Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee concerning the need to develop a co-ordinated strategy to improve the fight against fiscal fraud {SEC(2006) 659}
Date: 2006-05-31
Institutions: European Commission
Subjects: EU Member State, VAT, administrative cooperation, cooperation policy, exchange of information, fraud against the EU, tax avoidance, tax evasion

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 31.5.2006 
COM(2006) 254 final 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL, THE EUROPEAN PARLIAMENT AND THE EUROPEAN 
ECONOMIC AND SOCIAL COMMITTEE 

concerning the need to develop a co-ordinated strategy to improve the fight against fiscal 
fraud  

{SEC(2006) 659} 

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TABLE OF CONTENTS 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

Introduction .................................................................................................................. 3 

The fight against fraud: state of play............................................................................ 4 

VAT.............................................................................................................................. 4 

Excise duties................................................................................................................. 4 

Direct taxes................................................................................................................... 4 

Evaluation of the existing legal framework ................................................................. 5 

Avenues to explore..................................................................................................................... 5 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

4. 

5. 

5.1. 

5.2. 

5.3. 

6. 

7. 

Administrative cooperation between the Member States............................................. 5 

Improving the functioning of cooperation ................................................................... 5 

Assistance in the field of recovery ............................................................................... 6 

Improved risk management.......................................................................................... 7 

A permanent forum for discussion at Community level .............................................. 7 

Increased cooperation with third countries .................................................................. 7 

Other aspects ................................................................................................................ 8 

The protection of revenue: a responsibility shared between Member States............... 8 

Improving the exchange of information....................................................................... 8 

Reinforcement of the tax declaration obligations ........................................................ 8 

Modifying the common VAT and excise duty system................................................. 8 

Conclusion.................................................................................................................. 10 

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COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL, THE EUROPEAN PARLIAMENT AND THE EUROPEAN 
ECONOMIC AND SOCIAL COMMITTEE 

concerning the need to develop a co-ordinated strategy to improve the fight against fiscal 
fraud  

1. 

INTRODUCTION 

In  2004,  fiscal  receipts,  i.e.  the  total  amount  of  taxes  and  compulsory  social  contributions, 
represented  39.3%  of  GDP  in  the  European  Union,  or  €4 097.7  billion.  On  the  other  hand, 
there are only very few estimates available on the amount of taxes not collected due to fiscal 
fraud. In general, the economic literature mentions that fraud accounts for approximately 2 to 
2.5% of GDP.  

Therefore,  the  interests  at  stake  in  the  case  of  fiscal  fraud  are  extremely  important.  The 
functioning  of  fiscal  systems  is,  and  should  remain,  primarily  the  responsibility  of  the 
Member  States. While fiscal  administration, tax auditing  and  the  recovery  of taxes  is in  the 
hands of the Member States, however, the Commission has the duty to stimulate and facilitate 
cooperation  between  Member  States  in  order  to  guarantee  the  proper  functioning  of  the 
internal  market  and  to  protect  the  financial  interests  of  the  Community1.  Fiscal  fraud 
undermines  the  smooth  functioning  of  the  internal  market  in  that  it  leads  to  distortions  of 
competition between those that pay taxes and those who do not. 

The  Member  States  express  strong  concerns  regarding  the  extent  of  the  fraud.  The  free 
circulation of goods, services, persons and capital within the internal market since 1993 has 
meant that Member States are increasingly incapable of fighting fiscal fraud in isolation. This 
difficulty is further compounded, at international level, by the globalisation of the economy. 
This  is  why  the  Commission  believes  it  has  to  intervene  in  this  area  by  presenting  some 
material for discussion.  

In  its  Communication  "The  Contribution  of  Taxation  and  Customs  Policies  to  the  Lisbon 
Strategy"  of  25  October  2005,  the  Commission  called  for  closer  cooperation  and  the  co-
ordination of efforts at Community level in order to render the Member States’ fight against 
fiscal fraud more effective. 

