The potential Impact of Digital reporting on VAT Carousel Fraud

We at Mazars’ tax department in Malmö have had the pleasure of having Deniz Çatmaz as an intern for the last ten weeks. Deniz is studying the master’s program in European and International Tax Law at Lund University. Within the framework of this program, Deniz has written an essay that is linked to the commission’s proposal about how current VAT rules can be modernized with regard to the opportunities that the new digital technology offers. Deniz has chosen to focus on the new proposals based on the possibility of preventing fraud.
The essay is a good summary of current fraud problems in the area of VAT and how these occur, as well as the content of the new proposals. The text below is a summary of the essay and adapted to our blog. If you wish to read the entire essay, which we recommend, you will find it in the end of this article.
I wish you a pleasant reading.
/Fredrik Rosén.


The VAT Gap was estimated at EUR 93 billion in 2020, and a major part of this loss is caused by missing trader intra-community (‘MTIC’) fraud and/or carousel fraud. The data reveals the EU’s suffering from MTIC and carousel fraud, as well as the urgency of the situation and the need for collective effort. In the face of the problem, in 2020 the Commission announced its Action Plan with the aim of the more fair, comprehensible and harmonized legislative package which will include renewed tax rules that can adapt to the digital era. After this step, the Commission announced a package of proposals on December 8, 2022, which aims to “modernise and make the EU’s Value-Added Tax (‘VAT’) system work better for businesses”.

The main source of this article is the development of the Digital Reporting Requirement (‘DRR’) that comes within this package, which has allowed Member States to implement it until 2028.

Current situation

The VAT Directive dates to the 1970s and the ‘transitional’ VAT system that has adopted along with the ‘single area without internal tax borders’ in the EU was intended to last until the creation of the single market in 1993, however, it is still in force today.  The system was designed to split a cross-border taxable event into two: the supplier’s zero-rated, with the right to deduct, intra-Community supply (‘ICS’) of goods from the Member State of departure, and the acquirer’s intra-Community acquisition (‘ICA’) of goods in a different Member State.

Carousel fraud occurs when several businesses shaped a circular by selling and purchasing the same goods and services. In other words, the common ground in both MTIC and carousel fraud is at least one of the businesses involved in the scheme is a missing trader who is taking advantage of zero-rated VAT. The business either exists on paper or uses counterfeit VAT ID numbers and disappears with money before the tax authorities realize the scheme.

The declaration responsibility belongs to the purchaser in the country of destination in its periodic VAT returns, in the form of recapitulative statements which are stored in Member State’s databases.  Recapitulative statements (regulated under Article 262(2) VAT Directive) are supported by the VAT Information Exchange Systems (‘VIES’), which facilitates the exchange of information related to intra-Community transactions and helps tax authorities to match intra-Community supplies and acquisitions and to guarantee that VAT is properly declared in the Member State of destination.

The VAT Directive has given Member States the discretion to adopt national reporting requirements, however, a harmonized level has not yet been formed and different digital reporting requirements have been introduced by several Member States. These differences cause ‘fragmentation’ and becomes burdensome for taxpayers who are registered in more than one Member State. This situation results in an obstacle to the single market and a barrier to free trade, which is one of the main aims of the EU.

What is new with the Proposal?

The reasons for the increase in VAT Gap and MTIC fraud are the fact that the current system (recapitulative statement) is outdated, and one of the deficits of the VAT system is that missing traders generally disappeared until the tax authorities learn about the carousel scheme, and real-time recording of intra-Community transactions are not possible at EU level.

The implementation of mandatory e-invoicing requirements begins in 2028 with amended Article 218. Formerly Article 232 regulated the necessity of the recipient’s consent in the acceptance of issuing an e-invoice is now deleted. Accordingly, Article 218 regulates the obligation of issuing standardised EU invoice, EN16931, which is currently known for mandatory B2G e-invoicing. The content of the e-invoice has been expanded with Article 226, and Article 222 necessitates the issuance invoices on a transactional basis and sets up two days of deadline after the chargeable event takes place.

