Mr. Seamus McCarthy:

Value added tax is a primary source of State revenue accounting for almost one third of total tax receipts. Approximately 90% of VAT receipts relate to domestic trade, with the remainder arising on imports from outside the EU. Special arrangements are in place in respect of VAT on goods and services traded internationally between businesses in the EU. Subject to certain conditions, a VAT-registered business in one member state can supply goods or services to a VAT-registered business in another member state at a zero rate of VAT. In such cases VAT becomes payable locally on the full sales price when the importing business sells the goods or services in its domestic market. VAT is collectable in Ireland on exports direct to retail customers.

Figure 11.1 from the report summarises the control system in place for VAT on intra-community trade. This includes the VAT information exchange system, VIES, and statistical reports on export trade. The VIES returns submitted by Irish traders to Revenue must include a VAT number for each EU customer supplied with goods at a zero rate of VAT. This is communicated via the EU Commission to the revenue authorities in the relevant country which follow up to ensure the appropriate VAT liability is paid.

To take advantage of the zero rate provisions, an Irish exporter must be able to satisfy Revenue the recipient of the goods or services is registered for VAT in another member state. Otherwise the exporter is liable for the payment of Irish VAT on the transaction. Revenue has acknowledged a substantial proportion of traders are non-compliant in filing VIES reports. While Revenue policy is to prosecute persistent non-compliant traders, the examination found Revenue suspended prosecutions for non-compliance in 2010. Revenue recommenced prosecution in such cases in March 2012.

The examination also found the volume of transactions reported by one large Irish export trader fell by 74% between the first quarter of 2010 and the last quarter of 2011. In response to queries by the examination team, Revenue asked the trader for an explanation. It transpired there had been significant underreporting of transactions by the trader because of a technical problem with a new billing system. Revenue asked the company to resubmit its returns for the affected period and stated the company had agreed to do so by the end of August 2012. The Accounting Officer should be able to inform the committee of the outturn in this case.

The EU Commission matches VIES data between countries and reports back any mismatches to the relevant tax authorities. In response to these reports, Revenue's policy is to send error reports to traders containing details of incorrect VAT numbers submitted. A sampling exercise conducted during the examination showed Revenue had issued letters to smaller traders for all incorrect VAT numbers submitted, but took no follow-up action in cases where a response was not received from the trader. The examination also found Revenue had not issued error reports in respect of unmatched transactions to the largest traders in 2010 and 2011 due to Revenue system failures. Error reports were subsequently issued. By the time the report was being finalised, Revenue stated a negligible amount of corrected data had been received from the large traders concerned. Because exporting companies are liable to pay full VAT to the Irish authorities where an invalid customer number is given, the uncollected VAT could be significant. For example, the audit team found that during 2010 and 2011 the value of transactions for which incorrect VAT numbers were submitted by large trading companies was €1.3 billion. The potential associated VAT was estimated to be approximately €200 million.

As part of the VIES control system, Revenue also receives a monthly report from the EU Commission detailing imports by Irish traders from other EU countries. Revenue compares this data to the data on VAT returns with the aim of identifying cases where VAT due has not been accounted for. However, the results of a sampling exercise carried out during the examination indicate cases highlighted by the data matching exercise are not routinely investigated by Revenue districts.

The preliminary results of a pilot project conducted in the Waterford Revenue district suggest that using VIES data to select cases for investigation has the potential to be effective in detecting unpaid VAT. The chapter recommends that Revenue should examine the results of the Waterford project and consider the potential for its extension to other districts. Two identified forms of fraud relating to the intra-community VAT system are known as "missing trader" and "carousel" fraud. Both involve a trader acquiring goods at a zero rate of VAT from another member state, selling them domestically at a VAT inclusive price and then disappearing without paying over the VAT collected to the revenue authorities. Although missing trader and carousel fraud is regarded throughout Europe as a significant risk to the payment of VAT, Revenue has not attempted to estimate the scale of the problem in Ireland or the cost to the State in terms of foregone VAT. Through the Eurofisc network, member states can share information on suspected fraudulent activities. Revenue is monitoring the activities of 17 Irish traders at the request of other member states, but has made no requests for foreign revenue authorities to monitor traders on its behalf. The report concludes by recommending that Revenue should review the range of control measures for VAT on intra-community trade in place in other member states and assess the case for their introduction here.