The VAT mechanism is vulnerable to fraud due to the specific design of transactions between entities in two different Member States. The European Commission, aware of the problem, made a proposal at the end of May to significantly impede fraud in intra-Community transactions.
Currently one the intra-Community supply of goods or services is divided into two transactions. The taxable person selling the goods shall supply intra-Community goods (WDT), while the purchaser shall carry out intra-Community acquisition of the goods (WNT).
Under specific conditions, the seller shall carry out a VAT-taxed transaction 0%, and the purchaser is obliged to settle the tax at the appropriate rate in his country of acquisition. This mechanism was based on the most serious VAT fraud. The European Commission wants to eliminate this "weak link".
The proposal is undoubtedly interesting. However, he may encounter obstacles. The question is immediately raised how will the seller determine what VAT rate is appropriate in the country of purchase for the goods or services he sells? It should not be recalled that VAT rates may vary for similar goods.
The way in which "disappearing taxpayers"
The change is meant to be significant. The EC proposes that taxation at the appropriate VAT rate for the country of acquisition should already take place in the country of sale. The amount of this tax to the competent tax office of the State of acquisition would be transferred to the tax office of the State of sale.
This would eliminate the existence of an entity which, under a functioning tax carousel, is called a "missing trader".
This entity (most often a fictitious company registered in a ‘virtual’ office) after buying goods in another country does not pay the relevant VAT on WNT and quickly sells the goods to another entity, a participant in the tax carousel.
On the other hand, no VAT rate 0% when selling to another Member State, it would eliminate the possible benefit of prior fictitious trade in goods in order to increase the amount of input tax that can be claimed from the tax office. The entity that carries out such benefits in the VAT nomenclature is called a ‘broker’.
A tax rate tool
The proposal is undoubtedly interesting. However, he may encounter obstacles. The question is immediately raised how will the seller determine what VAT rate is appropriate in the country of purchase for the goods or services he sells? It should not be recalled that VAT rates may vary for similar goods.
How to verify that the rate on a given commodity is the appropriate rate when one is delivery to the buyer in Malta and Romania? The European Commission wants to address this problem by creating a special information portal for entrepreneurs, where an appropriate tax rate can be set. The solution is certainly interesting.
However, will this portal be kept up-to-date and cover all possible goods that may be traded? On the side of the creators and administrators of such a system, there will be an extraordinary need for meticulousness.
More cooperation will also be needed between the tax administrations of the Member States, which will pass on the amounts of VAT paid for intra-Community transactions. The European Commission is optimistic. The taxpayers will see whether her ideas will work if the proposed changes come into force, which could happen in the near future.