Communication from the Commission to the Council concerning some key elements contributing to the establishment of the VAT anti-fraud strategy within the EU {SEC(2007) 1584}
Date: 2007-11-23
Institutions: European Commission
Subjects: VAT, administrative cooperation, exchange of information, fraud against the EU, tax evasion, tax inspection

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 23.11.2007 
COM(2007) 758 final 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL 

concerning some key elements contributing to the establishment of the VAT anti-fraud 
strategy within the EU 

{SEC(2007) 1584} 

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TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

Background .................................................................................................................. 3 

The Commission's Communication on fiscal fraud. .................................................... 3 

Follow up of the Communication. ............................................................................... 3 

1.2.1.  Within the Council. ...................................................................................................... 3 

1.2.2.  Within the Commission................................................................................................ 4 

1.2.3.  With businesses............................................................................................................ 4 

2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

A first milestone: the ECOFIN conclusions of 5th June 2007...................................... 4 

Defining the future direction within the existing legislative framework ..................... 6 

First observation: tax administrations need accurate information to control 
the VAT system............................................................................................................ 6 

Second observation: Member States do not have a sufficient EU approach to 
ensure the functioning of the common VAT system ................................................... 8 

Third observation: the importance of up to date information on the VAT status of 
traders........................................................................................................................... 9 

Fourth observation: the need to enhance the capacity of tax administrations to 
collect VAT receipts in fraud cases ........................................................................... 10 

4. 

Conclusions ................................................................................................................ 11 

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COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL 

concerning some key elements contributing to the establishment of the VAT anti-fraud 
strategy within the EU 

1. 

BACKGROUND 

1.1. 

The Commission's Communication on fiscal fraud. 

On 31 May 2006 the Commission presented a Communication concerning the need 
to  develop  a  co-ordinated  strategy  to  improve  the  fight  against  fiscal  fraud1.  The 
purpose was to launch a debate with all stakeholders (Council, European Parliament, 
businesses)  on  the  different  elements  to  be  taken  into  account  in  an  "anti-fraud" 
strategy  at  EU  level.  It  is  also  recalled  that  a  successful  strategy  must  include  a 
multidisciplinary approach including the action of investigation services as well as of 
judicial authorities. In that respect reference is made to initiatives developed in such 
areas including the proposal for a Regulation2 and the modification of the Regulation 
515/973 that are already presented to the Council. 

The  Communication  set  out  -  for  discussion  -  a  whole  range  of  pragmatic  and 
realistic  ideas  that  would  contribute  to  the  improvement  of  the  current  situation. 
Moreover,  the  question  was  also  raised  whether  there  is  a  need  to  modify 
substantially the current VAT system in order to tackle VAT fraud efficiently, either 
by providing Member States the option  of introducing a generalised reverse charge 
system or by introducing a system of taxation of Intra-Community supplies of goods. 

1.2. 

Follow up of the Communication. 

1.2.1.  Within the Council. 

the 
The  ECOFIN  Council  of  7  June  2006  welcomed 
Communication  and  stated  that  it  would  examine  all  measures  envisaged  in  the 
Communication.  

the  production  of 

The  subsequent  technical  analysis  carried  out  by  the  Council  led  to  the  ECOFIN 
Conclusions  of  28  November  2006.  The  Council  made  clear  that  VAT  fraud  is  its 
main concern and defined a number of aspects to which the Commission should give 
particular  priority.  Efforts  have  since  then  been  fully  devoted  to  the  VAT  area  and 
unlike the abovementioned Communication, the present one only covers VAT fraud. 

In addition, the Council stated that it would continue the work on the reverse charge 
mechanism and the taxation of intra-community supplies. 

1 
2 
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COM(2006)254, 31.5.2006 
COM(2006)473, DOC 2004/0172/2006 
COM(2006)866, DOC 2006/0290(COD) 

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1.2.2.  Within the Commission.  

As  a  response  to  the  ECOFIN  Council  conclusions  of  28  November  2006,  the 
Commission  created  a  new  expert  group  with  Member  States,  the  "Anti  Tax  Fraud 
Strategy [ATFS] expert group" in view of fleshing out the priority areas identified by 
the Council.  

