Plans by Germany and Austria to beat rampant value added tax fraud by completely changing their tax collection systems were on Wednesday vetoed by Brussels, fuelling tensions over the issue.

Laszlo Kovacs, European Union tax commissioner, said the proposal by the two countries to depart from standard European VAT rules by introducing a so-called “reverse charge” system could not be allowed.

Germany, which claims to be losing between €17bn-€18bn ($21.3bn-$22.5bn) a year through all forms of VAT fraud, is blocking other EU tax agreements in an attempt to force Mr Kovacs to change his stance.

Berlin argues the reverse charge system would deny fraudulent middle men
the chance to commit fraud as VAT would be collected by the retailer at the end of the supply chain.

On Wednesday Mr Kovacs said derogations from the normal VAT rules could only be allowed if they were “targeted, restricted and proportionate”. He said the Austrian and German plan could only be approved if there was a change of EU VAT law.

However, he is prepared to accept reverse charging in targeted cases. Officials said the commissioner was likely to accept this autumn a proposal by Britain to allow the scheme to apply to mobile phones and computer chips.

So-called “missing traders” have chosen these high-value, low-volume goods as their preferred target for fraud, which occurs when goods are imported VAT-free from another European country. This type of fraud is estimated to cost the UK Treasury up to €3bn a year.

Because of the growing scale of VAT fraud, finance ministers will consider this autumn whether to change the tax law, with Germany likely to lead calls for the widespread use of reverse charging.

However Mr Kovacs prefers an alternative method where tax is paid only in the country of origin: that country then passes a share of the VAT receipts on to the country that receives the goods.

Germany’s threat to disrupt other VAT reforms until a deal on reverse charging is agreed could hit plans to change the taxation rules for e-commerce enterprises.

That reform, which has been delayed for at least six months, would close a loophole whereby e-commerce companies such as Apple’s i-Tunes, AOL and Ebay-Skype move to the EU member with the lowest VAT rates – such as Luxembourg and the Portuguese island of Madeira – from where they undercut competitors based in higher rate territories.

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