The  objective  of  the  current  Communication  is  to  launch  a  debate  with  all  the  parties 
concerned  on  the  different  elements  to  be  taken  into  account  in  an  “anti-fraud”  strategy  at 
European level. 

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Member States contribute to the Community budget through the VAT-based “own resources”. 

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2. 

THE FIGHT AGAINST FRAUD: STATE OF PLAY 

2.1. 

VAT 

VAT fraud takes different forms within the Member States, ranging from the black economy 
to  internal  fraud  (false  returns,  unauthorised  deductions).  One  typical  form  of  fraud,  termed 
“carousel” fraud, is where transactions within a Member State (on which VAT is charged) are 
fraudulently  combined  with  intra-Community  transactions  (on  which  no  VAT  is  charged 
between  the  contracting  parties)2.  A  growing  involvement  of  traders  in  third  countries  has 
been observed in such cases recently. 

VAT fraud affects the financial interests of the European Community within the meaning of 
Article 280 of the EC Treaty3. 

Although the common legal framework for administrative cooperation4 was reinforced some 
years ago, the Member States do not make sufficient use of the new possibilities offered and 
the level of administrative cooperation is not commensurate with the size of intra-Community 
trade. 

2.2. 

Excise duties 

After  1993,  concerns  were  expressed  about  the  weaknesses  of  the  “paper-based”  system 
designed  to  follow  up  the  movement  of  goods  under  an  excise  duty  suspension  system  and 
about  fraud  committed  outside  the  suspension  regime  by  exploiting  the  differences  in  rates 
between the Member States.  

The computerisation of the duty suspension system constitutes an important step forward in 
making the system secure. The Decision of the European Parliament and Council of 16 June 
2003 calls for the creation of an automated system within 6 years. In the short term, certain 
measures have already been taken, one of which is the adoption of a new regulation aiming to 
strengthen administrative cooperation specifically on excise duties. 

Nevertheless, other types of fraud completely outside the duty suspension regime, such as the 
smuggling  and  counterfeiting  of  alcohol  and  tobacco,  are  likely  to  emerge  despite  the 
automated system and other measures will need to be considered. 

2.3. 

Direct taxes 

Mutual assistance between Member States is regulated through Directive 77/799/EEC5, which 
provides  for  the  exchange  of  all  information  needed  by  Member  States  to  correctly  assess 
taxes on revenue and wealth.  

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For a more detailed description of carousel fraud, see COM(2004) 260, 16.4.2004, point 3.2.2. 
The distortions caused by VAT fraud affects the overall balance of the own resources system which has 
to be "fair and transparent" in order to guarantee the well functioning of the Community. 
Council Regulation (EC) No 1798/2003 of 7 October 2003 on administrative cooperation in the field of 
value added tax (OJ L 264 of 15.10.2003, p. 1). 
Council  Directive  77/799/EEC  of  19  December  1977  concerning  mutual  assistance  by  the  competent 
authorities of the Member States in the field of direct taxation and taxation of insurance premiums (OJ 
L 336 of 27.12.1977, p. 15) last amended by Directive 2004/106/EC of 16 November 2004 (OJ L 359 
of 4.12.2004). 

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In  addition,  Directive  2003/48/EC6  puts  in  place  an  automated  system  to  exchange  certain 
types  of  information  in  the  field  of  interest  payments.  Measures  equivalent  to  those  in  the 
Directive  have  been  adopted 
in  agreements  concluded  with  Switzerland,  Andorra, 
Liechtenstein, Monaco and San Marino.  

2.4. 

Evaluation of the existing legal framework 

The  Community  legal  framework  in  the  field  of  administrative  cooperation  on  VAT  and 
excise duties as such appears to be satisfactory from the Commission’s point of view. Even if 
improvements on specific points may be necessary, it offers real possibilities for cooperation 
between Member States.  