1.2.3.  With businesses. 

The Commission organised on 29 March 2007 a "VAT fraud conference" in order to 
provide European businesses the opportunity to express their views on the way VAT 
fraud is tackled today, to comment on the ideas which have been put forward within 
the  Commission's  Communication,  and  to  present  any  other  ideas  which  could 
contribute to the fight against VAT fraud. 

A general conclusion that resulted from the conference was the common interest of 
businesses and tax authorities in combating fraud and the willingness from traders to 
assist  the  tax  administration  in  this  task.  Improving  the  communication  between 
these  two  parties  is  a  major  element  in  this  context.  Today  taxpayers  are  not 
convinced that the flow of information they have to provide to the tax authorities are 
used in an efficient way.  

There  was  also  a  clear  statement  about  disproportionate  costs  for  businesses 
emerging  from  divergent  national  reporting  requirements.  Businesses  pleaded  for  a 
win-win  situation  whereby  a  potential  review  of  the  reporting  obligations  should 
provide  the  tax  authorities  with  the  relevant  information  in  a  timely  fashion  on  the 
one  hand  and  facilitate  compliance  by  a  far  reaching  harmonisation  of  these 
obligations, including a deletion of certain obligations imposed at national level.  

2. 

A FIRST MILESTONE: THE ECOFIN CONCLUSIONS OF 5TH JUNE 2007. 

The  Council  Conclusions  are  divided  in  2  main  areas:  conventional  measures  to 
reinforce  the  existing  VAT  system  and  more  far  reaching  measures  to  modify  the 
system. 

As  regards the conventional measures, the Commission presented  a progress  report 
on the work carried out since the previous ECOFIN Council meeting of November 
2006.  

Based on this progress report the Council prioritised a number of measures for which 
it invited the Commission to come forward with the necessary legislative proposals 
including an impact assessment by the end of 2007, at the latest, so that the Council 
can adopt these by the end of 2008. 

These topics concern the more frequent reporting of intra-Community supplies and a 
quicker  exchange  of  this  information  among  tax  administrations;  the  possibility  of 
applying joint and several liability where the information on these intra-Community 
supplies is not properly reported; and improving the information on VAT identified 
businesses which is made available to operators active in intra-Community trade. 

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The  Commission  intends  to  present  at  the  beginning  of  next  year  appropriate 
legislative proposals on these issues, where necessary, taking into account the further 
technical discussions which have taken place on these topics and the outcome of the 
impact  assessment.  In  case  of  information  on  VAT  identified  businesses,  the 
improvement can be achieved without any legislative changes. 

Furthermore, the Council wanted discussions to be continued on all other measures 
mentioned in the Commission's progress report and asked for a report on the state of 
play of these discussions by the end of 2007. 

The Commission Staff working document - "Progress report on the state of play of 
the  discussions  on  the  conventional  measures  proposed  by  Member  States" 
[SEC(2007)  …  of  …/11/2007]  presented  today  provides  a  detailed  state  of  play  of 
the discussions which have taken place in the ATFS expert group. 

As regards the taxation of Intra-Community supplies, the Council noted that taxation 
of  Intra-Community  supplies  in  the  Member  State  of  arrival  raised  considerable 
reservations.  Taxation  of  these  supplies  in  the  Member  State  of  departure  received 
more support from Member States and therefore the Council invited the Commission 
to explore this system further.  

The Council also observed that the majority of Member States expressed reservations 
concerning  the  introduction  of  an  optional  generalised  reverse-charge  mechanism. 
The  Council  therefore  invited  the  Commission  to  analyse  the  effects  of  such  an 
option  on  the  internal  market,  and  in  particular  the  possibility  of  running  a  pilot 
project for a limited period of time in an interested Member State.  

The  Council  invited  the  Commission  to  submit  its  findings  on  both  far  reaching 
measures by the end of 2007.  

Much  preparatory  work  has  been  carried  out  (questionnaire  to  Member  States, 
external studies, public consultation and meetings with businesses, including SME's) 
as a response to these demands of the Council. Considering the substantial degree of 
analysis required and the fact that the Commission did not receive the required input 
from all Member States within the specified deadline, the Commission will only be 
in a position to report on its findings at the beginning of next year.  

