For this episode of VAT Talks we had the honour to speak with Marie Lamensch. Marie Lamensch is Professor of Taxation at the Université Catholique de Louvain (UCLouvain) and the Free University of Brussels (VUB) and a lawyer at the Brussels Bar. She is a member of the VAT expert group of the EC and academic adviser for the Organisation for Economic Co-operation and Development (OECD) and the World Customs Organisation. She has written a report on VAT fraud in the European Union (EU) at the request of the European Parliament (EP). In the interview we discussed her role in the VAT Expert Group (VEG), why we need more Europe to fight fraud, and why VAT is fun and diverse.

For how long have you been working in VAT and how did you end up in this field of work?

“I have been working in VAT for a little bit more than 10 years. Before that, I studied International and European Law and worked as a lawyer in an international firm. When I did my LLM in 2005 I wrote a Master’s Thesis about taxation and that’s when I realised tax was a fascinating topic. In the firm where I was working at the time, I was mostly working on financial services in the banking sector. I was also a teaching assistant at University but in the field of contract law. In 2009 I then decided to quit the bar and to write a PhD thesis on Tax Law. When I was looking for a topic, e-commerce rapidly became an obvious choice. I was fascinated by the work the OECD had done back in the 1990s leading to the adoption of the Ottawa Framework and I was convinced that major changes were to come, because we were now 10 years later and the sector had changed dramatically. This really was the time when I became passionate about what I do, because it was obvious that tax law and VAT in particular needed to adjust to these new developments and that academics might have an important role to play to propose and comment on the possible alternatives. I must say I picked the right topic because no one really talked about it back in 2009 and soon after it ended at the top of the agenda of the Commission.”

Your colleague Charlene Herbain told us previously that she loves VAT, she even called it a Very Attractive Tax, do you feel the same way?

“What I really like about it is that it’s about the day-to-day management of a business. You have to look into the way your business functions, where do you buy, where do you sell, what is the business model? For each and every purchase and sale or even transfer of your own goods you have to take the right decision. That link with daily management to me is very appealing, whereas income tax or corporate income tax is more linked to accounting on an annual basis. VAT really has a practical aspect on a day-to-day basis, that I find very interesting.”

You have co-authored a report about VAT fraud for the EP and are also advising the European Commission (EC) through the VEG. Could you tell a little bit more about this group and your role within it?

“The VEG is a unique opportunity for both academics and businesses. It is very important that the viewpoint of the main stakeholders, the businesses, is taken into account when reforms are designed, but academics also have a role to play because they have a more complete and objective perspective to offer than businesses who understandably tend to essentially focus on simplification and cost reduction. Academics look at the bigger picture: the balance between efficiency for businesses and the protection of tax revenue for States. They also analyse any new proposal with the basic tax principles and the general principles of EU law in mind and of course also the Court of Justice case law. In fact I think it could be beneficial to make even more use of the perspective of academics than we do now”.

“The decisions the EC makes are always a matter of perspective, a matter of preferences, arbitrage and trade-offs, always keeping in mind that they have to convince 27 Member States. Therefore, I think it is very important that, in making these decisions, the Commission can hear what academics have to say. That’s why I’m really happy to be part of the VEG and to have the opportunity to offer input on future legislation. Not that all of our comments are always taken into consideration, but we at least have the opportunity to express and share our comments and I think this is very valuable in the legislative process. I once wrote that the creation of the VEG was an important step towards inclusive governance in the field of VAT.”

Are academics with a technological background part of the VEG?

“No, to my knowledge we all have a legal background. Although it might be possible that some of them also work for a different faculty as well. For example I teach at the faculty of Law, but I also teach at the Management Science faculty. In any case there are no academics in the field of IT within the VEG so the Commission must be getting its IT expertise from somewhere else.”

Do you think the solution to VAT fraud will come from the EU? What would be the best way forward?

“At the European level I think the creation of Eurofisc and the development of the TNA technology are the most significant developments in this area in recent years. Member States are sovereign to decide and whatever you do in the area of VAT fraud on a European level will always be an issue of trust and an issue of self-interest. It is probably the case in many fields but it is the case in this field in particular: it is in your own interest to protect your own VAT revenue, but it will never be your number 1 priority to protect VAT revenue of other Member States. Unless the system is such that by preserving your own revenue, you also preserve the revenue of the other Member States. But just asking the Member States to look after VAT revenue of other Member States as is proposed in the definitive system[1] is not a sustainable approach in my opinion.”

“I really believe that on this issue, and on many other issues, we need more Europe. The big bang solution would be to turn the VAT into an EU tax in order to get rid of national interests, but even if we keep national VAT systems I think we should nevertheless organise centralised collection at the level of the EU. If we manage to organise the collection centrally (making sure that all Member States could be represented and that complete transparency could be ensured) fraud would be much easier and quicker to prevent in my opinion. That would also simplify things for businesses.”

