VAT Fraud and the Digital Economy within the European Union: Risks and Opportunities

Since the adoption of VAT, EU and Members States’ policy-makers and administrations have been confronted with fraud and avoidance (abuse), often on a (very) large scale. Despite all the efforts made in order to improve the fight against this phenomenon, VAT fraud numbers remain worrying. According to the latest VAT Gap study, published by the Commission in 2014, EUR 177 billion in VAT revenues were lost due to noncompliance or non-collection of VAT in 2012. VAT fraud not only negatively affects the financial interests of the Member States, but it also constitutes a serious issue for business, because VAT malpractices distort the normal conditions of fair competition in which compliant businesses operate. The transformation of business models through information and communication technologies paves the way for new forms of VAT fraud, particularly in an EU cross-border context. This is in part due to the inadequacy of the design of the present VAT system. As the Commission pointed out, the common system is not entirely ‘well-fitted for today’s society’ and ‘inconsistent with the idea of a Single Market’. Adopted more than forty years ago, it also suffers from the institutional rigidity of the unanimity rule and barely takes into account recent developments, in particular the digitalization of the economy. Digital commerce follows its own specific pattern, and one could wonder how traditional tax rules ‘would interact with the new technologies that enabled global electronic commerce’. Action 1 of the OECD BEPS Report is related to the tax challenges of the digital economy and recognizes that the present tax rules, also in the area of income taxation, are not adapted to the new business environment. Even if this situation does not necessarily imply that specific VAT regimes have to be set up for digital transactions it certainly forces all concerned to rethink the manner in which VAT rules are applied and in which the fight against VAT fraud is conducted