For the past eight years or more, trade in the single European market has been subject to a transitional system for the levying of VAT.

With few exceptions, VAT is levied wherever goods are consumed and not where they originate. This ‘country of destination’ principle means that not all the VAT on Community cross-border trade is paid, with some EUR 5 billion lost each year, according to official estimates by the European Commission. In addition, companies become accomplices for finance administration authorities jealously guarding their revenues. Consumers have hardly any chance to benefit from the enormous differences in VAT rates among the Member States. Small and medium-sized firms in particular are weighed down by cumbersome paperwork. In surveys on trade obstacles in the single market, VAT regulations regularly top the list.

The ‘new strategy’ presented by the Commission to improve VAT regulations in the single market makes little or no difference. Instead of getting to the root of the problem by levying VAT in the country in which the goods and services originate, the Commission continues to work needlessly on the symptoms. By abandoning the hitherto legally prescribed tax representative, the simplified administrative procedures and the streamlined deduction of VAT, the ‘country of destination’ principle may have been simplified somewhat, but it continues to apply. There are no considerable cuts in administrative costs and costs for companies, while large-scale tax fraud continues to be tolerated openly.

For this reason, the UFE tax committee calls on the Commission to work towards introducing the ‘country of origin’ principle as soon as possible.

UFE calls for the harmonization of companies’ tax bases throughout Europe.

Experts estimate that by 2005, up to 7% of trade with private customers in Europe will be conducted via the internet, with sales of EUR 160 billion and excise duties for the EU of at least EUR 25 billion. If the State loses even a part of this, the EU alone will lose tens of billions of euros. The UFE tax committee therefore calls on the Commission to ensure immediately that regulations enabling the recording of internet sales for tax purposes are enacted.

The draft Directive presented in June is at best a start. The key questions of how to monitor online sales and to ensure that, as planned, companies from non-EU Member States register for VAT purposes in an EU Member State, remain unanswered. As taxes on private-customer business are no longer payable in the country of consumption, but in the country in which the supplier is based, countries with high VAT rates must fear that business will move to low-tax countries.

The compromise formula on the uniform taxation of investment income devised at the summit in Feira, Portugal, which provides for the abolition of the withholding tax throughout Europe in ten years’ time and its replacement with a duty to inform tax offices in investors’ home countries of income from capital investments, does not go far enough. It is riddled with derogations and need not be implemented before 2010.

The fair recording of investment income in Europe cannot wait that long. The UFE tax committee calls on the EU governments to agree on common regulations immediately for taxing investment income in the European Union. Once again, the UFE tax committee reaffirms the so-called co-existence model, which specifies either a withholding tax of 20% or a duty for banks to inform local tax offices.

For the foreseeable future, politicians have no plans to replace the ‘country of destination’ principle with the ‘country of origin’ principle. As a result, the VAT fraud associated with the ‘country of destination’ principle will continue and even grow. Since the European Anti-Fraud Office (OLAF) is supposed to take the fight against VAT fraud seriously, it must be adequately staffed in accordance with the framework conditions. The three staff members responsible for combating VAT fraud are insufficient to fight against such a dangerous form of tax crime.

Therefore, the UFE tax committee calls for the number of staff at OLAF responsible for the fight against VAT fraud to be increased significantly in line with actual needs.

In order to combat tax fraud effectively throughout Europe, a computerized system should be devised in all member states using the same criteria and the direct exchange of and access to information all over Europe should be provided by OLAF.

UFE demands that the simplification measures adopted to make it easier to set up small businesses and provide them with tax relief do not present new opportunities for fraud.

To prevent such opportunities from arising, the tax administration authorities must be allowed to inspect taxpayers effectively, thereby contributing to a fair taxation system.