The EU’s financial interests and single market are not protected firmly enough against Value Added Tax (VAT) fraud on imports when simplified import customs procedures are used, according to a new audit report published on Monday by the European Court of Auditors (ECA).
For imported goods, VAT is due when the goods enter the EU customs union, with the amount owed being established on the basis of customs declarations. VAT fraud on imports distorts competition in the single market, and has a negative impact on both the EU’s and the Member States’ finances. The auditors found that simplified import customs procedures are particularly vulnerable to such fraud.
There are two risky simplified VAT procedures. One procedure is known as “Release for free circulation – CP42” and exempts VAT collection on goods imported from third countries into one EU member state when they are meant to be traded in another. The other procedure is called “IOSS – import one-stop shop and exempts VAT on e-commerce for goods imported into the EU from third countries.
The Commission estimates the corresponding value of the imported goods at around €260 billion between 2021 and 2023. The estimated value of the loss of VAT on imported good is difficult to estimate, according to the audit team. However, the team found significant losses in VAT collection for intra-Community supplies identified in the sample of imports audited.
The audit was carried against the backdrop of the Commission’s annual VAT Gap reports, which measures the difference between theoretically expected VAT revenues and the amount actually collected.
According to the latest report (published in December 2024), the overall EU VAT compliance gap amounted to €89.3 billion in 2022, representing 7% of the theoretically expected VAT revenues. Compared to 2021, the gap increased by €13.3 billion. The Commission’s press release on the report includes a table on the overall VAT compliance gap in the Member States.
Is it possible to estimate how much of the gap is due to the simplified import customs procedures?
“The Commission should be in a position to provide a data-based estimate of the VAT gap related to import VAT fraud in order to address the gap correctly through an appropriate risk strategy,” the audit team told The Brussels Times. Nevertheless, we note that the Commission cannot provide a quantified estimate of VAT fraud under simplified procedures as the VAT gap report lacks specific data on import VAT fraud related to these procedures.”
An audit of the total VAT is not included in ECA’s current working programme but the auditors will consider it in coming years.
“Existing measures are not sufficient to prevent and detect VAT import fraud when simplified import customs procedures are used,” commented François-Roger Cazala, the French ECA Member responsible for the audit. “The value of goods imported under these procedures is significant, and the risk of abuse due to fraudulent practices is high.”
“The right balance should be kept between trade facilitation and the need to protect the EU’s financial interests,” he added.
The auditors found loopholes and inconsistencies in the EU regulatory framework for simplified import customs procedures, and in the way the European Commission monitors that framework. They recommend that standardised rules should be introduced and enforced. Currently traders who infringe VAT rules may continue to conduct customs operations. In addition, sanctions and penalties differ significantly between member states.
Furthermore, the auditors found significant losses in VAT collection in the sample of imports they scrutinized. There is no assurance that goods are moved from the member state of import to another member state for sale, which is a condition for granting the VAT exemption upon import into the EU. The auditors conclude that transport evidence for those goods should be collected upon import.
Also, the auditors detected several cases of undervaluation of products – and thus also of VAT – by importers, mainly for smartphones, textiles, shoes, and jewellery. Despite recommendations made in previous audits, data-sharing remains an issue, particularly between tax and customs administrations in the various member states.
The European Commission welcomed the audit report on VAT fraud and says that it is taking concrete steps to address the issues raised in the report and to strengthen the EU's tax framework. “This includes enhancing the Import One Stop Shop scheme and improving cooperation between tax and customs authorities, to protect the EU's financial interests and ensure a fair and competitive business environment.”
The Commission accepted all audit recommendations, though some of them partially. The partial acceptance of the audit recommendations was the result of the discussions during the adversarial procedure, when ECA and the audited body discuss the findings before the publication of the report. ECA is also obliged to publish the replies of the auditees.
For the recommendations where the Commission gives a partial acceptance, this is mainly due to the fact that changes in the EU legal framework are needed in order to implement those recommendations, ECA explained. For such recommendations, the decision is therefore not up to the Commission and it depends on the co-legislators (Council and Parliament) to decide on new legislation and rules.
M. Apelblat
The Brussels Times