From a practical point of view, on the other hand, Directive 77/799/EEC is not as efficient as 
could  be  expected,  due  especially  to  the  insufficient  use  made  of  its  legal  provisions.  In  its 
report of 22 May 20007, the ad hoc group on tax fraud carried out a complete analysis of fraud 
systems  and  made  several  recommendations  aimed  at  strengthening  the  mechanisms  for 
administrative cooperation between Member States. In addition, the Commission presented in 
2004 its Communication “Preventing and Combating Corporate and Financial Malpractice”8, 
which also emphasised the need to improve administrative cooperation, proposing initiatives 
to promote collaboration both between fiscal authorities within the European Union and with 
those in third countries.  

The  findings  of  this  report,  the  Communication  and  subsequent  discussions  between  the 
Commission and the Member States indicate that Directive 77/799/EEC should be given more 
efficient tools, based on what already exists for indirect taxation (revision of Article 8 of the 
Directive,  limiting  the  deadlines  for  replying,  presence  of  officials  of  other  Member  States 
during on-the-spot checks, etc.). 

AVENUES TO EXPLORE 

3. 

ADMINISTRATIVE COOPERATION BETWEEN THE MEMBER STATES  

3.1. 

Improving the functioning of cooperation  

Member  States  cite  several  reasons  to  explain  the  insufficient  use  of  the  cooperation 
instruments:  language  problems,  lack  of  human  resources  and  limited  knowledge  of  the 
cooperation procedures among staff, etc.  

These shortcomings are not new, as they have already been pointed out and reiterated in the 
various  Commission  reports,  without  the  situation  improving  significantly.  In  addition,  the 
Council’s ad hoc group on tax fraud has identified the absence of a Community administrative 
culture as an obstacle to the fight against fraud.  

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Council  Directive  2003/48/EC  of  3  June  2003  on  taxation  of  savings  income  in  the  form  of  interest 
payments (OJ L 157 of 26.06.2003, p. 38). 
FISC 67 – CRIMORG 83 of 22.5.2000.  
COM(2004) 611, 27.9.2004.  

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However,  it  is  no  longer  sufficient  to  take  note  of  the  problem:  there  is  now  a  need  for  a 
political  commitment  on  the  part  of  the  Member  States  to  remedy  it.  Therefore,  the 
Commission considers that the moment has come to set up a monitoring system, on the basis 
of  quantifiable  indicators,  in  order  to  ensure  that  each  Member  State  is  able  to  and  actually 
does provide efficient assistance to other Member States.  

In addition, multilateral audits should become the rule in view of the Community dimension 
of trade. 

As  regards  VAT,  Member  States  should  also  make  more  coherent  use  of  the  structures  for 
support  and  operational  assistance  at  Community  level,  specifically  the  resources  of  the 
European Anti-Fraud Office (OLAF), which acts as a service platform (providing operational 
assistance and "intelligence") for the operational units of the Member States.  

Fiscal  fraud  is  often  linked  with  organised  criminal  structures  in  different  criminal  sectors. 
The  proceeds  of  fiscal  crime  (e.g.  VAT  fraud  or  cigarette  counterfeiting)  are  normally  re-
invested  in  other  criminal  activities.  It  is  therefore  important  to  adopt  a  common  and 
multidisciplinary approach to the fight against fraud. 

This  is  why  the  Commission  has  put  forward  its  proposal  for  a  Regulation  on  mutual 
administrative assistance for the protection of the financial interests of the Community against 
fraud and any other illegal activities9. 

This  proposal  seeks  to  clarify  and  strengthen  the  legal  framework  for  such  operational 
assistance,  to  enable  already  at  the  administrative  mutual  assistance  stage  the  use  of 
information on suspect financial transactions obtained from the anti-money laundering sector, 
and  to  specifically  put  into  place  a  detailed  framework  for  operational  assistance  and 
intelligence provided by the Commission (OLAF). 

