VAT Fraud as a Policy Stimulus - Is the US Watching? VAT Withholding, RTvat, and the Mittler Model

17 Pages Posted: 26 Feb 2011 Last revised: 2 Dec 2019

See all articles by Richard Thompson Ainsworth

Richard Thompson Ainsworth

NYU - Graduate Tax Program; Boston University - School of Law

Date Written: February 24, 2011


The EU VAT, like most mature tax regimes, is resistant to change. Fraudsters are testing this resilience today, and this may not be such a bad thing for policy-makers. Significant challenges produce significant reforms proposals. If the US is seriously considering a VAT it would do well to observe this dynamic, avoid the known pitfalls, and work to advance the policy debate before it inherits a problem.

The most serious EU VAT frauds include missing trader intra-community fraud (MTIC), its extra-community companion in tradable services (MTEC), and sales suppression (the fraud of manipulating cash register records with Zappers and phantomware).

Fraud does seem to bring out the best efforts in reform proposals. This paper highlights three examples of this fraud/reform dynamic. The examples are drawn from the payment side, and can be seen in a continuum.

The first example presents the Ecuadorian VAT withholding regime. In EU terms VAT withholding is the reverse charge mechanism, with an added requirement that the withheld VAT must be directly remitted to the treasury. Financial intermediaries are required to split VAT from payments and directly deposit these funds with the Treasury.

Secondly, the RTvat is considered RTvat presents a similar VAT withholding proposal for the EU. However, under the RTvat the third-party withholding application is dramatically expanded to all business-to-business (B2B) payments. But the RTvat goes even further. It applies the same third-party withholding mechanism to: (a) all business-to-consumer (B2C) transactions, and then applies the third-party, intermediary payment principle to (b) VAT refunds.

The third example is the Mittler Model. This EU proposal takes the next logical step and eliminates all B2B VAT payments (but retains the B2B paperwork). Simply stated, the Mittler Model replaces the money (the payment of the VAT) with encrypted exemption certificates.

Perhaps the US needs to take a good look at the RTvat, or the Mittler Model when it considers a VAT. Just because these proposals for change are meeting resistance in a mature system, like the EU VAT, does not at all mean that they would be inappropriate for the US if it decides to look seriously at a VAT. VAT fraud is a very effective VAT policy stimulus.

Keywords: MTIC, MTEC, Zapper, Phantom-ware, RTvat, Real-time VAT, Mittler Model, VAT withholding, Third-party withholding, Ecuador, Green paper, COM(2010) 695/4, Fractioned payment, Red Ink Rising, The Moment of Truth, Restoring America's Future, Payroll Tax, P.L. 111-312, Employment, Labor-intensive services

JEL Classification: H26, H89, K14, K19, K34, K39

Suggested Citation

Ainsworth, Richard Thompson, VAT Fraud as a Policy Stimulus - Is the US Watching? VAT Withholding, RTvat, and the Mittler Model (February 24, 2011). 62 Tax Notes International 397 (May 2, 2011), Boston Univ. School of Law Working Paper No. 11-08, Available at SSRN: or

Richard Thompson Ainsworth (Contact Author)

NYU - Graduate Tax Program ( email )

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New York, NY 10003-711
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Boston University - School of Law ( email )

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