  cooperation  and  VAT  control 
systems in the Member States. 

7. 

CONCLUSIONS AND RECOMMENDATIONS 

7.1. 

Conclusions 

The Commission followed up the Council’s recommendations by proposing a stronger legal 
framework for administrative cooperation. This led to the adoption, on 7 October 2003, of a 
new Regulation on administrative cooperation in the VAT field and, on 3 December 2002, of 
the Decision on the  Fiscalis 2003-2007  programme.  In the medium term  the Commission is 
also planning to propose the modernisation of the VIES system. 

The  Member  States  have  also  made  significant  progress  towards  complying  with  the 
Council’s recommendations. 

They have been making much greater use of mutual assistance. The rising trend in the number 
of mutual assistance requests is set to continue, and even accelerate, owing to the enlargement 
of the EU and the adoption of the new Regulation on administrative cooperation in the VAT 
field. 

The Member States have made headway in rendering their control procedures more efficient 
and  modern,  notably  by  adopting  risk-analysis  systems  and  investing  in  computerised 
auditing. 

In addition to the body of measures taken to follow up the Council’s recommendations, there 
has  recently  been  much  discussion  aimed  at  finding  solutions  to  the  specific  problem  of 
intra-Community fraud (and in particular carousel schemes). 

18 

 
 
  
 
One solution is to adapt control to these new fraud mechanisms. A list of good practices has 
therefore  been  identified  at  Community  level  in  cooperation  with  the  Member  States.  The 
Member States which have gone down this road are already recording considerable successes. 

Some  national  authorities,  professionals  and  academics  have  proposed  another  solution, 
namely  to  reform  the working of the VAT  system itself. Various  options exist, but all have 
disadvantages which far outweigh the potential benefits. 

It is therefore preferable to continue efforts to strengthen administrative cooperation and make 
national  control  systems  more  effective,  in  order  to  reap  the  benefits  of  recent  national  and 
Community  reforms,  rather  than  embarking  on  the  hazardous  path  of  reforming  the  VAT 
system itself, an approach that involves more risks and uncertainties than it offers solutions. 

Finally,  the  ten  new  Member  States  must  adopt  the  same  standards  on  control  systems  and 
mutual assistance at the earliest possible date. 

7.2. 

Recommendations 

– 

– 

– 

– 

– 

– 

– 

The  Member  States  must  continue  to  make  intensive  use  of  the  administrative 
cooperation machinery. They must make the best possible use of the facilities offered 
by  the  new  Regulation  (notification,  request  for  an  administrative  inquiry  and 
presence of officials on the territory of another Member State). 

They  must  allocate  the  human  resources  needed  for  carrying  out  more  numerous 
multilateral controls and build such controls into their national control plans. 

They must remove the remaining legal barriers identified by the Council so that VAT 
controls are equally effective throughout the territory of the EU. 

They  must  adopt  as  quickly  as  possible  a  national  plan  to  reduce  the  average 
response time to mutual assistance requests. 

To do this they must rapidly allocate additional resources for mutual assistance either 
to  CLOs  or  to  services  on  the  ground,  and  they  must  use  to  the  full  the 
decentralisation  possibilities  afforded  by  the  new  Regulation  to  ensure  that 
increasing use of mutual assistance does not overload the system. 

They  must  continue  their  efforts  to  make  tax  control  more  efficient  and  modern. 
Those Member States which have yet to adopt computerised auditing must do so as 
soon as possible. 

They  must  implement  as  quickly  as  possible  the  good  practices  identified  in  the 
matter  of  carousel  fraud  (see  point  6.1),  and  in  particular  set  up  national  fraud 
departments empowered to exchange information with the other Member States. 

19 

 
 
  
 
Annex 1 

Recommendations made by the Council in June 2000 

1- Recommendations which fell within the Commission’s competence 

(1) 

Eliminate all existing legislative obstacles at Community level so as to allow swift and 
effective administrative cooperation among the various Member States in cases of tax 
fraud or in the event of clear signs of fraudulent practice. 

