Beyond the Transaction: Every Transaction Has a Story
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Fighting the European shadow economy through electronic payments

By Cora van Nieuwenhuizen, Member of the European Parliament, VVD The Netherlands

In Europe a fierce discussion is on-going about tax avoidance, which is mainly about corporate income taxes. Large multinationals are being put under a magnifying glass, research is ongoing and measurements are being taken.

Naturally, I believe that tax avoidance or worse evasion by multinationals must be addressed. Everybody must pay their ‘fair share’; whether you are an individual, a small business or a multinational. But even more importantly, we have to fight the illegal shadow economy, which arises when people commit VAT fraud on a large scale. One example: the Dutch government collects about six percent of its total income through corporate income tax; through VAT that is almost 20 percent!

Luckily, the size of the European shadow economy has been decreasing for some years now. However, even the Netherlands, with its relatively small shadow economy, misses out on around 1 billion euro in VAT income.

The number of financial transactions which are unknown to tax authorities has to drastically decrease and there is a concrete way to make this happen: the facilitation and promotion of electronic payments. An excellent electronic infrastructure, including internet connections, in all member states of the EU is therefore needed. The national governments should make this a priority.

The costs of electronic payments for retailers has been lowered due to European legislation that entered into force last year. Therefore, there is no more reason for consumers to pay extra for these regulated electronic payments.

In addition to being an effective tool in the fight against VAT fraud and the shadow economy, there is also a huge advantage for shopkeepers if people pay electronically: safety! The less cash in store, the less likely it is that they will become the victims of a robbery. In the Netherlands, the amount of robberies in public transportation has decreased to virtually zero since the introduction of electronic ticketing.

Confidence

Apart from facilitating electronic payments, we also need to change the payment culture. In many places, cash is still the only thing that is trusted by consumers. This culture shift takes time; especially older people prefer to pay with, and receive, cash. Because what you see is what you get, it makes them feel safe.

I believe though that this will change more or less automatically. One of the advantages of paying electronically is that there is proof of the transaction. There will always be a receipt of the purchase, which is important for the warranty, insurance etc. In the old days you could trust the plumber next door to do a good job without the paper proof of the invoice -which allowed him to evade VAT. But nowadays companies are much bigger and increasingly anonymous so you’d better have some proof to avoid future problems. People are increasingly aware of this.

Strangely enough, not all governments are equally active in promoting the use of electronic payment systems despite the fact that it could help them collect more taxes. Fortunately, there are also some good cases. Portugal, for instance, has recently started a public awareness program to convince consumers to ask for a purchase receipt. Discounts to favour card payments over cash transactions would also help.

It is vital that all European institutions and authorities concerned work together to fight the battle against the shadow economy. If they paid only half the attention to reducing VAT fraud as they do to the tax planning of multinationals, the national treasuries’ coffers would be a lot better off.