It  is  useful  to  recall  that  Article  10  of  the  EC  Treaty  obliges  Member  States  to  take  all 
appropriate  measures,  whether  general  or  particular,  to  ensure  fulfilment  of  the  obligations 
arising from Community acts, which include administrative cooperation, and that Article 280 
obliges Member States to co-ordinate their actions in order to protect the financial interests of 
the Community.  

3.2. 

Assistance in the field of recovery 

Alongside  the  strengthening  of  the  means  to  detect  tax  fraud,  reinforcement  of  the  existing 
legislation  on  assistance  in  the  recovery  of  taxes  should  improve  the  collection  of  unpaid 
taxes.  

Consideration  should  therefore  be  given  to  ways  of  facilitating  procedures  and  providing 
assistance for tax officials. In addition, the success of mutual assistance also depends on the 
resources available to the national authorities and on the instruments they have for recovery 
under their national legislation.  

Moreover, other measures could be envisaged, such as incentives and/or penalties.  

9 

COM(2004) 509, 20.7.2004. 

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3.3. 

Improved risk management  

A  guide  on  risk  management  for  the  tax  administrations  has  recently  been  finalised  in 
cooperation with the Member States. The Commission calls for the results of this work to be 
put into practice by the Member States.  

Also worth examining is to what extent the taxation field could benefit from the experience 
gained in the customs area, where risk management is more advanced. There, Member States 
exchange information electronically using a standard computerised form.  

In a single market, the tax administrations may find it useful to obtain information rapidly on 
the  potential  risks  that  particular  companies  may  represent,  as  determined  using  a  common 
methodology,  in  particular  where  one  already  operating  in  other  Member  States  starts  an 
activity within their territory.  

3.4. 

A permanent forum for discussion at Community level  

At present, the Standing Committee for Administrative Cooperation in the field of VAT, the 
Committee on Excise Duties, the Working Party on administrative cooperation in the field of 
the direct taxation, and the Recovery Committee are the bodies in which Member States and 
the  Commission  discuss  technical  questions  in  the  respective  fields.  This  is  essentially  a 
compartmental approach.  

The Commission thinks therefore that it would be appropriate to create a forum for high-level 
discussion  or  even  consultation  where  issues  relating  to  fraud  and  to  cooperation  between 
Member States could be examined at an overall level. This forum could play an important role 
in monitoring the actions described above and in particular could provide guidelines for the 
work to be carried out by the individual committees and working party.  

4. 

INCREASED COOPERATION WITH THIRD COUNTRIES  

As  tax  evasion  does  not  stop  at  the  external  borders  of  the European  Union,  it  is  becoming 
increasingly important to develop the external aspects of administrative cooperation.  

The increased involvement of companies established in third countries in carousel fraud, the 
expansion of electronic commerce and the globalisation of the services market underline the 
need  for  international  cooperation  on  VAT.  Although  the  scope  of  Article  26  of  the  OECD 
model convention has been extended to VAT, the situation is unsatisfactory, especially as the 
cooperation mechanism is still bilateral.  

A  coordinated  approach  at  Community  level  should  be  examined  in  order  to  enhance  the 
ability of Member States to take action. The possibility of a convention could be envisaged. 

As regards direct taxation, ways of increasing fiscal transparency in some third countries (and 
dependent  and  associated  territories),  in  order  to  enable  Member  States  to  obtain  useful 
information,  and  strengthening  oversight  of  the  application  of  their  tax  laws  need  to  be 
examined, in particular in conjunction with other international organisations.  

In  the  Member  States,  cooperation  with  third  countries  is  primarily  under  bilateral 
agreements.  This  approach  does  not  ensure  the  necessary  effectiveness.  The  Commission  is 
looking into proposals to develop a Community approach to cooperation with third countries.  

