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The measures in question are the introduction of taxation for intra-Community supplies and the introduction of a generalised reverse charge.

Both systems have the potential to considerably reduce the phenomenon of 'missing trader' (MTIC) fraud, also commonly called carousel fraud.

Potential problems

A missing trader fraud is where a taxable person, having made an intra-Community acquisition on which VAT has not been charged makes a subsequent domestic supply on which he charges VAT and then disappears without having paid that VAT to the Treasury.

Both systems also pose potential problems, however, that the Commission said would need to be examined further before either system could be agreed.

The taxation of intra-Community supplies of goods could create competitive cash flow disadvantages for businesses trading in the internal market and would require the re-allocation of VAT revenues between member states.

As regards the possible introduction of a generalised reverse charge system for domestic transactions, the Commission insists that this could only work effectively if it was applied uniformly across all member states and it should not be made available as an optional system.

Given the dearth of experience with such a generalised system, however, the Commission said it was not opposed to a pilot project being launched by a willing member state, provided that certain conditions are met.

László Kovács, Commissioner for Taxation and Customs, added that the system of taxing intra-Community supplies and a generalised reverse charge system both presented advantages in the fight against MTIC fraud.

He said that the lack of empirical data and the need to preserve national budgets from other, new types of fraud obliged the Commission to be very cautious in proposing changes to the current VAT system.

“Before continuing work in this area, political steering is needed to ensure that member states are prepared to accept the consequences of any radical change,” Kovács added.

Taxation of intra-Community supplies of goods

Under this concept, intra-Community supplies would be taxed in the member state of origin at the rate of 15 per cent.

Where the member state of arrival applies a rate of more than 15 per cent, the purchaser in the latter member state would have to pay that additional VAT directly to that member state.

Likewise, where the member state of arrival applies a rate lower than 15 per cent (due to the application of certain reduced VAT rates or the zero rate in certain member states), the member state of arrival will allow credit to the taxable person who is making the intra-Community acquisition.

Taxation of intra-Community supplies appears to provide an adequate solution to the problem of Missing Trader Intra-Community (MTIC) fraud, but it by no means solves other types of fraud.

The Commission said that it would potentially cause cash-flow difficulties for traders, in particular for SMEs, which would have to pre-finance the VAT in transactions where they currently do not pay VAT.