Moreover,  once  the  Commission  will  have  finalised  its  analysis  on  the  taxation  of 
Intra-Community  supplies  and  on  the  introduction  of  a  generalised  reverse  charge 
system,  there  will  be  a  need  for  a  political  debate  at  Council  level  on  the  way 
forward. The possibility of running a pilot project for a limited period of time in an 
interested  member  State  will  certainly  be  a  key  element  in  this  discussion.  The 
technical analysis of this complicated question is ongoing and two bilateral meetings 
with  the  Member  State  concerned  have  already  taken  place  and  another  meeting  is 
scheduled before the end of the year.  

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3. 

DEFINING  THE  FUTURE  DIRECTION  WITHIN  THE  EXISTING  LEGISLATIVE 
FRAMEWORK 

Notwithstanding its commitment to complete an analysis of potential changes to the 
VAT system, the Commission sees no contradiction in continuing in parallel a debate 
on  the  so-called  conventional  measures.  Providing  the  tax  authorities  with  more 
modern and efficient tools for combating tax fraud is an objective to be pursued in 
any  event,  independently  of  the  decisions  which  will  be  taken  on  the  more  far 
reaching measures.  

The  discussions  in  this  context  until  now  have  been  intense  and  have  generated  a 
wide  range  of  ideas.  On  a  number  of  key  elements  the  discussions  have  come  to  a 
point where there is a need for strategic decisions on the future direction to take in 
defining  and  EU  wide  approach.  In  particular,  the  Commission  has  drawn  the 
following conclusions from the on-going debate. 

3.1. 

First observation: tax administrations need accurate information to control the 
VAT system 

One of the main problems is that the system which was put in place in 1993 for the 
exchange  of  information  between  Member  States  on  intra-Community  supplies  of 
goods  does  not  provide  relevant  and  timely  information  for  tackling  VAT  fraud 
efficiently. 

The  legislative  proposals  planned  for  the  beginning  of  next  year  will  provide  for 
more frequent reporting of intra-Community supplies and for a quicker exchange of 
this information among tax administrations and hereby constitute a response to this 
problem. 

However, some Member States want to go beyond that and have expressed the view 
that  taking  into  account  the  possibilities  offered  by  electronic  technologies,  an 
exchange  of  information  on  Intra-Community  supplies  at  transaction  level  best 
answers their needs as an appropriate tool to fight tax fraud efficiently.  

At the outset however, it should be kept in mind that all measures that are discussed 
in the context of the fight against VAT fraud have to respect other EU policies, and 
in  particular  the  general  target  of  the  European  Council  to  achieve,  by  2012,  a 
reduction  by  25%  of  the  existing  administrative  burden,  as  set  out  in  the  "Action 
Programme for Reducing Administrative Burdens in the European Union4". 

Furthermore,  the  obligations  imposed  upon  cross-border  trade  should  not  be 
disproportionate to the obligations imposed on national transactions thus making the 
internal market less attractive in comparison with the domestic market.  

Is  high  level  transaction  based  information  within  a  1  month  time  period  on 
the  ultimate  solution  for 
domestic  and  on  Intra-Community 
controlling the VAT system? 

transactions 

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COM(2007)23 final, 24.1.2007 

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It  is  clear  that  the  concerns  set  out  above  (related  tot  the  renewed  Lisbon  Strategy 
and the proper functioning of the Internal Market) have to be included in the debate 
on  potential  new  reporting  obligations  as  a  tool  to  fight  fraud  in  respect  to  their 
global impact on businesses. 

Additional  reporting  requirements  should  be  limited  to  information  that  is  already 
available in businesses' accounting systems so that business can fulfil them without 
major difficulties. Furthermore, electronic transmission of the information to the tax 
administrations has to be ensured in order to reduce compliance costs and to allow an 
efficient processing of the data. 

Small  and  medium  sized  businesses  that  are  not  involved  in  intra-community  trade 
should be excluded from applying additional reporting obligations.  

The  minimum  level  of  information  that  needs  to  be  reported  to  and  exchanged 
between tax administrations should be determined at Community level.  

