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19th Jan 2021

EU carbon credit system still 'at risk of VAT fraud'

  • Fraudulent traders used loopholes in the EU's emission trading system to make up to €5 billion (Photo: SWIFT)

A loophole allowing carbon-credit tax fraud resulting in losses of several billion euros has not been fully closed, the European Court of Auditors said in a report published Thursday (2 July).

The EU's Emissions Trading Scheme market, put in place to reduce carbon emissions, “remains at risk to VAT fraud”, the auditors said in a special report titled The integrity and implementation of the EU ETS.

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A carousel fraud involving the trade of emission credits in 2008 and 2009 amounted to a loss of €5 billion for national tax revenues.

A front company in one EU country would sell the carbon credits to a company in another, but without transferring VAT tax. The credits would then be traded and sold for a price that included VAT - but did not hand over that VAT to the relevant tax authority.

Following the fraud scheme, the EU adopted a directive which gave member states the possibility to implement a VAT reverse charge mechanism, which puts the obligation to pay VAT on the person to whom credits are transferred. This has been seen as a sufficient deterrent.

But not all 28 member states have put the mechanism in place.

Six countries - Bulgaria, Cyprus, Estonia, Latvia, Lithuania and Malta - are dragging their feet on implementation.

“The risk of value added tax (VAT) fraud on EU ETS allowances is consequently still not fully addressed in the European Union”, the auditors' report said.

Kevin Cardiff, the Irish member of the ECA, told this website that “we don't have an indication that [this type of fraud] is still being carried out”, but that may also stem from the fact that the ECA did not actively investigate it.

In a response published in the report, the Commission noted that in June 2011, the then climate and tax commissioners sent a letter to all member states that had not applied the mechanism yet to urge them to do so.

“This demonstrates that the issue has been addressed at the highest possible level”, the Commission said.

The Luxembourg-based European Court of Auditors – which is more of an audit agency than a real court – said in its report that while there were “significant improvements to the framework for protecting the integrity of the [ETS] system”, the management of the ETS by the Commission and national governments “was not adequate in all respects”.

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