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CLIMATE ACTION PROGRAMME

1 October 2009

EU moves to tackle carbon trading fraud

The European Commission has presented measures to fight VAT fraud in carbon permits to regain the credibility of its emissions trading scheme ahead of crunch climate talks in December.

The EU executive proposed on 29 September an express solution to stop "carousel fraud," which has seen criminals steal billions from EU governments by means of VAT receipts for items like mobile phones and computer chips.

These criminals have recently moved to the EU carbon market (see EurActiv LinksDossier on the EU's emissions trading scheme).

In a simple case, known as 'the missing trader' fraud, a trader buys carbon credits in one member state without having to pay VAT and then sells them in another country, charging VAT.

Afterwards the importer disappears instead of paying VAT to the government.

The Commission proposes to combat this by temporarily applying a "reverse charge mechanism" to greenhouse gas emission allowances, as well as other "particularly fraud sensitive goods": computer chips, mobile phones, precious metals and perfumes.

Under the mechanism, the supplier does not charge VAT.

Instead, the customer becomes liable for paying the tax, and declares and deducts it at the same time without effecting payment to the treasury.

This removes the opportunity to commit fraud as carbon traders do not exchange VAT every time they sell carbon credits.

During the summer, several member states already took action against suspected fraud cases in carbon trading.

The Dutch government opted for the approach now proposed by the Commission. France exempted emissions allowances from VAT completely, while the UK set the rate at zero.

The Commission is now proposing a harmonised EU response to the problem. Applying the mechanism would nevertheless remain optional for member states.

"VAT carousel fraud is against member states' finances and they should have the means to combat it efficiently.

However, actions taken against this fraud should be taken in a consistent manner across the EU and clear evaluation criteria should be established," said László Kovács, EU commissioner for taxation and customs.

The proposed measure is only temporary, and the Commission regards it as an opportunity to assess the usefulness of a sector-targeted application of reverse charging.

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Source: EurActiv

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