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Cross-border Value Added Tax Fraud In The European Union

This paper proposes a quantification of Value Added Tax (VAT) fraud eliminated through the implementation of the Reverse Charge Mechanism to domestic transactions, a measure reforming the EU VAT rules and preventing traders from exploiting a weakness of the system that allowed them to collect VAT without remitting it to the tax authorities. The targeted fraud schemes involve cross-border transactions and result in firms misreporting their transactions, which in turn affects trade statistics. I estimate pre-reform fraud levels based on how discrepancies between trade statistics reported by importing and exporting countries change at the time of reform. Based on 54 reform episodes in 24 countries over 2004-2019, I find that fraud worth up to 1.6 billion EUR annually is removed thanks to the reform. Although large in absolute terms, this only represents a tiny fraction of total VAT revenues in the EU.