“In any case I really believe the definitive system proposal should be withdrawn, because it will never work to require from Member States to collect VAT for each other and do the necessary checks and controls without a collection fee and, as I already stated in front of the Tax3 Committee of the Parliament, I believe it would even create tension between the Member States. If you don’t know how other Member States are treating your revenue, you might be suspicious even if there is no reason to. Also keep in mind that the capabilities of Member States wildly vary. You can never expect the smaller Member States to develop the same administrative resources that their bigger counterparts just for the sake of protecting VAT revenues of other Member States. And I don’t think you can blame them for that. It’s a natural thing that you first protect your own revenue and most of the time they do not even have enough resources to do that. So I think the definitive system proposal will eventually be withdrawn and I think many people agree. It’s just a matter of time.”

In order to deal with the fight against VAT fraud the EP has established a new subcommittee, called FISC. What do you think such a committee can add to the existing institutions?

“The EP has been increasingly looking at tax issues and I think that the creation of this subcommittee as a more stable set-up is a positive development, keeping in mind that the Parliament does not have competence to adopt legislation in this field. We’re still, as least for now, applying the consultation procedure, so the Council (that is the Member States) decides alone and the Parliament can only propose amendments. In any case, the creation of this sub-committee should result in increased knowledge and therefore should also improve the quality of the comments and suggestions for amendments that the Parliament will submit. So, obviously it is a positive development and I think it also shows that politicians are very much aware that tax fraud and avoidance issues are a growing cause of concern for EU citizens. Because they realise that public finances, that are very much needed right now, are also affected by the difficulties we face to curb fraud and avoidance. Summing up: it is a positive development but at the end of the day Member States have to take courageous decisions.”

As you know we value confidentiality. What do you think the role of confidentiality is in the development of the solution to VAT fraud? Is it part of the debate? Also in your talks with the VEG?

“Well, often someone within the group raises the issue of privacy, but then it will not be further discussed in too much depth within the VEG because we are not intellectual property or data protection experts. However, we are very aware of it, and it’s relevant in any file. Think of the whole e-commerce issue, in particular with B2C transactions, or the exchange of data in the fight against fraud. In such cases it is very common that the issue of a possible data breach is raised and flagged, but not further discussed in the VEG because we are no experts in this field. Businesses are also very concerned about the issue of privacy, because they are very much aware of the need to protect their data and the data of their clients and their own obligations towards the protection of their clients’ data.”

Previously, we discussed the issue of ‘known, and should have known’ with different experts and that this sometimes results in the fact that not the actual fraudsters, but other companies that are in the fraudulent value chain have to pay the price of the fraud. You previously stated that this creates a ‘sense of impunity’. Could you elaborate on that?

“Before the Tax3 Committee of the EP I stated that our objective should be to turn carousel fraud into a ‘risky non-profitable business’. At this moment it is not too risky to commit VAT fraud if you’re an organised crime band because it’s pretty easy to get away with it. Most academics and certainly businesses criticise the tendency of tax administrations to go after the smaller fish, that is not those who initiate the fraud but those who passively enable the fraudsters to steal VAT because they buy from them (the famous ‘knew or should have known’ standard). On the one hand, we should not be completely naive and acknowledge that some of them just turn a blind eye on suspicious situations and we should also understand that for the administration, it seems to be the only way to not lose revenue because those actually organising the fraud cannot be caught. On the other hand, when I talk with colleagues and practitioners I hear that in the majority of cases they have seen or which they have to treat, the tax administration is ‘aggressively’ trying to prove that suppliers ‘should have known’ that they were facilitating fraud in cases where they obviously have acted in good faith. In some cases this has very dramatic consequences for those companies that did not have any direct advantage in the fraud, which can even lead to bankruptcies. In any case what I meant is that the fact that tax administrations focus on the smaller companies down the chain and also the difficulty to sue the real fraudsters before national courts indeed creates a sense of impunity for the actual fraudsters.”

“The key to tackle carousel fraud is in my view either to change the system so that technically the fraud is no longer possible (but then you have to be careful about the new fraud schemes that might become possible) or to develop technology to detect and stop the fraud faster. What Member States are currently trying to do within EUROFISC is the latter. I like to compare this to running water taps. Imagine each carousel fraud as a running water tap with VAT revenue flowing and getting lost in the sink. An efficient detection system should allow the authorities to identify the running taps and turn them off as soon as they are opened or quickly thereafter. If you manage to do it in a very short time frame (and the TNA seems to enable Member States to do that), then fraudsters constantly need to set up new schemes and it becomes a ‘less profitable business.’ To make it a ‘risky business’ you then have to make sure that national authorities have the means and the intel to catch and prosecute the real fraudsters and to obtain reimbursement of the stolen amount together with other sanctions.”

