Value-added tax (VAT) fraud causes tax revenue shortfalls and diminishes public budgets correspondingly. In 2017, for example, total VAT revenue amounted to approximately €226 billion. Value-added tax (VAT) fraud causes tax revenue shortfalls and diminishes public budgets correspondingly. In 2017, for example, total VAT revenue amounted to approximately €226 billion. VAT has been levied for 100 years now and has established itself as one of the most important sources of tax revenue. VAT revenue is used to finance the various functions performed by the government (such as providing internal security, infrastructure, health services, social services and education). As the government’s financing needs have grown, VAT has undergone regular increases, going from its original rate of 0.5% in 1918, to 19% currently. In terms of standard rates for VAT, Germany is thus in the lower fifty percent compared with the other countries of the EU.1
The Federation and the Länder jointly take action against VAT fraud to safeguard public revenues, guarantee fair taxation and protect tax-compliant companies against distortions of competition. We are currently witnessing the emergence of particularly challenging phenomena: as digital technology spreads to all areas of life, new possibilities of committing VAT fraud arise, too. VAT fraud comes in many forms: it can range from the failure to declare and/or pay VAT in full and the fraudulent use of the right to deduct input tax, to what is known as VAT carousel fraud, where several participants form a fraudulent (trade) cycle. These forms of fraud can be combated with the help of legislative measures and the efficient control mechanisms and smooth exchange of information that are enabled by effective cooperation between the responsible authorities at the national and international level. With the spread of digital technology, there has also been an increase in VAT fraud in connection with online activities (trade and services). Since national borders are no longer an obstacle here, the emphasis in combating VAT fraud must increasingly be shifted to the international level.
Organisational measures within the German Finance Ministry to combat VAT fraud
The requirements for an effective fight against VAT fraud, both at the national and international level, have increased. To meet these emerging challenges as effectively as possible, the German Finance Ministry has increased staffing in this area and grouped together responsibilities in a new division which deals with national and international “VAT monitoring and fraud prevention”.
This division will be continuing and enhancing the many measures that are already in place to prevent and combat VAT fraud.2 The new unit also allows for a sharpened focus on combating fraud committed in the area of VAT.
Having a dedicated Finance Ministry division grouping together the national and international competencies within the fight against VAT fraud allows us to develop a unified process for effectively combating fraud throughout Germany, Europe and the world.
The fundamental framework of VAT law is set out in Community law; the Council Directive on the common system of value added tax (VAT Directive, 2006/112/EC) is particularly important. The VAT Directive has been transposed into national law, which is why, in the EU, we also speak of mostly “harmonised” VAT legislation.
The term “value added tax”
is mainly used in European Community law, with equivalent terms in many of the languages of other EU member states (e.g. Taxe sur la valeur ajoutée (TVA) in French, or Mehrwertsteuer (MwSt), as it is informally called in German (the official German term is Umsatzsteuer )).
constitutes one of the EU legal acts as defined in Article 288 of the Treaty on the Functioning of the European Union (TFEU). A directive must be transposed into national law to become applicable in an EU member state.
Legislative proposals made by the European Commission are discussed in the Council of the European Union, where, as is the case in many other EU-level bodies, the German government is represented by the Ministry of Finance. These discussions always also consider how they can contribute to combating fraud more effectively.
In the area of VAT-related administrative cooperation and the exchange of information in a European setting, the Council Regulation on administrative cooperation and combating fraud in the field of value added tax ((EU) 904/2010) is of particular importance.
constitutes an EU legal act as defined in Article 288 of the TFEU and becomes directly applicable in all EU member states.
Since fraud increasingly plays out across national borders, cooperation between the EU member states to combat VAT fraud now plays a decisive role. The Regulation already makes it possible to effect a cross-border exchange of information: for example, it allows for the exchange of information via the VAT Information Exchange System (VIES), or the submission of a request for administrative enquiries (e.g. audits) in another EU member state, coordinated with the requested country’s own investigations, and even provides for multilateral, simultaneous controls.
the EU member states inform each other on cross-border transactions carried out by their traders in the EU.
Particularly noteworthy among the anti-fraud measures performed jointly by all EU member states is the “Eurofisc” network, an early warning system. Liaison officials from EU member states and, more recently, from Norway,3 engage in the targeted exchange of information in various specialised fields relating to cross-border VAT fraud. This concerns operational and general information, for example findings regarding new fraud schemes. These targeted exchanges produce starting points for checks on fraudulent transactions within the European Union. The European Commission is also currently developing an IT programme which is intended to help Eurofisc liaison officials detect cross-border VAT fraud even faster and more effectively. In Germany, Eurofisc is implemented in close coordination between the federal level and the Länder , by the German liaison official at the Federal Central Tax Office (BZSt) and the responsible contact points determined by the Länder .
On 2 October 2018, the EU finance ministers adopted various amendments to the Regulation on administrative cooperation and combating VAT fraud. These amendments will allow for an even more extensive cooperation in the future. The most important changes include:
- A basically obligatory performance of certain administrative enquiries, if requested by at least two EU member states. There is only restricted scope for declining such a request.
- A new instrument, for “administrative enquiries carried out jointly”, which will enable officials of EU member states to take part in administrative enquiries in the territory of another EU member state, for example by participating in joint audits.
- The exchange of data from import declarations.
- The provision of access to EU member states’ vehicle registration data.
