Intra-Community VAT fraud

Report ID: 16

In collaboration with the Dutch SAI (Algemeen Rekenkamer) and the German SAI (Bundesrechnungshof), the Belgian Court examined whether tax authorities are sufficiently resourced to combat VAT carousel fraud. The report to the federal Parliament with the findings for Belgium reveals that the department rightly prioritize fraud prevention and fraud detection. As a matter of fact it is very difficult to collect evaded VAT, VAT arrears and penalties when fraud carousels are involved. As far as prevention is concerned, the tax department performs an adequate review before assigning a VAT number. Tax authorities are insufficiently resourced to prevent malafide persons from infiltrating existing companies. The opportunities for international information exchanges are not used in an optimal way. The Eurocanet network created by Belgium allows for quick and targeted information exchanges between specialized tax authorities, but loses some of its impact because not all European Member States participate equally.

Audit parallel on Intra Community VAT Fraud

Report ID: 133

1.1 Background to the joint audit

The current vat system in the European Union provides opportunities for intra Community fraud that all Member States have to deal with. In a resolution of 12 December 2006, the Contact Committee expressed support for its vat Working Group’s recommendation to encourage Supreme Audit Institutions (SAIs) to exercise bi and multilateral cooperation in this area. In response to this recommendation, in March 2007 the Netherlands Court of Audit invited Germany’s Supreme Audit Institution (Bundesrechnungshof) and the Belgian Court of Audit (Rekenhof) to participate in an investigation into intra-Community vat fraud.

This trilateral audit resulted in national reports for each of the three participating countries and in this joint report presenting the overall conclusions and recommendations supported by relevant audit observations. Institutions involved in tackling intra-Community vat fraud, at European level and in the Member States, may benefit from this report.

1.2 Explanation of intra-Community vat fraud

The EU Member States have a common vat system. Since the European internal market has been created in 1993, goods within the internal market can be traded freely and border controls have ceased to exist. A ‘temporary’ system was introduced for vat, whereby the zero rate applies to the supply of goods to another Member State. To be eligible for this zero rate, an entrepreneur must have a valid vat identification number and must be able to verify that its trading partner also has a valid vat identification number. In addition to the vat return, entrepreneurs must file a quarterly return of their intra-Community supplies so that they can be monitored.

The temporary vat system appears to be vulnerable to intra-Community fraud.

A simple form of fraud is the wrongful use of the zero rate by presenting a domestic supply as an intra-Community supply. The most common and widespread form of intra-Community vat fraud is ‘Missing Trader Intra-Community Fraud’ (mtic Fraud) or ‘Carousel fraud’. In the typical form of this fraud, a trader acquires goods from a trader in another EU Member State at the zero rate of vat. The trader sells on the goods within his own country and charges vat to the purchaser. The trader, however, does not remit this vat to the tax authorities and makes sure that he cannot be traced (‘missing trader’) if he is investigated. The receiver of the goods sells them on and reclaims the vat he has paid. The goods can then return to their country of origin via an intra-Community supply at the zero rate, so that the cycle can be repeated one or more times. This is why it is called carousel fraud.

1.3 Anti-vat fraud initiatives at EU level

For a number of years, the eu Member States, the Economic and Financial Affairs Council of the EU (Ecofin) and the European Commission (EC) have been discussing ways to counteract intra-Community vat fraud more effectively.6 The Commission has explored avenues for a coordinated strategy against tax fraud. In its meeting of 28 November 2006, Ecofin invited the Commission to prepare the elements of such a strategy in close cooperation with the Member States. In 2007, the Commission made an inventory of possible measures consisting of conventional measures within the existing VAT framework and more far-reaching measures, implying a change in the current system.

Administration of Value Added Tax in the Czech Republic and the Federal Republic of Germany Follow-up Audit Report

Report ID: 345

VAT is an audit area which is very suitable for tax audit cooperation because it is the only tax harmonised within the EU. The Supreme Audit Office of the Czech Republic (hereinafter “Czech SAI”) and the Federal Court of Auditors – Bundesrechnungshof (hereinafter “German SAI”) conducted a first ever parallel audit in the field of VAT in 2006. The report was published in 2008 (The report si also published in the catalogue at https://intosai-cooperativeaudits.org/catalog/report/report-on-the-results-of-the-parallel-audit-of-the-administration-of-value-added-tax-in-the-czech-republic-and-in-the-federal-republic-of-germany).

The follow-up audit of the administration of VAT in the Czech Republic and in Germany was carried out on the basis of an agreement between the two SAIs. During previous parallel audits, suspicious cases of intra-Community transactions were detected. Some of them merited further review. On the basis of audit findings the two SAIs produced recommendations on VAT management.

The follow-up audit was conducted to evaluate the action taken in response to these recommendations and to review the suspicious cases selected. In addition, the two SAIs decided to examine the following matters in their parallel audit mission:

• review of selected cases of intra-Community transactions between taxpayers from the Czech Republic and Germany that were not resolved during the previous parallel audit,

• review of selected cases of intra-Community transactions between taxpayers from the Czech Republic and Germany that were classified as high-risk cases,

• audit of the tax administrations’ procedure in the field of international assistance for the recovery of VAT claims,

• VAT audits of large companies.

The cooperation of the two SAIs within the parallel audits of the administration of VAT achieved the objectives set by the German and Czech SAI. The two SAIs developed a deeper understanding of the applicable systems in the Czech Republic and Germany in the fields of:

• intra-Community transactions

• risk management of VAT, especially concerning the selection of risk prone transactions

, • recovery of VAT claims, and

• VAT audits of large tax entities.

Due to mutual cooperation, differences of strategies to detect VAT fraud cases and in the above mentioned areas of VAT administration in the Czech Republic and Germany were revealed. Audit findings were compared and on their basis best practices were identified. Furthermore, the SAIs hope that the results achieved may encourage stakeholders to enter into discussions about approaches and strategies within and among Member States as well as with the EU Commission.

Source: https://www.nku.cz/assets/publications-documents/other-publications/paralelni-kontroly-spravy-dph-cr-srn-2010.pdf