June 8, 2009 / 1:15 PM / 10 years ago

UPDATE 2-France makes CO2 credits VAT-exempt to avoid scam

* France to exempt carbon credits from value-added tax

* Govt source says move was to avoid potential VAT fraud

* Source says no evidence of fraud, no revenue implication

* BlueNext halts spot trading, to resume Wednesday morning

(Writes through with quotes from French Budget Ministry source)

By Michael Szabo and Muriel Boselli

LONDON/PARIS, June 8 (Reuters) - The French Budget Ministry has made carbon permits exempt from value-added tax (VAT) in order to prevent a potential tax scam linked to a French emissions exchange, a government source said late on Monday.

“There is a risk of VAT carousel fraud so as a preventative measure, we are changing the VAT regime on (emissions exchange) BlueNext’s transactions,” a Budget Ministry source told Reuters.

“There has been no evidence of VAT fraud. It is only a rumour ... but it could have potentially hurt BlueNext’s ability to compete, so we had to react.”

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 collected tax to the government collection authority.

Emissions traders said rumours were circulating that a recent surge in volumes in European Union emissions permits traded over BlueNext, Europe’s main exchange for spot permit trading, were suspicious.

“Part of this volume was sound, coming from the market expanding and new players entering, but a share of it might be hard to explain,” said one emissions analyst.

A BlueNext spokesman also told Reuters there was no evidence that VAT fraud was occurring over its exchange, and that the rumours were “unsubstantiated.”

BlueNext, a joint venture between NYSE Euronext NYX.PA and Caisse des Depots, traded a record 19.8 million permits last Tuesday and saw average daily volumes of 9.4 million in May, up from less than 7 million in the first four months of the year.

BlueNext halted trade on Monday in anticipation of the news and after the French national emissions registry was closed last Thursday and Friday for what it called “technical reasons.”

The French registry re-opened on Monday morning, but BlueNext said its spot trade will resume on Wednesday, June 10 at 8 a.m. Paris time (O600 GMT).

All spot contracts will then be exempt from the 19.6 percent VAT, BlueNext said, meaning the French government will no longer be able to collect related tax revenues.

“Because these permits are traded between companies, there is no actual VAT collected. Globally it’s revenue neutral,” the government source said.

A BlueNext spokesman said the exchange had been working with the ministry for several months to get a VAT exemption.

“VAT placed quite a large financial burden upon us as we had to have the cash on hand to manage the cash flow,” he added.

In a note to members, BlueNext said spot trading will remain halted for two days to allow for members to make any necessary changes to their systems and to inform their customers.

The BlueNext spokesman said all other market rules for its spot contracts remained unchanged and trading in emissions futures was unaffected.

Under the EU’s $92 billion Emissions Trading Scheme, companies emitting more climate-warming carbon dioxide than allowed must buy permits from others that have cut emissions.

The spokesman said the VAT exemption applied EU permits as well as to Kyoto Protocol offsets called Certified Emissions Reductions, adding that he could not confirm whether other types of traded carbon credits would be affected. (Writing by Michael Szabo; Editing by Lisa Shumaker)

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