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The inclusion of tax cooperation clauses under the economic partnership agreements that the 
Community  concludes  with  its  partners  could  be  a  way  of  supporting  this  objective.  The 
incorporation in forthcoming trade agreements of provisions concerning good governance, in 
particular with respect to taxation, will be examined on a case-by-case basis. In addition, the 
Commission is currently looking to promote technical assistance to help third country partners 
increase  the  transparency  of  their  taxation  systems.  An  incentive  allocation  related  to  good 
governance, notably in the financial, tax and judicial areas, will be foreseen in the 10th EDF.  

5. 

OTHER ASPECTS  

5.1. 

The protection of revenue: a responsibility shared between Member States  

Frauds with a Community dimension (in particular carousel frauds) often include participants 
in Member States where no loss of revenue is actually incurred. This is mainly to make the 
fraud circuit more obscure and thus to make tax collection more difficult, or even impossible.  

In order to protect the fiscal revenues of all the Member States in an internal market, Member 
States should take comparable measures against fraudsters, in particular in terms of sanctions 
and  criminal  proceedings,  regardless  of  whether  the  fraud  leads  to  losses  of  revenue  in  the 
Member State concerned.  

5.2. 

Improving the exchange of information  

As regards VAT, given that rapid access to information is crucial in combating fraud, more 
efficient  methods  of  exchanging  information,  taking  account  of  recent  technological 
developments  and  the  equipment  used  by  traders,  should  be  envisaged.  More  frequent  and 
more detailed automated exchanges between Member States, or even direct access to national 
databases, should to be considered for this purpose. The required modernisation of the VIES 
system presents an opportunity for implementing some of these improvements.  

As regards direct taxation, standard forms and computer formats should be envisaged for the 
exchange  of  information  and  for  collaboration  as  provided  for  in  the  directive  should  be 
envisaged,  in  particular  through  taking  over  and  adapting  the  automatic  system  for  the 
exchange of information set up under the Savings Directive. Similarly, it would be useful to 
provide Member States with comments, handbooks, guidelines, country profiles, etc.  

5.3. 

Reinforcement of the tax declaration obligations  

A general reinforcement of the tax declaration obligations could be examined, while possibly 
lightening  the  obligations  for  companies  that  obtain  an  authorisation  by  entering  into  a 
partnership  with  the  tax  administrations,  as  is  currently  the  case  in  the  customs  field.  The 
objective  is  to  maintain  detailed  tax  compliance  obligations  only  for  parties  considered  to 
represent a risk. 

6. 

MODIFYING THE COMMON VAT AND EXCISE DUTY SYSTEM  

As regards VAT, the Commission considers that the weak points of the current system need to 
be  analysed  in  the  light  of  the  fraud  opportunities  it  creates.  These  include  in  particular  the 
taxation of distance selling, the rules for the taxation of new and second-hand vehicles, and 
even the rules for the taxation of intra-Community trade in general.  

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Without  wanting  to  exclude  alternative  solutions,  the  Commission  recalls  that  the  definitive 
VAT regime supported by the Community institutions could remedy these weaknesses as well 
as eliminate certain types of fraud. 

Moreover,  the  Commission  could  envisage  the  possibility  of  strengthening  the  principle  of 
joint and several liability for the payment of tax. This principle has been the subject of lively 
discussions  between  tax  administrations  and  economic  operators.  Any  such  examination 
should remain within the parameters laid down by the Court of Justice, which, in its judgment 
of  11  May  200610,  raised  the  general  question  of  the  proportionality  and  legal  certainty  of 
measures intended to combat fraud.  

In addition, some Member States consider that the VAT system should be amended in order 
to reduce the losses of VAT income due to fraud. They call for the reverse charge mechanism 
to be extended to domestic transactions in a Member State, thus challenging the principle of 
fractionated payment,  which has hitherto been regarded as a key element in a VAT system. 
This topic has already been discussed in various fora. In particular, it has been debated by a 
technical group of the Commission with the Member States.  

