Europe To Crack Down On Chip Tax Fraud

LONDON — The European Commission has laid out plans to combat a specific tax fraud that it says is costing hundreds of billions of Euros a year and is having a major impact on many industries, especially those susceptible to the fraud, such as semiconductors and mobile phones.

The EU Tax Commissioner, Laszlo Kovacs, acting at the behest of the U.K. government, will urge finance ministers of the 25 EU countries at a meeting next week to harmonize practices and thus prevent cross border tax dodging within the EU.

If there is agreement, the changes would mean that VAT is only levied once on these goods, at the final point of supply.

Under current rules the tax is collected every time the goods change hands all the way down the supply chain — from when an item leaves the factory to when it is bought in a shop. The VAT is refunded at every stage except the final one when the consumer foots the bill.

The European tax commissioner said he would allow the U.K. to introduce so-called "reverse charging" for certain goods. This will mean that VAT will be levied only once — at the point of consumption.

Kovacs said: "The commission will be positive about the U.K. request on reverse charging. This will apply to goods such as computer chips and mobile phones."

He added: It is time to consider new ways of combating tax fraud more effectively. Tax fraud has become a major cause of concern.”

The U.K. led the way in seeking more collaboration and a more co-ordinated approach, and asked the Commission to introduce the changes on mobile phones and semiconductors after Revenue & Customs uncovered lucrative scams involving the goods.

The problem has arisen as more and more companies fraudulently import the goods free of tax, which they sell with VAT added before disappearing with the proceeds. Others then reclaim VAT at the point of export before taking the goods back across the border. The fraudsters then repeat the scam, setting up what is has become known as a "carousel fraud".

The U.K. tax authorities recently estimated that such fraud increased by 50 percent in the first quarter of this year and has grown by more than 500 percent in the past year. It has estimated the fraud is losing it £5 billion (about $9.3 billion) a year.

In a statement Wednesday (May 31), the Commission said it is also prepared to consider extending the “reverse charge mechanism” to domestic transactions in a Member State. However, it stipulates that “any change to the VAT system must reduce considerably the possibilities for fraud, exclude new risks and above all generate no disproportionate administrative burden for companies.” It suggested VAT carousel fraud is one of the biggest problems, and that overall tax fraud is costing member states between Euros 200 to 500 billion ($250 to $640 billion.)