Proceeding to a far reaching harmonisation of the VAT reporting obligations within 
the EU would reduce the compliance costs for businesses having economic activities 
in several Member States. Businesses have repeatedly declared that the 27 different 
types  of  reporting  obligations  is  an  irritant  for  them,  considerably  enhancing  their 
compliance costs since their software needs to be adapted to the specific situation in 
each Member State. 

A closer harmonisation of the invoicing rules could also be taken into account in this 
context. 

New  reporting  obligations  can  only  be  considered  when  compensated  by  a 
reduction of the administrative burdens in other areas. 

The capacity of tax administrations to make efficient use of the data collected should 
be guaranteed before new reporting obligations are considered. 

Collecting detailed information from traders would allow for the automatic matching 
of data provided by the supplier and purchaser. The great majority of the information 
will relate to genuine transactions but material errors and different interpretation of 
the rules will probably result in numerous mismatches being brought to the attention 
of tax administrations.  

In  order  to  manage  the  massive  flows  of  information,  highly  efficient  risk  analysis 
and  risk  management  systems  will  have  to  be  set  up  to  select  from  the  bulk  of 
mismatches those transactions and traders which require special attention.  

Tax administrations do not have sufficient information available in time to act 
efficiently against VAT fraud, especially missing trader fraud. There is a need 
for  an  in-depth  analysis  of  the  accuracy  of  the  information  currently  collected 
from  businesses  and  the  use  that  tax  administrations  make  of  it.  However,  a 
review  of  the  reporting  obligations  has  to  take  place  in  the  context  of  the 
renewed  Lisbon  Strategy's  objective  of  decreasing  red  tape  for  businesses  by 
25%  

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3.2. 

Second  observation:  Member  States  do  not  have  a  sufficient  EU  approach  to 
ensure the functioning of the common VAT system 

The proposed changes in the place of supply of services currently under discussion in 
the  Council  have  highlighted  the  importance  of  Member  States  not  only  taking  an 
interest in the protection of their own VAT revenues but also playing a major role in 
the protection of the VAT revenues of other Member States.  

This issue is, however, much broader. The growth of cross border trade triggered by 
the  establishment  of  the  internal  market  and  the  adaptation  of  the  common  VAT 
system  to  the  requirements  of  that  internal  market  (abolition  of  obligatory  fiscal 
representatives) means that there are an increasing number of transactions where the 
place of taxation and the place of establishment of the person liable to pay the VAT 
are located in two different Member States.  

The  development  of  the  internal  market  obliges  Member  States  to  allocate  more 
resources to administrative cooperation in order to ensure a proper functioning of 
the common VAT system.  

The  Commission  recognises  that  this  involves  significant  financial  and  resource 
efforts for Member States.  

there 

is  potential  for  reducing 

However, 
tax 
administrations.  Allowing  tax  authorities  of  other  Member  States  automated  access 
to non sensitive data would eliminate the costs of human intervention in the Member 
State holding this information in cases of routine requests for information.  

the  administrative  costs  for 

A discussion on more far reaching ideas such as the implementation of a system of 
incentives  or  cost  sharing  to  stimulate  an  EU  approach  would  be  desirable.  Such  a 
system  would  give  Member  States  a  financial  incentive  to  increase  their  efforts  to 
improve  control  of  cross  border  trade.  The  mutual  assistance  for  recovery  of  taxes 
could be an appropriate area for testing the efficiency of such a mechanism. 

Some member States have advocated an even more ambitious approach, namely the 
setting  up  of  an  informal  structure,  composed  of  officials  from  national  tax 
administrations,  with  the  aim  of  largely  facilitating  the  exchange  of  information 
between  national  tax  authorities.  The  creation  of  such  a  structure  could  provide  a 
solution  to  certain  obstructions  in  the  current  functioning  of  administrative 
cooperation  (language,  resources)  but  also  for  some  legal  concerns  related  to  new 
instruments,  like  automated  access  to  data.  Insofar  as  such  approach  could  not  be 
achieved by the development of existing structures and would not lead to duplication 
of existing structures at EU level, the Commission is prepared to further explore the 
idea if Member States show a sufficient interest in it.  

