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EU Parliament VAT fraud briefing

Review of policy measures, examples of cooperation and future progress

The EU Parliaments research service has produced a briefing on EU VAT fraud. It covers:

  • Background to the VAT Gap and types of fraud
  • Member State and EC policy measures
  • Future progress and challenges.

The briefing reviews the reliance of VAT invoice and concerns over significant annual losses due to fraud. While eliminating the VAT gap is unrealistic, progress has been made, with losses dropping from €142 billion in 2014 to €89 billion in 2022. Key causes include fraud, insolvencies, avoidance, and maladministration. It examines fraud tactics like inflating input VAT claims and major schemes such as MTIC (carousel) fraud and CP42 fraud.

  1. Summary of Policy Measures Against VAT Fraud

The EU has implemented a range of measures to combat VAT fraud, including carousel fraud (MTIC) and other fraudulent schemes. These policies, executed both at the EU level and within individual Member States, aim to detect, prevent, and counteract VAT fraud. Some of the most significant initiatives include the removal of low-value consignments VAT relief, the establishment of the Central Electronic System of Payment Information (CESOP), digitalization efforts under the VAT in the Digital Age package (ViDA), and increased cross-border cooperation.

Removal of €22 Low-Value Consignments VAT Relief

Previously, goods imported into the EU valued at €22 or less were exempt from VAT. However, this exemption became a major loophole, leading to an estimated €7 billion in fraud annually. Sellers deliberately undervalued and misrepresented their goods to evade VAT charges, an issue exacerbated by the rapid growth of e-commerce. In July 2021, EU e-commerce VAT package. abolished this exemption, ensuring that all goods imported into the EU, regardless of value, are subject to VAT. Initial assessments indicate that this measure has successfully curbed undervaluation fraud.

Introduction of the Central Electronic System of Payment Information (CESOP)

With the rise of digital commerce, VAT evasion by online sellers has become a significant concern. Many businesses, both inside and outside the EU, fail to register for VAT in the Member States where they sell goods, either avoiding VAT entirely or under-reporting sales. To address this, since 2024, the EU has mandated payment service providers (PSPs) such as banks to report cross-border transactions where recipients receive more than 25 payments per quarter from EU customers. This data is stored in CESOP, allowing anti-fraud experts to analyze and cross-check transactions against other datasets. This system enhances transparency, helping tax authorities detect fraudulent behavior.

VAT in the Digital Age (VIDA) and Digital Reporting Requirements (DRRs)

The digitalization of tax administration has played a critical role in improving VAT compliance and reducing fraud. EU Member States that have heavily invested in digital tax infrastructure have seen VAT revenue grow 81% more than those that have not. Technologies such as artificial intelligence (AI) allow tax authorities to analyze vast amounts of transactional data, identifying fraudulent activities more efficiently.

One of the key advancements under VIDA is the introduction of Digital Reporting Requirements (DRRs), which enable real-time reporting of sales and purchases to tax authorities. This ensures immediate tracking of VAT transactions, reducing the time between fraud detection and enforcement. Although Member States have implemented DRRs at different levels, early indications suggest they have significantly reduced fraud. Between 2014 and 2019, national DRRs contributed to an estimated additional VAT revenue of €19–28 billion.

To further strengthen anti-fraud measures, the EU has planned to introduce a mandatory, harmonized DRR system for intra-EU business-to-business transactions by 2030. Based on electronic invoicing (e-invoicing), this system will require businesses to report transaction data to a central EU-wide database, allowing tax authorities to cross-check VAT compliance across Member States. VIDA also provides guidelines for Member States considering domestic DRRs, ensuring consistency across different national systems.

Cross-Border Cooperation in Combating VAT Fraud

VAT fraud, particularly MTIC fraud, often involves complex cross-border networks. To tackle this issue, various EU agencies and initiatives have strengthened cooperation among Member States.

Eurofisc

Eurofisc, established in 2010, is a network of anti-fraud officials from EU Member States and Norway, dedicated to exchanging information and coordinating actions against VAT fraud. The system allows for automatic data sharing, early warnings, joint investigations, and collaboration with Europol and the European Anti-Fraud Office (OLAF).

In 2019, Eurofisc introduced the Transaction Network Analysis (TNA) tool, which helps tax authorities analyze large datasets more quickly. By 2023, Eurofisc had identified 3,500 fraudsters and uncovered €12.7 billion in suspicious VAT transactions.

Eurojust and Europol

Eurojust, the EU’s judicial cooperation agency, facilitates legal collaboration between Member States to combat VAT fraud. It helps execute European Investigation Orders and supports coordinated action across multiple jurisdictions.

Europol plays a crucial role in tackling organized crime linked to VAT fraud. The European Financial and Economic Crime Centre within Europol provides intelligence and support to national law enforcement agencies. Given that VAT fraud is often connected to organized crime—such as drug trafficking, cybercrime, and arms smuggling—Europol’s involvement is essential. In 2024, Europol assisted in dismantling a €300 million VAT carousel fraud network with suspected ties to Russian organized crime. Some VAT fraud networks have even been linked to terrorist financing, making VAT enforcement a broader security priority.

OLAF and the European Public Prosecutor’s Office (EPPO)

OLAF, the EU’s anti-fraud office, investigates VAT fraud affecting the EU budget. However, while it can conduct administrative investigations and notify Member States, it lacks the power to prosecute offenders.

The EPPO, operational since 2021, is responsible for prosecuting crimes affecting the EU budget, including large-scale VAT fraud. It focuses on high-value fraud cases, including VAT fraud exceeding €10 million. By the end of 2023, the EPPO was handling 339 VAT fraud cases worth €11.5 billion. Unlike OLAF, the EPPO has prosecutorial authority, allowing it to take legal action against fraudsters.

3 Progress and Future Challenges

Efforts to combat VAT fraud have led to significant progress. Strengthened VAT regulations and improved cross-border cooperation have exposed large-scale fraud networks and reduced the VAT gap. These measures also facilitate closer collaboration between Member States, potentially setting a precedent for tackling other financial crimes.

However, challenges remain. The involvement of multiple anti-fraud bodies has led to concerns about inefficiencies and overlap. The EU is currently reviewing its overall anti-fraud structure to enhance cooperation between agencies, particularly OLAF and the EPPO. A revision of Council Regulation (EU) No 904/2010 in 2025 is expected to enhance Eurofisc’s capabilities and improve information-sharing mechanisms.

Additionally, the rise of new digital tools has revolutionized VAT fraud detection, but their implementation requires significant resources. The VAT Expert Group has expressed concerns that DRRs could lead to excessive administrative burdens for compliant businesses. The EC is urged to develop standardized guidelines to ensure efficient data collection and minimize unnecessary compliance costs.

Fraudsters are also constantly adapting, finding new loopholes in the VAT system. As digital commerce expands and new business models emerge, policymakers and tax authorities must remain vigilant in addressing evolving fraud risks.

Conclusion

The EU has made significant strides in combating VAT fraud through regulatory reforms, digital tools, and cross-border cooperation. The removal of low-value VAT exemptions, the establishment of CESOP, the introduction of DRRs, and the strengthening of Eurofisc, Europol, Eurojust, OLAF, and the EPPO have all contributed to enhanced VAT compliance. Looking ahead, policymakers must ensure that enforcement measures remain effective while balancing administrative efficiency for businesses. By continuing to strengthen coordination and leveraging technological advancements, the EU can further reduce VAT fraud and protect public finances.

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