Making it happen in Europe: the challenge of an EU-wide solution

Initial responses to RTvat's real-time solution

The initial draft proposal by RTvat for a rapid solution for managing tax losses in the intra-EU VAT has been reviewed by experts within the EU Commission, the IMF, the OECD, by individual countries’ tax authorities and by other business organisations and has been positively received. This was initiated in the context of identifying and delivering a solution which, if implemented, will resolve a significant portion of the total VAT fraud.

Background to cross-border VAT in the EU

In 1992, the Commission's intention for VAT on cross border intra-Community transactions had from the beginning been that goods and services should be taxed in the country of origin. Exports would not therefore be zero rated and businesses would be able to deduct foreign VAT charged by their suppliers on their internal VAT returns.

Intra-Community transactions would in effect be treated like transactions within a single state. Since however tax would continue to accrue to the country of consumption, a clearing house mechanism for redistribution of revenue between Member States was foreseen.

This however proved to be a step too far, essentially because of concerns about the clearing system.

Instead what was put in place to deal with the abolition of fiscal borders is what is referred to as the "transitional arrangements" which were basically seen as temporary pending the resolution of technical and political obstacles to a full "origin" system of VAT. To a large extent the VAT Directive still reflects this long term intention

E.g., in the preambles to the directive, you find the following
(10) During this transitional period, intra-Community transactions carried out by taxable persons other than exempt taxable persons should be taxed in the Member State of destination, in accordance with the rates and conditions set by that Member State.

History tells us however that the "transitional period" is still on-going and to a great extent, this is the source of difficulty in the VAT system, leaving it open to fraud.

Towards an integrated and coherent VAT solution

Fraud in the VAT system is facilitated by the fact that taxing intra-Community transactions is done on the basis of what was really a quick and temporary fix, which is now under stress.

The technical and political concerns about the clearing system which would be needed - lack of trust between Member States about handling one another's tax receipts, suspicion towards a new inter-governmental institution needed to handle the treasury function, etc. - have been overtaken by developments in technology.

The move from zero rating transactions – a big source of the fraud problem - to taxing with ‘real time’ collection and allocation of funds can be achieved using systems and know-how which have been developed for commercial purposes and which are in place today.

These commercial applications have sophisticated anti-fraud features which quickly identify non-typical transactions. The neural network solutions used by banks, card associations and specialist fraud control companies have taken this to a high degree of effectiveness for many transaction types.

We believe that delay in addressing these losses is both unacceptable and unnecessary, to an extent that would be intolerable in a commercial environment. What is needed is the opportunity to show that a solution, using existing and proven business-based systems, can be put in place rapidly and at modest cost. This possibility, as advocated by RTvat, should be debated at the political level, even to the extent of bringing it before the Council of Ministers, at the earliest possible moment.

The political challenge of changing the VAT system

To achieve this we are advocating that the EU Commission devote resources to considering RTvat’s solution, particularly those aspects which are capable of early delivery. The unanimous support of the 27 governments is needed at the bi-annual meeting to create the changes.

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