1.1 Background to the joint audit
The current vat system in the European Union provides opportunities for intra Community fraud that all Member States have to deal with. In a resolution of 12 December 2006, the Contact Committee expressed support for its vat Working Group’s recommendation to encourage Supreme Audit Institutions (SAIs) to exercise bi and multilateral cooperation in this area. In response to this recommendation, in March 2007 the Netherlands Court of Audit invited Germany’s Supreme Audit Institution (Bundesrechnungshof) and the Belgian Court of Audit (Rekenhof) to participate in an investigation into intra-Community vat fraud.
This trilateral audit resulted in national reports for each of the three participating countries and in this joint report presenting the overall conclusions and recommendations supported by relevant audit observations. Institutions involved in tackling intra-Community vat fraud, at European level and in the Member States, may benefit from this report.
1.2 Explanation of intra-Community vat fraud
The EU Member States have a common vat system. Since the European internal market has been created in 1993, goods within the internal market can be traded freely and border controls have ceased to exist. A ‘temporary’ system was introduced for vat, whereby the zero rate applies to the supply of goods to another Member State. To be eligible for this zero rate, an entrepreneur must have a valid vat identification number and must be able to verify that its trading partner also has a valid vat identification number. In addition to the vat return, entrepreneurs must file a quarterly return of their intra-Community supplies so that they can be monitored.
The temporary vat system appears to be vulnerable to intra-Community fraud.
A simple form of fraud is the wrongful use of the zero rate by presenting a domestic supply as an intra-Community supply. The most common and widespread form of intra-Community vat fraud is ‘Missing Trader Intra-Community Fraud’ (mtic Fraud) or ‘Carousel fraud’. In the typical form of this fraud, a trader acquires goods from a trader in another EU Member State at the zero rate of vat. The trader sells on the goods within his own country and charges vat to the purchaser. The trader, however, does not remit this vat to the tax authorities and makes sure that he cannot be traced (‘missing trader’) if he is investigated. The receiver of the goods sells them on and reclaims the vat he has paid. The goods can then return to their country of origin via an intra-Community supply at the zero rate, so that the cycle can be repeated one or more times. This is why it is called carousel fraud.
1.3 Anti-vat fraud initiatives at EU level
For a number of years, the eu Member States, the Economic and Financial Affairs Council of the EU (Ecofin) and the European Commission (EC) have been discussing ways to counteract intra-Community vat fraud more effectively.6 The Commission has explored avenues for a coordinated strategy against tax fraud. In its meeting of 28 November 2006, Ecofin invited the Commission to prepare the elements of such a strategy in close cooperation with the Member States. In 2007, the Commission made an inventory of possible measures consisting of conventional measures within the existing VAT framework and more far-reaching measures, implying a change in the current system.