Risk management needs to profit from experiences gained by other Member States 

Besides  the  obvious  need  to  share  responsibility  for  control,  there  are  other 
situations,  for  instance  in  the  early  detection  of  missing  traders,  where  the 
information available in one Member State is essential for early detection of potential 
VAT losses in another Member State. 

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Obtaining  very  rapidly  the  information  gathered  in  other  Member  States  on  certain 
fraudulent transactions or on fraudulent traders in order to use this information in its 
own  risk  management  system  is  a  major  tool  for  a  Member  State  in  combating 
missing trader fraud. 

A system for a quick and selected exchange of information and risk analysis has been 
developed  by  the  Belgian  tax  administration  in  cooperation  with  other  Member 
States and with the support from the Commission. Currently 24 Member States are 
participating in this project. The Commission recognises the benefits of the targeted 
approach  of  these  exchanges.  It  would  therefore  be  important  to  eliminate  existing 
political barriers to the participation of all Member States to these exchanges. 

Criminal proceedings against fraudsters 

The issue of criminal prosecution of persons involved in fraud resulting in tax losses 
in another Member State has been discussed on several occasions in Council and in 
the ATFS Expert Group.  

As  reciprocity  in  prosecution  of  trans-national  VAT  fraud  cases  is  not  sufficiently 
guaranteed  in  Member  States,  the  necessary  legislative  steps  need  to  be  taken  to 
improve the protection of VAT receipts by criminal law.  

The  Council  should  clarify  that  the  PFI  Convention  also  covers  the  protection  of 
VAT. 

In  response  to  the  ATFS  expert  group’s  suggestion  that  ECOFIN  would  invite  the 
Justice  and  Home  Affairs  Council  to  come  forward  with  an  initiative  to  put 
appropriate  legislation  in  place,  the  Commission  recalls  that  the  Convention  on  the 
protection  of  the  financial  interests  of  the  European  Community  (PFI  Convention) 
already  offers  a  level  of  criminal  law  protection  to  be  implemented  by  all  Member 
States  regarding  fraud  to  the  detriment  of  the  financial  interests  of  the  Community 
including VAT fraud. 

Fraud  mechanisms  which  make  use  of  the  advantages  of  the  internal  market 
cannot be tackled properly by an essentially national approach. The integration 
of a real EU approach into the management of the VAT system by the national 
authorities  should  result  in  a  higher  level  of  protection  of  the  revenues  for  all 
Member States.  

3.3. 

Third observation: the importance of up to date information on the VAT status 
of traders 

The VAT identification number is a key factor in the VAT arrangements applicable 
to intra-Community trade. The VAT status of his customer is an essential element for 
a supplier to decide whether he can make his supply VAT exempt or not. There is a 
need  to  continuously  update  the  register  of  taxable  persons  identified  for  VAT 
purposes in order to provide the necessary legal certainty to businesses.  

Today  traders  can  often  obtain  only  very  fragmented  information  on  this  status. 
Where a trader makes a wrong judgement on the VAT status of his business partner 
on the basis of this fragmented information, he runs the risk that the tax authorities 

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will afterwards try to recover the tax from him. Therefore, Member States should be 
responsible for the information they put into the register and should also suffer the 
consequences for outdated or erroneous information on the register. 

An agreement has already been reached on the improvement of the central access to 
VAT  registration  data  on  the  Europa  website  with  a  view  to  allowing  traders  to 
obtain confirmation of the VAT number, name and address of trading partners in all 
Member  States.  Nevertheless,  this  alone  is  not  sufficient  and  the  reliability  of  the 
available information should also be improved. 

Vigilance  at  the  time  of  issuing  a  VAT  number  should  avoid  fake  taxable  persons 
entering  into  the  system  and  ensure  that  tax  authorities  put  suspicious  traders  for 
whom identification cannot be refused under close scrutiny.  

A  possible  solution  could  be  to  introduce  an  obligation  for  Member  States  to  keep 
newly registered persons under close scrutiny and notably to carry out a control visit 
within  6  months  or  1  year  in  order  to  verify  whether  the  person  having  obtained  a 
VAT identification number is in fact carrying out taxable transactions. 

