LONDON Britain's exemption of carbon emissions credits from value-added tax (VAT) is just a temporary fix for a tax fraud that will just resurface in other European Union countries, traders said, calling for an EU-wide response.
On Thursday, the UK Treasury said it was acting to prevent the risk of carousel tax fraud, alleged to have occurred on a French emissions exchange earlier this year. These allegations prompted the French government in June to make carbon credits VAT-free.
"While these moves will serve to flush out any criminal element that may have been operational in those countries, they do nothing to solve the problem for the EU carbon market as a whole," said James Emanuel, commercial director at brokers CantorCO2e.
"Any fraudsters will now simply set up camp in another EU jurisdiction."
Through carousel fraud, also called missing trader fraud, fraudsters import goods VAT-free from other countries, then sell the goods to domestic buyers, charging them VAT. The sellers then disappear without paying the tax to the government.
The European Commission said on Friday it had been informed by EU member states that there was a strong suspicion of carousel fraud in carbon credit trading.
"The Commission intends later this year to propose the application of reversed charge to the supply of certain goods or services on an experimental basis," a Commission spokeswoman told Reuters.
"This could be an opportunity to include carbon emission certificates in the list of services (if proved necessary)."
Earlier this month, the Netherlands applied a reversed charge approach to its carbon credit trading, meaning the buyer, not the seller, is liable to pay the VAT.
Other governments including Spain are reportedly looking into their own preventative measures.
Although the UK said it is engaged in discussions with the European Commission on establishing an EU-wide solution, tax experts said the unilateral moves by member states could be illegal under EU tax laws.
"We've applied to the EU for a derogation ... Though (our VAT exemption) may be outside of EU regulation, I think the Commission will understand," said a UK Treasury spokesman.
"The VAT revenue on this is marginal but the potential for fraud and the risk to the exchequer and the taxpayer is huge. We needed to act now."
Asked whether it would take legal action against Britain, France and the Netherlands, the Commission said it was examining the measures taken and that it was too early to say. (Editing by Sue Thomas)