Carousel fraud with VAT is possible due to a flaw in the European VAT system. A customer can claim a VAT refund, even if his supplier has not paid this tax to the tax authorities. Only a link between payment and refund can eradicate the fraud, which costs states billions. This link could possibly be realised with today’s technology. This is the conclusion of Redmar Wolf in his thesis, for which he will be awarded a PhD by the University of Groningen on Thursday 15 April 2010. Wolf established that carousel fraud is reasonably under control in the Netherlands, but the situation in other EU countries is less rosy.
As a lawyer and tax advisor, Redmar Wolf has had close contact with the consequences of carousel fraud. In addition, in recent years he has been investigating the tax legislation and the decisions of fiscal judges in cases where carousel fraud has played a role.
Carousel fraud is when fraudulent suppliers (‘missing traders’) do not pay VAT and generate huge turnovers through related VAT collection. This money is not paid to the tax authorities but is siphoned away. Their customers still retain the right to VAT refunds from the tax authorities. As a result, the tax authorities are repaying VAT they have never received. Ultimately, all that remains for the tax authorities is a stripped company.
With ‘pure’ carousel fraud, the products circulate among the same group of parties. Trader A purchases goods that are easily tradable, such as mobile phones and computer processors, from a different EU country, which are thus VAT exempt. This trader sells the goods on to trader B in his own country. A charges VAT at the local rate and siphons the VAT received from B away. B claims the VAT back from the tax authorities and then sells the goods on to C in a different member state with a zero tariff. C then supplies the goods to A and the game starts again from the beginning. In each round the tax authorities pay VAT to B, while A never pays VAT to the tax authorities. The fraud also works when the goods are only traded between parties once. Carousel fraud also appears to be possible with less tangible products. Wolf discovered that CO2 emission rights are also used for extensive carousel fraud.
‘Carousel fraud is different to other forms of tax fraud because the tax authorities are not in fact missing out on income but actually losing money. The tax authorities are repaying VAT they have never received. This means that we can speak of negative tax income’, says Wolf. Within the EU this concerns many billions of euros a year. Tackling the problem also costs governments a great deal of money. ‘Add to that the fact that the market in some goods is distorted because the fraudsters can compete unfairly on price.’
In the Netherlands, carousel fraud is tackled directly by a special department of FIOD-ECD [Fiscal Intelligence and Investigation Service and Economic Investigation Service]. This approach appears to be successful. Other EU member states have the fraud less under control. According to Wolf, although the fact that traders are able to make purchases within the EU that are VAT exempt has given a boost to carousel fraud, it is impossible to annul that legislation without seriously harming the internal market.
According to Wolf there’s actually only one pragmatic solution: repair the flaw which means that VAT rebates are not linked to payments to the tax authorities. ‘In the early 1960s, when the current VAT system was designed, this link was not considered to be technically possible. However, thanks to technological advances it might well be possible now to do something.’
Redmar Wolf (Zwolle, 1966) studied Dutch law in Utrecht and fiscal law at the University of Amsterdam. Since 1991 he has worked as a lawyer/tax expert for Baker & McKenzie Amsterdam, a company of which he is now a partner. His work involves diverse matters in the field of VAT and transfer tax. In recent years he has published articles in the Weekblad voor Fiscaal Recht, Maandblad Belastingbeschouwingen and in the Financieele Dagblad. His PhD research was conducted alongside his usual work. Wolf will be awarded a PhD by the Faculty of Law of the University of Groningen for a thesis entitled Carrouselfraude. Een Europees probleem vanuit Nederlands perspectief [Carousel fraud. A European problem from a Dutch perspective]. His supervisor was Prof. B.G. van Zadelhoff.
Redmar Wolf: + 31 20 55 17 113 (work), e-mail: redmar.wolf bakermckenzie.com
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