VAT fraud spreading through European energy markets

Criminal organisations are setting their sights on European wholesale natural gas and power markets for value-added tax (VAT) fraud and failure to implement anti-fraud mechanisms makes it difficult to prevent such activities, European power associations said.

“States remain unprotected while law enforcement agencies have repeatedly reported signs of a major penetration of the gas and electricity markets by VAT fraudsters,” ten European gas and power associations warned in a joint statement on Tuesday. No case of fraud in gas or power markets has been made public so far. However, numerous lengthy investigations are underway, a spokesman for German-based European Energy Exchange said.

The German federal tax authorities confirmed in October that cases of VAT fraud were found in the German gas and power market but gave no further detail. A spokesman for Europol, the European Union’s law enforcement agency, said criminal activities range from creating fake companies to hijacking activities of reputable companies.

Reverse charge mechanism

So far only six out of 28 EU member states have implemented the Reverse Charge Mechanism (RCM) to their electricity and power markets. Under the RCM the buyer, rather than seller, of goods or services assumes responsibility for recording VAT.

However, even in countries that have implemented the mechanism – Austria, France, Germany, the Netherlands, Romania and the United Kingdom – misuse can still happen because of the specific VAT treatment of gas and electricity transactions, the associations said. To avoid this, market participants should ensure they know who they are doing business with and make sure transaction flows make business sense. “In case of any suspicious activity, we strongly recommend immediately contacting the relevant local customs and/or law enforcement agencies,” they added.

Attempted fraudulent behaviour, not restricted to VAT fraud, can encourage regulators to impose stricter rules, which has an impact on market participants. In the case of the German intraday market, the energy regulator wanted to restrict companies from being able to conduct non-asset backed trading, among other measures, following an alleged case of abuse where a mail box company left a transmission system operator with an unpaid bill for balancing energy charges ( see EDEM 31 October 2014 and EDEM 24 November 2014 ). Martin Degen