In particular, it would be necessary to: 

– 

– 

– 

– 

consider introducing exceptions to the various secrecy provisions hampering or 
delaying the exchange of information; 

examine  the  possibility  of  setting  shorter  time-limits  for  the  exchange  of 
information on the most serious cases of fraud; 

dispense with prior notification of the information exchange to the taxpayer; 

clarify the ambiguities in Directive 77/799/EEC and examine the limitations on 
the use of information; 

(2) 

(3) 

(4) 

(5) 

Amend Community legislation with a view to providing more direct contact between 
the control authorities of the various Member States. This objective may, for example, 
be  achieved  with  the  presence  of  officials  taking  part  in  control  activities  in  other 
Member States, which may lead to increased effectiveness in combating fraud. These 
joint control operations would in every case be the subject of bilateral or multilateral 
agreements  and  under  the  direction,  control  and  responsibility  of  an  official  of  the 
Member State in which the inspection is carried out. 

Study  the  possibility  of  amending  the  VIES  system  in  order  to  consider  including 
supplies of services, particularly those under Article 9(2)(e) of the 6th VAT Directive; 

Amend Regulation (EEC) No 218/92 and Directive 77/799/EEC leading preferably to 
the  establishment  of  an  appropriate  single  legal  framework  to  enable  cooperation  in 
the fight against fraud to be reinforced, thus removing the obstacles identified above. 

Examine the rules laid down in the Sixth VAT Directive with the aim of simplifying 
them and submitting a relevant proposal for a Directive as soon as possible. 

2- Recommendations which fell within the competence of Member States 

(1) 

Eliminate  all  existing  legislative  obstacles  at  national  level  so  as  to  allow  swift  and 
effective administrative cooperation among the various Member States in cases of tax 
fraud or in the event of clear signs of fraudulent practice. 

In particular, it would be necessary to: 

– 

consider introducing exceptions to the various secrecy provisions hampering or 
delaying the exchange of information; 

20 

 
 
  
 
– 

examine  the  possibility  of  setting  shorter  time-limits  for  the  exchange  of 
information on the most serious cases of fraud; 

– 

dispense with prior notification of the information exchange to the taxpayer; 

Amend national legislation with a view to providing more direct contact between the 
control authorities of the various Member States. This objective may, for example, be 
achieved  with  the  presence  of  officials  taking  part  in  control  activities  in  other 
Member States, which may lead to increased effectiveness in combating fraud. These 
joint control operations would in every case be the subject of bilateral or multilateral 
agreements  and  under  the  direction,  control  and  responsibility  of  an  official  of  the 
Member State in which the inspection is carried out; 

Study  the  possibility  of  amending  the  VIES  system  in  order  to  speed up  access  to 
information  made  available  under  the  VIES  system,  bearing  in mind  that  the  time 
factor plays a major role in fraud mechanisms, so that administrative cooperation will 
need to be made simpler and speedier through this system, as through others; 

Provide  Central  Liaison  Offices  (CLOs)  with  appropriate  human  and  material 
resources,  organising  their  proper  liaison  with  control  departments  and,  in particular, 
with  anti-fraud  squads,  so  as  to  ensure  that  scheduled  reply  times  are  met  and  that 
quality information is exchanged; 

Develop  efforts  to  ensure  that  local  or  regional control  departments,  depending  on 
each Member State’s own organisation, have the necessary human resources to enable 
them  to  reply  promptly  to  information  requests  from  the  other  Member States  and 
follow them up in the appropriate manner; 

Consider  the  relevance  of  direct  contacts,  with  a  prior  mandate  from  the  competent 
authority, regarding specific cases or types of case: multilateral control measures and 
the  direct  transmission  of  data  in  cases  of  fraud  or  in  the  event  of  clear  signs  of 
fraudulent practice, in cross-border areas and joint investigations; 

Organise  mechanisms  providing  for  administrative  sanctions  in  the  case  of  late 
submission of such statements; organising the timely handling of such statements and 
promoting the speedy rectification of errors found in them, so that data are forwarded 
within  the  stipulated  period  and  are  as  complete  as  possible.  The  implementation  of 
measures  in  this  area  would  speed  up  the  flow  of  more  reliable  information  and 
therefore  enable  it  to  be  used  for  risk-analysis  purposes  and  for  better orchestrated 
control operations; 

Step  up,  by  means  of  agreements,  the  spontaneous  and  automatic  exchange  of 
information, particularly in specific cases or operations which generally entail a higher 
risk  of  fraud  or  tax evasion,  such  as  distance  selling  and  sales  of  new  means  of 
transport for private individuals. 

