Do more harm than good? The optional reverse charge mechanism against cross-border tax fraud

The so-called ‘missing trader intra-community’ (MTIC) fraud causes enormous losses in value-added tax (VAT) revenue. The fraudsters take advantage of the zero-rated cross-border supplies within the European Union (EU) and resell the goods domestically without paying the received VAT to the tax authorities. One of the most prominent measures to combat this scheme is the optional reverse charge mechanism (RCM) that shifts the VAT liability from the supplier to the customer in business-to-business transactions. Using asymmetries in international trade (trade data gap, TDG), we identify the fraud-reducing effect of the RCM. For the observation period (2003 – 2019) within the EU, we quantify this effect in terms of the VAT revenue between 7.5 and 7.7 billion euros using a midpoint estimate. Additionally, we are the first to provide empirical evidence of a harmful fraud relocation from RCM countries to non-RCM countries. This explains the domino effect of RCM introductions in the EU and calls for a unified approach to VAT fraud

Digitalization and Cross-Border Tax Fraud: Evidence from E-Invoicing in Italy

The digitalization of transaction processes through tools such as electronic invoicing (e-invoicing) aims to improve tax compliance and reduce administrative costs. Another important aspect of digitalization is its potential to reduce tax evasion. We analyze the impact of the widely introduced e-invoicing in Italy on cross-border value-added tax fraud. As a proxy for this tax fraud, we make use of the discrepancy in trade data that is double-reported in both the importing and exporting country (trade gap). We calculate trade gaps based on product flows on the most detailed level between Italy and the remaining countries of the European Union. Our results suggest a significant decline in cross-border fraud in response to the introduction of mandatory e-invoicing, providing an important rationale for the application of this measure by other countries. Furthermore, we estimate that e-invoicing decreased the Italian revenue loss by €0.6 billion to €1 billion in 2019. This is in line with the statements of the Italian Ministry of Finance, which are probably based mainly on the revenue development. In this context, we underpin the suitability of the trade gap as an approach for the study of anti-fraud measures and provide a more accurate estimate of cross-border fraud. In addition, our study suggests that fraudsters shift their activities to similar products and drive honest traders out of the market