1. Types of VAT Fraud

• Missing Trader Fraud: This involves a chain of transactions where one or more companies charge VAT but do not remit it to the tax authorities. The companies involved in the fraud often disappear after a short period, leaving the tax authorities with unpaid VAT. For example, a German conduit company was found to have purchased protective masks from a Hong Kong company (the missing trader) and sold them to the German Federal Ministry of Health without declaring the VAT collected.
• Carousel Fraud: This is a more complex form of fraud where goods are imported and exported multiple times within the EU, exploiting the VAT exemption for intra-community transactions. The fraudsters create a cycle of transactions, leading to significant VAT losses. For instance, a case involving the resale of luxury cars in Germany and Italy resulted in a loss of 13 million euros in VAT.

2. Organized Crime Involvement

• Organized crime groups are increasingly involved in VAT fraud, using multiple shell companies and sophisticated schemes to evade detection. These groups operate across multiple EU member states, causing significant financial losses. For example, a case involving the sale of electronic products saw the participation of multiple organized crime groups operating in 22 EU member states and 14 other countries, with each group having a clear division of labor and close cooperation.

3. Prevention and Control Measures

• Strengthening VAT Registration: Countries like Canada and Slovakia have implemented stricter registration requirements to identify and exclude potential fraudulent businesses. For example, Canada requires non-resident businesses to provide a security deposit based on their estimated tax liability.
• Reverse Charging Mechanism: This shifts the responsibility of VAT payment from the supplier to the buyer, reducing the risk of missing traders. Italy and the UK have implemented this mechanism in high-risk sectors such as construction and electronics.
• Split Payment Mechanism: This involves the buyer withholding VAT and paying it directly to the tax authorities, ensuring that the tax is collected. Italy and Poland have implemented this mechanism in sectors prone to VAT fraud.
• Use of Technology: Countries like Italy and Luxembourg have implemented electronic invoice monitoring systems to track transactions in real-time and detect anomalies. The UK has developed an automated risk assessment system (TRUCE) that links taxpayers to over 1 billion pieces of information from 28 data sources.

4. International Cooperation

• The European Public Prosecutor’s Office (EPPO) plays a crucial role in coordinating cross-border investigations and prosecutions of VAT fraud. It has established a network of cross-border cluster investigations and a strong information-sharing mechanism. For example, EPPO has coordinated investigations involving multiple member states to combat VAT fraud in the sale of luxury cars and electronic products.
• The EU has also implemented a series of reforms to strengthen administrative cooperation and tax governance in the digital economy, including the introduction of the One-Stop-Shop (OSS) system for cross-border e-commerce transactions.

Conclusion

• The significant challenges posed by VAT fraud and the need for robust measures to combat it. These include strengthening registration and control mechanisms, leveraging technology for real-time monitoring, and enhancing international cooperation. The experiences and practices of countries like the UK, Italy, and the EU provide valuable insights for improving VAT fraud prevention and control.