MTIC (Carousel) Fraud: Twelve Ways Forward; Two Ways 'Preferred' - Has the Technology-Based Administrative Solution Been Rejected?

Abstract

In a May 31, 2006 Communication to the Council, the European Parliament, and the European Economic and Social Committee, the European Commission indicated a need to develop a co-ordinated strategy to improve the fight against fiscal fraud [COM(2006) 254 final]. Although the Communication considers fiscal fraud broadly (VAT, excise duties and direct taxes) the most pressing need seems to be for a VAT strategy that will effectively deal with MTIC (Missing Trader Intra-Community) or carousel fraud. To this end the Commission hosted a conference: Fiscal Fraud - Tackling VAT Fraud: Possible Ways Forward. The March 29, 2007 conference was constructed workshop-style, and divided into three concurrent sessions

What was the way forward? On February 22, 2008 a press release and a communication from the Commission indicated that after consideration, the ECOFIN Council of June 5, 2007 was of the opinion that two ways were preferred: "... [1] a generalized reverse-charge system, where liability for VAT payments would be shifted from the supplier to the purchaser,... [and 2] taxing intra-Community supplies of goods." Among these, the second "way" is preferred over the first. "... [T]he preferred system of taxing intra-Community supplies should be based on taxation in the Member State of departure and not in the Member State of arrival..." Both of these solutions require significant structural changes to be made to the VAT. The Commissions assessment of these preferred ways forward is not overwhelmingly positive.

These ways forward require significant structural changes. On May 31, 2006 the Commission (as opposed to the ECOFIN) had been of the opinion that an administrative (not a structural) solution was preferable. In addition, the Commission wanted a technological solution that would advance the Lisbon Strategy.

Has a technology-based administrative solution to MTIC (carousel) fraud been rejected? The answer is no. No, because no such solution has even been considered.

This paper makes such a proposal. The proposal is for a limited adoption of the Digital VAT (D-VAT) throughout the EU, and community-wide (and coordinated) adoption of the recently enacted French rules that remove zero-rates from high-risk intra-community cross-border transactions.

This solution creates a surgical disincentive that targets the cross-border trade identified as high-risk MTIC (carousel) fraud trade. At the present time this trade is in cell phones and computer chips, if MTIC (carousel) migrates to other products so too would this solution. This proposal flexibly re-directs market forces so that the market itself becomes a barrier to MTIC (carousel) fraud.

Unlike all other proposals, this approach involves no structural change to the VAT itself. It simply seeks digitization and certification of the current system.

Keywords: MTIC fraud, carousel fraud, SSUTA, VAT, fraud, certified solutions, EU Commission, ECOFIN, ways forward, missing trader intra-Community fraud

JEL Classification: E62, H20, H25, H71, K00, K34, K40,K42, O23, O33