Optimise  selection  methods  on  the  basis  of  “risk analysis”.  These  methods,  without 
prejudice  to  subsidiarity  and  in  so  far  as  is  possible,  should  be  based  on  principles 
common to the various Member States, which remain to be defined. 

(2) 

(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

(9) 

(10)  Endeavour  to  take  account  in  their  national  inspection  plans  of  certain  guidelines 
based  on  common  denominators  of  tax  evasion  and  fraud,  preferably  and  where 

21 

 
 
  
 
possible  defined  in  accordance  with  the  methods  referred  to  in  the  preceding 
recommendation, specifically with the aim of combating fraud in a concerted manner 
and not on a case-by-case basis and reaching conclusions on the frequency of certain 
types of fraud within the Community.  

(11)  Define  a  strategy  for  monitoring  registration  procedures,  taking  into account  alarm 
signals  pointing  to  the  incidence  of  possible  fiscal  fraud.  If  it  is  established  through 
checking  that  the  activity  is  not  being  carried out  or  that  the  conditions  for  its 
performance do not exist, the Member States should consider precautionary measures; 

(12)  Adapt  control  systems  to  the  realities  of  electronic  commerce  and  introduce 

widespread use of computerised procedures in auditing; 

3- Recommendations which required Community action (other than legislative) 

(1) 

(2) 

(3) 

(4) 

(5) 

Study the possibility of amending the VAT Information Exchange System (VIES) in 
order  to  allow  each  Member  State  direct  access  to  the  VIES  database  of  the  other 
Member  States,  subject  to  safeguards  to  be  determined  subsequently,  in  order  to 
prevent  violation  of  commercial  secrets,  etc.,  thereby  making  it  possible  for  it  to 
identify  those  of  its  taxable  nationals  who  are  the  recipients  of  intra-Community 
transfers from a given operator registered in another Member State. 

Optimise  selection  methods  on  the  basis  of  “risk  analysis”.  These  methods,  without 
prejudice  to  subsidiarity  and  in  so  far  as  is  possible,  should  be  based  on  principles 
common to the various Member States, which remain to be defined. 

The  taking  into  account  in  Member  States’  national  inspection  plans  of  certain 
guidelines  based  on  common  denominators  of  tax  evasion  and  fraud,  preferably  and 
where  possible  defined  in  accordance  with  the  methods  referred  to  in  the  preceding 
recommendation, specifically with the aim of combating fraud in a concerted manner 
and not on a case-by-case basis and reaching conclusions on the frequency of certain 
types of fraud within the Community.  

Adaptation of Member States’ control systems to the realities of electronic commerce 
and introduce widespread use of computerised procedures in auditing; 

Request the Multidisciplinary Group on Organised Crime actively to pursue its efforts 
to ensure that certain types of VAT fraud are combated more effectively. 

22 

 
 
  
 
ANNEX 2 

Evolution of the number of mutual assistance requests

d
n
a
9
9
7
/
7
7
e
v
i
t
c
e
r
i
d
f
o
2

i

t
r
a
(
s
t
s
e
u
q
e
r
g
n
o
g
t
u
o
f
o
r
e
b
m
u
n

l
a
t
o
T

)
2
9
/
8
1
2
n
o
i
t
a
l
u
g
e
r

f
o
5

t
r
a

18000

16000

14000

12000

10000

8000

6000

4000

2000

4204

0
1995

10642

10595

11180

13199

7359

17064

17059

1996

1997

1998

1999

2000

2001

2002

Year

23 

 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX 3 

Evolution of the number of "outstanding requests"
(not replied within the assigned deadlines)

9000

8000

7000

6000

5000

4000

3000

2000

1000

i

s
t
s
e
u
q
e
r
g
n
d
n
a
t
s
t
u
o
f
o
r
e
b
m
u
N

1275

0
1995

4896

4509

5738

2811

3279

8354

7115

1996

1997

1998

1999

2000

2001

2002

Year

24