Cross-border Value Added Tax Fraud In The European Union

Abstract

We study the effects of a reform to VAT rules (the reverse charge mechanism on domestic transactions) aimed at eliminating VAT fraud involving cross-border transactions within the European Union (EU). The EU VAT system is prone to fraud involving cross-border transactions between member states, whereby traders either collect VAT without rightfully remitting it to tax authorities or claim a VAT refund to which they are not entitled. We find that pre-reform fraud amounts to around 4% of the trade volume of treated products, or 0.1-0.2% of overall VAT revenues in reform countries in the year leading to the reform. We also show that fraud is concentrated in countries with higher corruption, lower customs efficiency, and lower GDP per capita. Our results represent a lower bound for the gains from local fraud removal, which appear similar in magnitude to the costs incurred by firms to comply with the reform. It is difficult to assess whether the reform is overall successful, since fraud could be relocated somewhere else, and the reform itself could create new opportunities for evasion.

Keywords: Tax evasion, VAT fraud, tax revenues, international trade, European Union

JEL Classification: H26, F14