The Government takes action to prevent VAT fraud in connection with trading of emissions allowances

In a draft legislation proposal, the Government recently presented changes to the VAT Act in order to prevent VAT fraud in connection with trading of emissions allowances.
"VAT is one of the most important revenue sources for the Government and it is important to limit the risks of fraud. Based on recently reported information about possible large scale fraud in the EU and actions taken in other European countries, the Government has decided that action is necessary to limit the risk of fraud in Norway", says finance minister Sigbjørn Johnsen.

Europol informed 9 December 2009 that VAT fraud in connection with trading of emissions allowances might have resulted in losses approximately 5 billion euros for several national tax revenues within the EU. Consequently, several EU-members have either taken actions or have informed that they are planning actions to prevent fraud. The EU-Commission presented a proposal directive allowing the member states to temporary introduce the reverse charge mechanism to domestic supply of emissions allowances between taxable persons.

Fraud arising from trading of emissions allowances is a simple form of VAT fraud. The seller charges VAT as normal, but fails to pay the VAT to the tax administration. Due to high prices (thus high tax bases) and swift transactions, emissions allowances are vulnerable to fraudulent traders who may be able to collect large sums of VAT before disappearing.

Norway takes part in the EU Emissions Allowances Trading System (ETS) and has the same VAT treatment as the EU in this area. As the number of nations taking actions grow, the risk of fraud moving to Norway is likely to increase. The Ministry of Finance proposes to introduce a reverse charge mechanism for domestic sales of emission allowances to businesses and to the public sector.

According to the general rules in the VAT Act, the seller is responsible for calculating and paying VAT when making a supply. This also applies to domestic supply of emission allowances. The draft legislation proposal suggests that when selling emission allowances domestically to businesses and public sector, the buyer will responsible for calculating and paying the VAT (reverse charge mechanism). However, when supplying emissions allowances to other persons than businesses and public sectors, the general rule still applies. The regulation will come into force as soon as possible after a decision is made in the Parliament.

The Ministry is also aware that the Tax Authorities have been monitoring emissions trading in order to detect and prevent possible evasion of VAT. In connection with this work, the police have recently conducted an operation against several traders.