Christin Schmidt, University of Mannheim

Missing trader fraud is widely viewed as the most important source of revenue loss from the VAT in the EU, yet existing evidence remains limited and largely based on indirect and aggregate measures. We leverage administrative audit data covering firm-to-firm cross-border transactions across all EU Member States to study this fraud. We start by documenting key new facts about the extent and nature of this fraud, and show that the majority of detected fraud is concentrated across a few borders in Eastern and Southern Europe, in the retail sector, and in small rapidly expanding firms. We then study how effective two key policy instruments – tax audits and the reverse charge mechanism – are in curbing this fraud. Event-study estimates show that tax audits are very consequential: upon detection, about 70% of missing traders exit, and surviving firms stop their turbo-growth of the last years, with similar dynamics observed for the exporting trade partners not subject to audits. In contrast, reverse charge reforms induce sizable substitution of fraud to neighboring non-treated sub-sectors, limiting the aggregate deterrence effect of the reforms. Given the contrasting evidence on the effectiveness of the two instruments, we conclude by discussing the trade-offs involved when designing anti-fraud policy.