Xinhua September 30, 2009

The European Commission (EC) on Tuesday proposed measures to fight value-added tax (VAT) fraud related to certain goods and services, notably covering greenhouse gas emission allowances.

The commission, the European Union (EU)'s executive arm, said VAT fraud is a major concern for member states' revenues and the correct functioning of the EU's internal market.

The measures proposed were targeted at VAT carousel fraud, a common and particularly severe form of VAT fraud, which the commission said costs billions of euros to the EU finances every year.

Under EU rules, business customers which buy a product from a supplier in their own country have to pay VAT to the supplier, and then claim it back from the government. They do not have to pay VAT if the supplier is a business in another EU country.

A carousel fraud occurs when businesses in different EU states sell one another goods without paying VAT, but then use a dummy go-between company to claim the money back from their government as if they had paid it.

Carousel fraud is traditionally organized with small goods of high value. Recently, several EU member states reported cases of carousel fraud on greenhouse gas emission allowances.

The commission said the measures would allow member states to take rapid action against this kind of fraud. They can opt for the application of reverse charge under the same conditions to a limited list of goods and services.

Under a reverse charge mechanism, the supplier does not charge VAT but is accounted for by the customer who, if a fully taxable person, deducts this VAT at the same time.

Besides greenhouse gas emission allowances, the measures would also cover computer chips, mobile phones, precious metals and perfumes.

The EU launched its emission trading system (ETS) in 2005, which is now the largest multi-national scheme in the world. The scheme is a "cap and trade" system whose objective is to cut greenhouse gas emissions by allocating emission allowances which can then be transferred between operators.

Transfers of allowances between taxable persons are considered as a supply of service and are taxable at the place where the recipient is established.

"VAT carousel fraud is against member states' finances and they should have the means to combat it efficiently," said Laszlo Kovacs, EU Commissioner for Taxation and Customs. "However, actions taken against this fraud should be taken in a consistent manner across the EU and clear evaluation criteria should be established."

The commission's proposal also included evaluation and reporting obligations for member states which will allow a precise assessment of the efficiency of the measures.