By Judith Ugwumadu | 05 February 2014

Money equivalent to one-fifth of all public spending in Europe is lost to tax evasion and fraud every year, the European Commission has said, as it revealed that around €193bn in value added tax revenues was missing in 2011.

As part of an intensified battle against tax fraud the EC has proposed stronger strengthening cooperation with non-EU members on VAT. Its action plan against tax evasion has identified VAT as one of the areas where more needs to be done to clamp down on fraudulent activity. 

The EC noted that VAT fraud involving non-EU operators in the telecoms and e-services sectors was particularly risky. It said more effective tools to fight such fraud were essential to protect public budgets given the growth of these industries.  

Taxation commissioner Algirdas Šemeta said the supply chain has evolved dramatically since VAT was first implemented in the EU. 

‘Globalisation and e-commerce open up new windows of opportunity, but also create new risks,’ he added. ‘Fraudsters play on cross-border differences and information gaps between countries.’

The EU needed to work hand-in-hand with international partners if it is to successfully combat VAT fraud, Šemeta said.

‘That is what the commission is proposing, with a request for negotiating mandates to formalise this cooperation,’ he added. 

Under this plan, the commission started negotiations with Russia and Norway on administrative cooperation agreements in the area of VAT. Exploratory talks have begun with Canada, Turkey and China and official negotiations will start once the countries indicate that they are ready. 

European member states should cooperate against VAT fraud by allowing each other access to their databases, and exchanging information on taxpayers’ activities, the commission said. It will establish a framework of mutual assistance in combating cross-border VAT fraud to help each member state recover what revenues they are due.