Kate Mackenzie Carbon credits hit by carousel fraud

Carousel fraud has found its way to the carbon market. The particularly European type of fraud entails setting up complicated import and export schemes between EU member countries, charging buyers for value-added tax in the country of destination, and then absconding with the tax rather than handing it over to the governments.

In 2006 the UK and German governments embarked on a series of raids in 2006, and the UK introduced ‘reverse charging’ for VAT on certain items prone to carousel fraud. At the time carousel fraud was mainly seen as confined to small electronic goods such as mobile phones and computer chips.

A year later it was it was observed that fraudsters were simply moving away from those goods towards others that hadn’t yet been targeted by authorities. But it wasn’t until high volumes of trade were observed on France’s BlueNext carbon exchange this year that carousel fraud became an issue in the carbon markets.

France last month decided to exempt carbon permits from VAT without seeking the required approval from the EU, and the UK government yesterday applied a zero VAT rate to carbon credits, again without seeking EU approval. The Netherlands meanwhile has introduced rules so that the carbon permit buyer, rather than the seller, is responsible for paying tax. And Spain is reportedly considering what to do about the issue.

Could there be a problem, however, with so many different approaches being taken?

KPMG’s Robin Print thinks so:

He noted that the Netherlands had opted for a “reverse charge”, requiring all traders to account for VAT at the time of purchase, and France had exempted the allowances from VAT, while all other member states except Britain charged a standard rate of VAT. “The fact there are four different VAT treatments across the European Union highlights the need for co-ordinated action,” he said.

Related links:

Treasury acts on carbon credit fraud fears (FT, 30/07/09)
Netherlands acts on tax fraud market (Reuters, 16/07/09)