“When I said that if you want to change the system to render the fraud technically impossible you need to be careful about new opportunities for fraud. My point is that it would take you years to change the system but it won’t take long for the fraudsters to adjust. As I said I think the Member States have made significant progress with the TNA technology and the developments towards the setting up of the European Public Prosecutor Office (EPPO)[2] are also going in the right direction (that is in the direction of supporting Member States to sue fraudsters and recover stolen VAT and make carousel fraud ‘a risky business’). I would think twice before changing the system, except to organise collection centrally as I mentioned earlier. With a centrally organised collection, EUROFISC work might be even easier.”

“One of those technologies to detect fraudsters at an earlier stage is real-time reporting, as implemented in Spain and Hungary for example. What do you think of this solution?

“Real-time reporting is a very interesting and important development but we need to make sure that it is affordable for businesses and that requires harmonisation. I think this is what the Commission has in mind when proposing for new plans for VAT in the digital age. Important is that you should also maximise the opportunities offered by this technology in terms of audits for example.”

“This really requires a multidisciplinary approach, and I think this is indeed what the EC is currently doing. The aspect of data-sharing is also being taken into consideration by the Commission and by the Member States. Although in the field of taxation you always have this special treatment because preserving tax revenue might justify, to a certain extent, being a bit more flexible on some regulations to protect privacy, because the revenue would be of a higher public interest. Of course, the data should indeed be protected as much as possible and there is always a limit to how much is being shared. This is especially true for corporate data and client information, which can be really sensitive. So it is very important that businesses are in the loop when discussing these new systems, which I think is the case.”

One of the problems with this massive data collection is that the burden of proof (onus operandi) will lie with both the taxpayer and the tax authority and both might need to prove that they ‘should have known’. Think of the situation where a company ended up in a fraudulent value chain. Only after a couple of months, the tax authority finds out about the fraud and the company potentially has suffered losses, but also has to prove that it ‘did not know or could not have known’ that it was dealing with a fraudster. However, it can then tell the tax authority instead ‘you should have known’. Do you think this might be a problem with real-time reporting systems?

“Exactly, but I do not really consider that as a big problem. I think that new powers always come with new responsibilities and if you have the information at hand you have to accept that the companies that provide the data might expect that you make good use of it and detect fraud at an early stage. Of course, I do understand why it might be a concern for tax administrations. They will collect all the data with real-time reporting for which they need to use appropriate technology and maybe even manpower to a certain extent which can become a challenge. However, it is also a great opportunity to upgrade the tax administration, to create attractive positions and to reinforce the administration at large. And at the end of the day it would increase the revenue collected so it should be seen as a positive development and as a risk that is worth taking. But I do understand what you mean and I am very curious to see the first case in front of a court where someone is saying that ‘actually it is not us that should have known, it’s you’.”

You are advising the EC on a regular basis, but if you have to give them 1 piece of advice which they should implement immediately what would it be?

“Consider direct and secured VAT payments to the tax administration in B2C cross-border e-commerce and stop asking and expecting offshore vendors and platforms to collect it and then pay it back to the EU. Why building on a system where EU VAT is first being paid to someone outside the EU, knowing that we will need international cooperation and costly procedures to have it back in case of a problem? (and before that: Withdraw the definitive VAT system proposal!).”

Lastly, what would you say to people who are not really fond of VAT? How would you enthuse them for this lovely form of taxation.

“I guess it is a matter of education. When I studied tax law at university, VAT was barely part of the programme. But things are changing and in any case I devote quite some time to it in my general tax courses.”

“For a non-specialised audience I would remind them that VAT is usually the second (sometimes first) source of revenue for States. In Belgium VAT revenue is used to finance social security spendings and therefore it should be interesting to know how it works, what the main advantages and weaknesses of the indirect collection method are and what could be done to improve it.”

“What also makes it interesting is that as I mentioned already earlier it is part of the everyday life of any business. As a business, even if you are not handling VAT yourself, you should understand how it works just to make sure you are not making mistakes because as I said earlier: in VAT you have to make correct decisions for each and every sale or purchase.”

“Finally, what I like about VAT is that although the basic principles are quite simple, from there you can get into really interesting discussions and reflections on how to apply it to complex chains of transactions and on complex new business models. It really allows you to play with and interpret the legislation and to propose the interpretations. So, as a lawyer it is a pretty joyful field, because you need a wide variety of skills. You also need to follow-up the court of justice case law. We have new decisions all the time, involving all kinds of situations and business models. Can you believe we have now more than 1000 VAT decisions? Mastering all this case law is a challenge but it also makes our work very dynamic, fun and diverse.”

1. Read more about the definitive system here: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52017DC0566&from=EN

2. Read more about the (EPPO) here: https://ec.europa.eu/info/law/cross-border-cases/judicial-cooperation/networks-and-bodies-supporting-judicial-cooperation/european-public-prosecutors-office_en