However, the supreme revolution is the changes in the articles between Article 262 and Article 271 under Chapter 6 of Title XI, which previously regulated recapitulative statements, stipulating the digital reporting requirement of intra-Community transactions on a transaction-by-transaction basis. From 2028, all businesses, including non-residents but except for call-off stocks under Article 17a, will be subject to report the intra-Community supply in digital format (Article 262). The functioning and the features of the new DRR are defined under Articles 263 and Article 264; the data will be first submitted to the national tax authorities and the transmission of the data might be transferred with a national e-invoice format (with the requirement of adhering to EU standard) by the taxable person or by a third party no later than 2 working days after issuing the invoice. Likewise, Article 268 obliges Member States to require data from taxable persons who, in their territory, make the intra-Community acquisition of goods in terms of Article 21 or 22, which was discretional for Member States under the recapitulative statements.

Finally, under the new Section 2 of Chapter 6 of Title XI, the new rules aim to harmonize the existing and future reporting systems and prevent fragmentation and administrative burdens within the Member States. Article 271a envisages Member States to adopt reporting systems for their domestic B2B supplies. In order to see the operability and results of the system, it is stipulated in Article 271c that the EU Commission will submit a report showing the outcomes in March 2033 and evaluate its future harmonization plans.

Last but not least, amendments to Regulation No. 904/2010 on administrative cooperation have been made in ViDA (‘VAT in the Digital Age’) package. According to Article 24g of Regulation No. 904/2010, the Commission will maintain and manage a new central database called “Central VIES” that will store DRR transactions’ data such as taxpayer identification data, including VAT ID numbers for 5 years. The current VIES, which enables the exchange of information on transborder purchases and VAT registration numbers between Member states, would be replaced by this system. The system would be able to store data and cross-check information received on intra-Community supplies and acquisitions and detect MTIC and carousel fraud, and the integration into the Central Electronic System of Payment (‘CESOP’) is possible under Article 24k.

What role does it play in carousel fraud?

As explained, with the new DRR obligations proposed within the package of the ViDA, the trader who performs a zero-rated (Article 138(1) VAT Directive) ICS transaction and the potential ‘missing trader’ who makes an ICA transaction in another Member State, shall report their transactions to the tax authorities in almost real-time. Thus, the new rules aim to help tax authorities and the Member States quickly identify a potential carousel scheme and create a level-playing field and fair competition between trading partners.

Even though the ViDA proposal is still newly introduced, and nothing has been accepted; there are criticisms regarding the security of the collected data and the potential breach of the privacy of private life. Moreover, the discretion given to Member States to impose a DRR on taxable persons even in domestic transactions might cause administrative costs (infrastructure of the system) since several Member States still use various reporting systems or have not adopted a reporting requirement due to the low VAT Gap in their country or the insufficient resources of the country. The issue has become controversial regarding the efficiency and the proportionality of the DRR on domestic transactions in combating MTIC fraud.


A pressing need to reform the system of EU VAT has been in the air since 2020.  Although several Member States have accepted some reporting requirements with their initiatives or by the request of derogation from Article 395 VAT Directive, a harmonization has not been established yet. Moreover, the steps to prevent MTIC fraud, which is the corollary of the VAT Gap and is considered the supreme loss of EU VAT revenue, are not effective due to the lack of administrative cooperation between Member States and the system is creating barriers within the internal market.

The DRR aims to unify the Member States, especially in terms of standard e-invoice reporting by abolishing ‘old-fashioned’ recapitulative statements by strengthening the trust between the Member States and establishing a control system called ‘Central VIES’ which will store and cross-check DRR data by transaction-by-transaction basis with the help of technology.

Deniz-Çatmaz-The-Potential-Impact-of-Digital-Reporting-Requirement-1Ladda ner


Artikeln publicerad i Mazars nyhetsbrev mars 2023

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