EU Sales-Tax Proposal Aims to Capture Revenue Lost to Fraud

  • Losses from fraud could be cut by 40 billion euros a year
  • EU Commission offers road map for overhauling VAT system

European Union nations could reclaim as much as 40 billion euros ($46 billion) in revenue lost to fraud under a new plan to overhaul the system for collecting value-added tax across the 28-nation bloc, the European Commission said in a statement Thursday.

Over the next two years, the Brussels-based commission will seek to streamline cross-border transactions, improve tax collection on Internet sales and consider new ways that countries can adjust rates on individual products. In 2017, the EU plans to propose a single European VAT area, a reform of rates and add specifics to its anti-fraud strategy.

The commission estimates that about 50 billion euros is lost to tax cheats under the current setup. Yet the EU’s executive has ambitions to realize even greater gains by linking together and simplifying systems from different countries.

“We face a staggering fiscal gap: the VAT revenues are 170 billion euros short of what they could be,” EU Economic Affairs and Tax Commissioner Pierre Moscovici said. “It’s time to have this money back. We also are keen to grant member states more autonomy on how to define their VAT reduced rates.”

The EU plan offers two options for how countries could adjust the rates they charge on individual products. One route would be to extend the ways that reductions are granted, while maintaining the minimum standard VAT rate of 15 percent. This option would not allow countries to eliminate rates on individual products like tampons, digital books or energy-saving goods unless they were on a common list.

Moscovici’s Preference

The second option would allow countries to adopt any reduced-rates policy they choose, “as long as it does not generate tax distortions,” the commission said. Moscovici said Thursday that he prefers the second option, which would require safeguards to avoid unfair competition and prevent fraud.

Changes to EU tax rules must be unanimously approved by nations to take effect. The European Parliament is limited to a consulting role. Anneliese Dodds, a member of the EU legislature from the U.K. Labour Party, said the commission’s strategy is a welcome step that will shift the “key battle” to the council of EU nations.

The U.K.’s so-called tampon tax, charged on women’s sanitary products, has taken on outsized significance in the debate over Britain’s membership with the EU. Dodds said the commission plan, if enacted, will allow the U.K. to eliminate the “abhorrent” tax as soon as 2017 and also raise much-needed revenue by stamping out fraud.

“By giving rate-setting powers back to the U.K., the EU is showing that it is both willing and able to change when it gets things wrong,” Dodds said in a statement Thursday. “Only by working at an EU level can we combat this cross-border fraud and bring extra revenue back to the treasury at a time of cuts and austerity.”

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