Is €50 billion fraud in the EU VAT Gap an overestimate
The European Commission’s annual VAT Gap estimate is due within the next few days. But is the calculation of missing VAT overestimating the amount of VAT fraud?
Last year’s estimate, covering 2021, but the gap at €61 billion, down from €99 billion in the previous year. This includes VAT fraud, errors, unpaid taxes due to bankruptcies and poor collections. A commonly quoted figure for VAT fraud is €50 billion, largely as a result of intra-community missing trader and carousel fraud. This involves criminals unlawfully charging and retaining VAT on sales of goods across EU borders.
The levels of VAT fraud have been the main driver for the recently agreed EU VAT in the Digital Age reforms which will introduce digital reporting and e-invoicing obligations from July 2050.
Challenging the VAT fraud estimates
There are now reviews into a more up-to-date estimate of VAT fraud element of the VAT gap. This includes:
- Eurofisc investigating cases of missing trader fraud. Yannic Hulot, the Chairman of Eurofisc has recently stated the actual number is close to €10 billion
- The EC has completed phase 1 of an estimate of gap due to Missing Trader IntraCommunity (MTIC) fraud
Causes of EU VAT fraud
Fraud related to EU VAT arises from the exploitation of VAT regulations, particularly those concerning cross-border trade, digital services, and educational offerings. Here are the key causes:
1. Complexity of VAT Rules
- Cross-border challenges: Different VAT rates, exemptions, and registration requirements across EU member states create confusion, making it easier to exploit loopholes.
- Digital services loopholes: Online education platforms often operate across borders, and fraudsters take advantage of the complexities in applying VAT to such services.
2. Misuse of VAT Exemptions
- Educational VAT exemptions: Genuine educational courses are often VAT-exempt in the EU. Fraudsters may falsely classify non-educational or commercial services as VAT-exempt courses to avoid tax.
- Fictitious courses: Shell companies may offer non-existent “courses” to claim VAT exemptions or refunds.
3. VAT Carousel Fraud
- Fraudsters create chains of transactions where the VAT paid by one company in a chain is fraudulently reclaimed by another, often using fake invoices. This can include fraudulent educational services as part of the scheme.
4. Inadequate Oversight
- Regulatory gaps: Weak coordination between tax authorities in different EU countries leads to inconsistent enforcement and monitoring.
- Digital platforms: The rapid growth of online education platforms outpaces regulatory oversight, making it harder to detect fraudulent operations.
5. Intentional Underreporting or Overreporting
- Underreporting VAT: Fraudsters collect VAT from customers but fail to remit it to the authorities.
- Overreporting refunds: Fraudulent claims for VAT refunds on supposed course-related expenses.
6. Use of Shell Companies
- Fraudsters set up shell companies in countries with lower VAT rates or lax enforcement to manipulate VAT obligations.
7. Lack of Awareness
- Many individuals and small businesses unknowingly become complicit by purchasing courses or services without understanding VAT compliance, creating opportunities for fraudsters.
Examples of Fraudulent Tactics
- Advertising a course as VAT-inclusive but not registering for or remitting VAT to authorities.
- Issuing fake VAT invoices to claim refunds for non-existent expenses.
- Using fictitious student enrollments to create a façade of legitimate course operations.
Mitigation Measures
- Improved VAT monitoring: Strengthening the EU-wide VAT reporting system.
- Cross-border cooperation: Harmonized rules and enforcement among member states.
- Audits and penalties: Regular audits and stricter penalties for fraudulent activities.
- Digital tracking systems: Leveraging technology to trace digital course sales and verify VAT compliance.