Within this period the tax administration could further assist and educate traders by 
providing the necessary assistance in becoming a compliant business, something that 
might prove very useful for small businesses.  

Deleting taxable persons from the database as soon as it is established they no longer 
carry out taxable activities is equally important. Unfortunately, there is evidence that 
sleeping  companies,  sometimes  even  identified  “missing  traders”  currently  remain 
too long in the VIES database because of stringent national procedures. Therefore, it 
is  essential  that  tax  administrations  automatically  check  whether  the  VAT 
identification  numbers  are  still  active  and  delete  them  from  the  VIES  database  as 
soon as this is no longer the case. 

Without  a  strong  commitment  from  Member  States  to  tackle  this  long  outstanding 
issue  and  a  readiness  to  change  national  procedures,  fraudsters  will  continue  to 
misuse this weakness in the functioning of the current VAT arrangements.  

The  establishment  of  minimum  standards  at  EU  level  for  registration  and  de-
registration  would  be  the  way  forward,  since  it  would  increase  the  confidence  of 
businesses and tax authorities in the information they obtain via VIES on the VAT 
identification of traders. 

Updated  information  on  the  VAT  status  of  a  person  is  essential  for  tax 
administrations and for businesses in combating VAT fraud. There is a need for 
a  common  approach  to  registration  and  de-registration  of  traders.  VAT  losses 
in a Member State due to the negligence of another Member State in updating 
the database should be borne by the latter.  

3.4. 

Fourth observation: the need to enhance the capacity of tax administrations to 
collect VAT receipts in fraud cases 

A further problem tax administrations encounter when tackling fraud is collecting the 
money  due  from  the  parties  involved  once  they  succeed  in  exposing  fraudulent 

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activities.  Two  different  elements  that  assist  Member  States  in  this  area  should  be 
looked at more closely. 

Joint and several liability 

Today  Community  VAT  legislation  already  provides  a  legal  base  for  the  Member 
States to introduce rules that make a person other than the person liable to pay the tax 
jointly  and  severally  liable  to  pay  this  amount  to  the  state  budget,  provided  the 
fundamental legal principles of Community law are respected. 

In the context of missing trader fraud, whereby a number of actors intervene with the 
sole objective of hiding the fraudulent character of the transaction chain and thereby 
making  the  detection  more  complicated,  the  Commission  sees  the  benefits  of 
invoking this provision. 

However,  the  use  of  this  provision  requires  striking  the  right  balance  between 
ensuring legal certainty for genuine businesses and improving the capacity of the tax 
authorities to recover the huge amounts of non collected VAT receipts due to VAT 
fraud. 

The  topic  has  already  been  discussed  on  several  occasions  and  the  Commission  is 
certainly  prepared  to  contribute  further  to  this  debate  and,  if  suitable,  to  present 
appropriate legislative proposals in order to determine some common grounds. 

Review of the Recovery Directive 

Another tool that the Community legislation offers Member States in order to assist 
them in collecting the money due is the mutual assistance scheme for the recovery of 
taxes.  The  present  results  of  this  recovery  assistance  make  it  clear  that  this 
instrument needs to be improved. In order to remedy the shortcomings of the current 
rules, the Commission is preparing legislative proposals, which will be presented in 
2008.  The  new  legislation  should  stimulate  the  recourse  to  mutual  recovery 
assistance and facilitate its application in practice.  

Collecting  the  money  due  in  fraud  cases  is  also  a  major  concern  for  all  tax 
administrations. Therefore, it is important to further develop the conditions for 
applying  the  joint  and  several  liability  and  to  improve  and  strengthen  the 
administrative cooperation in the field of recovery of taxes.  

4. 

CONCLUSIONS 

The  Commission  will  shortly  deliver  the  various  reports  and  initiatives  that  were 
requested by the Council in June 2007. 

However, the Commission is aware from the discussions in the ATFS expert group 
that  other  aspects  still  need  to  be  debated  concerning  the  fraud  proofing  of  the 
existing VAT arrangements as indicated in Section 3 above. 

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The  Council  is  therefore  invited  to  indicate  whether  it  endorses  the  above 
observations  and  provide  the  necessary  political  guidance  for  the  Commission's 
further work in this area. 

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