As  it  supports  the  objective  of  combating  fraud,  the  Commission  is  examining  the  need  for 
such a step with an open mind at this stage. However, the precondition for any change to the 
current VAT system is that it has to:  

–  reduce considerably the possibilities for fraud and exclude new important fraud risks;  

–  generate no disproportionate administrative burden for traders and the authorities;  

–  ensure tax neutrality;  

–  ensure  non-discriminatory  treatment  in  a  Member  State  of  both  national  operators  and 

operators established elsewhere.  

The Commission recognises that the reverse charge mechanism has proved its effectiveness in 
specific sectors such as construction. In theory, a more generalised application could reduce 
certain types of fraud, but it also entails other problems, such as the risk of new types of fraud.  

In  addition,  Member  States  that  promote  broader  use  of  the  reverse  charge  mechanism 
consider that such a system has to be accompanied by additional tax compliance obligations, 
compared to the current system, in order to avoid new risks of fraud.  

Such a change raises a number of important questions, requiring an in-depth discussion with 
all  the  interested  parties,  first  and  foremost  with  the  operators  who  would  be  affected.  This 
would cover primarily:  

–  the level of legal certainty for operators applying the reverse charge system in good faith 

(the VAT treatment of operations being dependent on the customer’s status);  

–  the advantages and the costs of implementation.  

10 

Case C-384/04, Commissioners of Customs & excise, Attorney general v Federation of Technological 
Industries and Others. 

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If  optional  application  of  the  reverse  charge  mechanism  were  to  be  considered,  strict 
conditions  should  be  implemented  at  Community  level  in  particular  to  ensure  proper 
functioning  of  the  internal  market  and  to  comply  with  the  simplification  policy  (divergent 
regulations, in particular as regards invoicing and complementary obligations).  

In  examining  possible  changes  to  the  VAT  system  to  fight  tax  fraud,  the  taxation  of  intra-
Community  transactions  should  be  considered,  either  at  a  single  rate,  which  should  high 
enough  to  rule  out  any  incentive  to  set  up  a  carousel  fraud,  or  at  the  rate  of  the  receiving 
Member State.  

As regards excise duties, it is obvious that the current structure of tax on tobacco prevents the 
proper functioning of the internal market, in particular by partitioning markets (price fixing) 
and thus generating trade diversions. Consequently, these distortions should be eliminated.  

7. 

CONCLUSION  

This  Communication  does  not  contain  "one"  single  and  global  solution  to  the  problems.  Its 
objective  is  to  present  some  realistic  and  pragmatic  actions  that  could  be  taken  in  the  short 
term  but  it  is  essential  that  this  would  be  done  in  a  coordinated  and  integrated  manner  to 
respond better to the Community or even international dimension of economic markets.  

Moreover, it is important to recall that this Communication must be seen within the broader 
context  of  realising  the  Lisbon  objectives.  The  simplification  of  the  fiscal  environment  is  a 
key  element  in  this  policy  and  any  measures  to  fight  tax  fraud  more  efficiently  cannot  go 
against these objectives.  

As  regards  VAT  in  particular,  the  debate  on  important  changes  to  certain  elements  of  the 
common VAT system has already started.  

The  Commission  has  an  open  mind  in  the  debate,  but  initial  discussions  with  the  Member 
States and the operators show that a change in the VAT system raises a number of important 
questions  requiring  an  in-depth  analysis,  in  particular  in  relation  to  its  effects  for  all  parties 
concerned.  

The  Commission  considers  at  this  stage  that  fraud  could  better  be  controlled  through  joint 
action  by  the  Commission  and  Member  States  and  through  an  efficient  and  modern 
organisation of the control system, accompanied by strong and rapid cooperation between the 
Member States and, where appropriate OLAF, on the basis of suitable legal instruments.  

Considering  the  seriousness  of  the  situation,  the  Commission  invites  the  institutions 
concerned,  notably  the  Council,  the  European  Parliament  and  the  European  Economic  and 
Social  Committee  to  debate  this  document  at  their  earliest  convenience  in  order  to  provide 
clear indications and to allow the Commission to launch a targeted action programme as soon 
as possible. 

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