- The expansion of Eurofisc’s remits. Among other things, this expansion allows Eurofisc to request information from Europol and OLAF, and to share that information with other EU member states via the Eurofisc network.
In recent years, there has been further development and improvement of the measures that were put in place in the past to improve the national exchange of information and cooperation between the federal level and the Länder . Within Germany, the responsibility for collecting and monitoring VAT lies with the Länder (Article 108 of the Basic Law ( Grundgesetz )). VAT fraud can only be combated successfully if there is early and effective monitoring. Special VAT audits and unannounced VAT inspections, which, for example, are carried out right at the start of business activities, are proven means of quickly clarifying circumstances that need checking. The central coordination office at the BZSt has a special role to play here, as it is responsible for coordinating checks (special VAT audits and tax investigations) across the Länder , and thus prevents any loss of information that may otherwise occur as competencies change from one Land to another. Using special IT procedures, all cases of VAT fraud in Germany are recorded and evaluated, and risk profiles are created. This ensures that all competent tax authorities and auditors and investigators involved have access to the same information. The tax authorities and customs administrations are also continuously intensifying cooperation.
In addition to the focus on creating closer interconnections within the administration, tax assessments have been automated to a greater degree. A first step in this direction was taken ten years ago, when the electronic balance sheet was introduced. Electronic systems are also deployed to help detect indicators of VAT evasion, for example in order to identify tax-relevant activities by traders via online sales platforms.
Other important legislative measures to help prevent VAT fraud include
- A new legal basis for retrieving data across several Länder and using data to prevent, investigate and prosecute tax fraud or tax evasion; this helps reduce shortcomings in tax enforcement.4
- The German government’s decision of 1 August 2018 concerning a bill on avoiding losses in revenue from VAT in the online goods trade and on amending further tax regulations ( Gesetz zur Vermeidung von Umsatzsteuerausfällen beim Handel mit Waren im Internet und zur Änderung weiterer steuerlicher Vorschriften ). The proposed legislation is intended to combat VAT fraud when goods are traded on online marketplaces. As of 2019, online marketplace operators will be required to record certain data on sellers for examination by the tax authorities; under certain conditions, operators themselves will be liable if no VAT is paid on supplies made via their marketplace. Thus the German legislature has already equipped the VAT Act (Umsatzsteuergesetz) with a norm to combat tax evasion in online trade two years before a binding European provision even enters into force. The German government has also drawn up a fact sheet in consultation with the Länder that provides information for companies which are not established in the EU on their obligations in terms of paying VAT. The fact sheet exists in several languages and has been sent to marketplace operators, associations and embassies with the request that it be published in suitable sites. The aim of this fact sheet is to make those concerned aware of the tax obligations in place.5
- A new package of rules on VAT in electronic commerce adopted by the Council of the European Union in December 2017 means that online marketplace operators can be made liable for VAT on goods supplied from non-EU countries under certain conditions; the rules will apply from 2021 onwards.
The new rules on VAT in e-commerce
were adopted by the EU finance ministers on 5 December 2017. The package includes amendments to the VAT Directive as well as to Council Regulation (EU) 904/2010 and Council Implementing Regulation (EU) 282/2011.6 It is intended to further simplify the collection of VAT in the B2C (business to consumer) e-commerce sector.
This is why it is so important that appropriate anti-fraud measures be taken jointly with the other EU member states and, within Germany, take action via coordination between the federal level and the Länder. Only coordinated action will allow us to prevent fraudulent activities that diminish national budgets and distort competition. Important anti-fraud measures in the area of VAT currently include the expansion of cooperation between the EU member states and the Act on avoiding losses in revenue from VAT in online goods trade and on amending further tax regulations. There are many ways of committing VAT fraud and they quickly adapt to new structures in trade, which are developing particularly quickly due to the spread of digital technology. This is why the legislative and organisational measures to combat VAT fraud need to be continuously developed and improved. Fraud schemes under VAT law are often designed to function across borders in order to escape detection by national authorities. This is why it is so important that appropriate anti-fraud measures be taken jointly with the other EU member states and, within Germany, take action via coordination between the federal level and the Länder . Only coordinated action will allow us to prevent fraudulent activities that diminish national budgets and distort competition. Important anti-fraud measures in the area of VAT currently include the expansion of cooperation between the EU member states and the Act on avoiding losses in revenue from VAT in online goods trade and on amending further tax regulations.
- See the German-language brochure “Die wichtigsten Steuern im internationalen Vergleich 2017” (“Taxes: an international comparison 2017”), Federal Finance Ministry, 2018 issue, p. 49.
- See the outline of measures to combat fraud provided in the Finance Ministry’s monthly reports of 23 April 2009 and 21 July 2014 (only in German).
- See the Agreement between the European Union and the Kingdom of Norway on administrative cooperation, combating fraud and recovery of claims in the field of value added tax (OJ L 195 of 1 August 2018, p. 3); in force since 1 September 2018 (see OJ L 199/1 of 7 August 2018).
- See the Finance Ministry monthly report of 21 April 2016 on persistently combating tax fraud, sophisticated tax avoidance and money laundering (“Steuerbetrug, trickreiche Steuervermeidung und Geldwäsche konsequent bekämpfen” (only in German))
- See the Finance Ministry webpage: http://www.bundesfinanzministerium.de/mb/20181025.
- See Council Directive (EU) 2017/2455, Council Regulation (EU) 2017/2454 and Council Implementing Regulation (EU) 2017/2459.