CO2 MTIC Fraud -- Technologically Exploiting the EU VAT (Again)

Abstract

On February 1, 2010 Algirdas Semeta is expected to be confirmed as the next European commissioner for taxation, customs union, audit and anti-fraud. If his nomination passes a confirmation hearing at the European Parliament he will succeed Laszlo Kovacs. At the top of Mr. Semeta’s list of things requiring attention should be MTIC fraud in tradable CO2 permits. Political and fiscal realities make CO2 MTIC fraud a top priority. CO2 MTIC is a technology-driven fraud that takes advantage of the same weaknesses in the EU VAT that have become well known in the cell phone and computer chip trade. The Europol press release from the third day of the 2009 UN Climate Change Conference in Copenhagen indicated that the fraud has reached, “…approximately 5 billion euros [and that] … in some countries, up to 90% of the whole market volume was caused by fraudulent activities.” This paper assess the unfolding reports of CO2 MTIC fraud, examines the errors in tax policy that allowed MTIC to morph from cell phones and computer chips into CO2 permits, and then diagrams one CO2 MTIC pathway, explaining why CO2 MTIC fraud is far more dangerous than what has come before. Particular attention is placed on the tax policy errors in the VAT Committee’s TAXUD/1625/04 REV 1 recommendation. It concludes with a discussion of the technology-based administrative solution, and indicates several avenues for moving forward. The remedies considered all require at least one fully harmonized unanimous act at the community level. This most likely means a VAT regulation, not a VAT directive. There are choices. The regulation could impose tax rules, or it could impose an administrative regime. Tax regulation: This approach essentially would require the community to go back and reconsider the TAXUD/1625/04 REV 1 decision. Administrative regulation. This approach essentially would require the community to adopt a regulation for the certification of tax compliance software. The regulation could be modeled on the American Streamlined Sales Tax, and should include third-party service providers who would guarantee compliance. Two models are possible, voluntary and mandatory. What does not work: It is also clear that there are some options that will not work at all to prevent CO2 MTIC fraud: TAXUD/1625/04 REV 1 and COM(2009)511.