Can the general reverse charge mechanism combat missing trader fraud and provide for secure VAT collection?

University essay from Lunds universitet/Institutionen för handelsrätt

Abstract: This thesis explores the European Commission’s proposal on General Reverse Charge Mechanism. VAT is a final tax on consumption. It is imposed on every transaction in the supply chain with the general aim of being deductible and thus being neutral for businesses with the right to deduct. The initial aim of the VAT system was to operate as if all the transactions occurred in one single country; however, after the changes made during 1993, goods in cross-border transactions are obtained free of VAT. According to the changes, VAT-registered traders are exempt from VAT in the state of origin and the purchaser accounts for the VAT in the country of destination. As a result, the goods could be sold in the Member State of origin free of VAT or, if transported to the member state of destination, VAT could be collected but not remitted while the business customer in the second MS can deduct the VAT incurred. Those possibilities are used to commit missing trader fraud, and in some member states, the VAT gap is around 40%. In 2016 the Commission adopted Action plan on VAT, aiming to introduce a definitive VAT system. As the preparation of the changes for the future VAT system requires some time, the Commission adopted several parallel measures to resolve the urgent problems about missing trader fraud. The Commission is of the view that the general reverse charge mechanism will stop missing trader fraud and that the VAT gap will be reduced. According to the Commission, the reform of the VAT should result in a new simple, efficient and neutral, and robust and fraud-proof’ VAT system. The objectives agreed by the Council and the European Parliament for introducing the general derogation are to stop missing trader fraud, lower compliance costs for both businesses and administrations and exert no negative impacts on the internal market. The purpose of this thesis is to evaluate the proposed GRCM in relation to the aim of the EU’s VAT system of which robust tax collection is one of the primary goals, and in relation to the objectives agreed by the Council and the European Parliament for the introduction of the GRCM. More specifically, the question researched is whether the GRCM meets the requirements set by the European Commission – a simple, robust, and efficient VAT collection system, and remedies the problem with of MTIC fraud. The conclusion from the analysis is that General Reverse Charge Mechanism as proposed today does not meet the requirements set out by the European legislator. Furthermore, carousel fraud is still possible, and compliance costs would be higher. The application of the GRCM would provide the sought-after result only if introduced sector by sector on a mandatory basis. As an alternative to the proposed GRCM, correctly designed algorithms would be able to solve the problem of relocating of the VAT due and the VAT paid. Thus, combining the origin with the destination principle in one single automative collection-distribution point would be a promissing possibility that needs to be researched in detail. A digital collection-distribution point would have to be established at the EU level, and integrated at the national level. Such a system should and would be able to introduce GRCM but without the risks, that the GRCM bears while the fractional collection system is preserved.

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