The Morphing of MTIC Fraud: VAT Fraud Infects Tradable CO2 Permits
24 Pages Posted: 7 Aug 2009 Last revised: 2 Dec 2019
Date Written: August 3, 2009
Missing trader intra-community (MTIC) fraud has been slowly morphing from cell phones and computer chips to other commodities. In the last few months however MTIC made a dramatic appearance in tradable CO2 permits. It closed exchanges and prompted France and the Netherlands to unilaterally change their tax treatment of CO2 trades. The UK has followed the French treatment in large measure. On Monday June 8, 2009 rumors of MTIC fraud in carbon emission permits closed the main European exchange for spot trading of European Union carbon emissions permits and Kyoto offsets. When BlueNext began trading permits again on Wednesday, June 10, 2009, the certificates, which had previously been subject to the 19.6% French VAT, were exempt (without right of deduction). MTIC fraud in tradable CO2 permits presents a high level policy dilemma – how do you aggressively pursue tax fraud without destroying the tradable permits market? Traditional tax enforcement (aside from direct pursuit of the missing trader) centers on denying deductions for VAT paid to the trader who purchased from the missing trader. This trader could well be innocent, and that is the problem. The standard of proof for allowing this deduction is whether or not this party knew or had reasonable grounds to suspect that the VAT payable in respect of the supply (or any previous or subsequent supply) would go unpaid. The underlying difficulty for the CO2 market is – even if there is no fraud – just the possibility of being denied millions of euro in VAT deductions is a significant increase in risk. On October 13, 2003 the European Parliament and the Council set out the rules for the trading of greenhouse gas emission allowances. The Directive follows from the UN Framework Convention on Climate Change and the Kyoto Protocol. The intent is to reduce greenhouse gas emissions by 8% relative to 1990 levels. The trading system began on January 1, 2005. The French, UK and the Dutch have taken self-help measures to prevent MTIC losses. None of these jurisdictions have received permission to make these changes, and objections have been raised in this regard. Each country approaches the problem structurally. The French (and now the UK) have elected (unilaterally) to treat transactions in tradable emission permits as exempt (the French exemption is without right of deduction; the UK is with the right of deduction). The Dutch have taken a different (unilateral) route – a full reverse charge regime. There is a third way, one that approaches the problem through administrative (not structural) mechanisms. It is technology-intensive, requires software certification, but is perfectly fit to a MTIC fraud problem embedded in a regulated digital marketplace. This paper presents this third method.
Keywords: MTIC, VAT fraud, Carousel fraud, BlueNext Exchange, Climate Spot Exchange, CO2, tradable emissions permits, UN Framework Convention on Climate Change, Kyoto Protocol
JEL Classification: K33, K34, K42
Suggested Citation: Suggested Citation