As part of an intensifying battle against tax fraud, the EU plans to strengthen cooperation with neighbouring countries on VAT.
VAT, which is charged as a sales tax on goods and services, is one of the main sources of tax revenue for governments, raising over €700bn in EU countries each year.
But almost one fifth of all potential VAT revenues fail to be collected across the EU each year and it is calculated that around €193bn in VAT revenues (amounting to 1.5% of GDP) were not paid in 2011, at least in part because of VAT fraud and evasion.
Focus on e-services
VAT fraud involving non-EU operators in the growing telecoms and e-commerce sectors is estimated to be particularly high, as fraudsters often play on cross-border differences and information gaps between countries.
Electronically-supplied services, such as music and video downloads, are often provided through servers and companies operating outside the EU.
Compared with more traditional transactions, it is often harder with these sorts of purchases to identity suppliers, customers and the place of supply. Consequently, it is more difficult to trace whether VAT was paid or not.
Limiting the economic damage of tax evasion
By working more closely with international partners, the EU hopes to develop more effective tools to fight such fraud, helping countries recover taxes due to them and protecting public finances.
To tackle the problem, the Commission proposes opening formal negotiations with Russia and Norway on improving administrative cooperation on VAT. Exploratory talks have also been held with Canada, Turkey and China.
Measures on the table include encouraging national tax authorities to share more data with each other on taxpayers’ activities, including access to their databases. Such cooperation already occurs between EU countries but not, so far, with the EU’s largest trading partners.
In an increasingly globalised economy, cooperation agreements, like the ones proposed with Russia and Norway, would improve the identification and targeting of VAT fraud and thereby limit financial losses to the public purse. Such revenue losses create extra tax burdens running into billions of euros each year for honest taxpayers.