Cross-border Value Added Tax Fraud In The European Union

Abstract

This paper quantifies Value Added Tax (VAT) fraud involving missing traders in the European Union (EU), whereby traders collect VAT and disappear before remitting it to the tax authorities. This scheme is thought to cause large revenue losses to governments, yet estimates of its importance are sparse. It involves cross-border trade and results in firms misreporting their transactions, which in turn affects reported trade statistics in the country in which fraud takes place, yet not in the partner country. To quantify fraud, I exploit the implementation of the Reverse Charge Mechanism to domestic transactions, a reform eliminating missing trader fraud. Based on 54 reform episodes in 24 countries over 2004-2019, I estimate pre-reform fraud levels based on how discrepancies in product-level mirror statistics change at the time of reform, comparing products targeted be the reform (treated) to non-targeted products (control). I find that trade associated with fraudulent activity represents 3.3%-4.2% of trade of treated products, which implies that fraud worth up to EUR 1.7 billion annually is removed thanks to the reform, amounting to 0.21% of VAT revenues.