Massive fraud of the VAT carousel

The incorporation of companies in the European Union with the purpose to carry out the VAT carrousel is penalized by the Tax Agencies. Any company registered in EU or outside of it should never be used for that purpose. Therefore we strongly recommend all our clients not to involve their companies in VAT carrousel. 

The VAT carrousel is how the Tax Agencies denominate fraud of the declaration of value added tax that has its origin in intra-community transactions. VAT carrousel fraud is such a complex network of business structures that it greatly hinders its investigation and its consequent dismantling. The VAT carousel is a very serious problem for the member states of the European Union, quantified in thousands of millions of euros, since the defrauded country will not only see how it stops entering the amount of VAT that corresponds to it, but it will also be bound to return the amounts borne by the companies that make up this network. Let's go on to learn what this VAT carrousel consists of and what modalities it can present. 

The origin of the VAT carousel

The companies that use the VAT carousel, as we mentioned above, make use of the gaps that are still present in intra-community transactions to commit fraud on corporate tax. The purchase and sale of goods and services between the countries that make up the European Union is governed by the Single European Act, by which there is free movement of goods, so that the exporting company does not pass VAT on its invoice and is the importing company which, through a self-assessment system, self-defeats and deducts the VAT corresponding to its country of residence. This is because not all countries of the European Union handle the same type of tax for value added tax. Subsequently, the importing company will sell its merchandise in the domestic market, with the VAT corresponding to the final recipient or a third company, and, if applicable, entering the VAT collected in its quarterly settlement. 

If all member states apply the same type of tax, the country through which the goods enter would pass the VAT to the acquiring country, which would be entitled to its return. That is to say, the quotas entered in one country would be deductible in another, to the great detriment of the net importing states such as Germany. The lack of tax uniformity, in terms of VAT between the member countries of the European Union, and the lack of cooperation between the tax agencies of the different countries of the European Union arise organizations dedicated to tax evasion

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What is the VAT carrousel? 

The VAT carousel works through a complex network of business structures, in which we mainly differentiate three types of companies that will be the ones that will play a major role in the operations. 

The VAT carrousel fraud begins with a national company (A) that makes a purchase to another company located in another member state. This company (A) upon receipt of the goods is self-effected VAT and simultaneously deducted when presenting quarterly its declaration and the payment letter dispensed by the customs authorities. Subsequently, this company (A), which has already paid and deducted the VAT from its intra-community purchase, sells the merchandise to a third company (B) in the national EU market, with the corresponding European territory VAT. However, the company (A), which in the slang is known as "missing trader", will never pay VAT on the sales made to the company (B), since it will quickly disappear without a trace. The company (B), which has bore the VAT of the purchase to the company (A) only pays its corresponding refund in the quarterly declaration and later sells the products with a small margin of profit to a fourth company (C). Company B is a "screen" company and there could be more than one in this scheme. The circle closes when company C proceeds to sell the products to another company registered in EU member country, sale not subject to VAT, and requests deduction of tax on purchase made from company B to the Tax Agency. This circle can go on and on, hence, the name of VAT carrousel. 

Variants of the VAT carousel scheme

The structure described above details what would be a simple scheme of the VAT carrousel. But it includes several variants that complicate it to an unexpected extent. For starters, the company "missing trader" is usually managed by an insolvent front man, to avoid liability derivations, and lacks a real business structure. In fact, we have seen how in some dismantled plots the figureheads have turned out to be homeless beggars, recruited by the ringleaders of the operation. The companies "missing trader" are thus easily removable to disappear quickly, once the merchandise has been transferred to "screen" company/s.  

On the other hand, the "screen" companies would act within the framework of legality presenting their regulatory taxes, because their sole objective is to hide the connection between companies A and C. On the other hand, company C would be the one that profits from the fraud, since it would buy the merchandise to company B at low cost and then resell it outside of the country at prices many times below the market price. The products that tend to be more attractive for this VAT carousel are the electronic devices. However, it is not uncommon to find out that the merchandise is completely fictitious and the only thing that circulates in this sale/purchase process are false invoices, empty or with no value content boxes. It may also be that company C simulates a fictitious intra-community sale and then circulates the merchandise in the domestic market. Of all this, perhaps what can divert the attention of the inspectors of this VAT carousel is the presence of "screen" companies. Due to its normal and legal functionality and regularly paid tax to Tax Agency it is hard to suspect its involvement in the VAT carousel plot, except for its sales with low profit margins. 

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Consequences of VAT carrousel 

Let us show you an illustrative example with real numbers of VAT carrousel frauds. Let's say that company A (located in Germany) purchases from company H (located in France) a batch of merchandise for a total amount of invoice of € 100 plus € 19 of VAT. When the merchandise arrives to German territory, company A receives the letter of payment from the customs authorities and submits the € 19, which will then be returned in its quarterly reimbursement. Then, company A sells the same goods to company B (both companies form part of the scheme), now for a value of € 150 plus € 29 VAT. Company A would have to submit to the Tax Agency those 29 €, but it will not because it has already disappeared. Then, B asks for the return of the € 29 he has declared. So far the fraud is € 29, which were not paid plus € 29 that were returned. Finally, company B sells to a company C the same merchandise for a symbolic value, let´s say € 157 plus € 29 VAT. Company B acts normally and in its quarterly settlement submits its € 29 reimbursed. Now C sells the same merchandise to F (located in France) on an invoice not subject to VAT for € 300 and also requests the return of its declared € 29. 

As you can imagine, the VAT carousel is a great harm to the defrauded country for different reasons. Thanks to the VAT carousel, the companies that form part of the scheme profit not only by saving the corresponding VAT quotas that they should present, but by benefiting from the requested tax refunds, which implies a double looting of the public coffers: The Tax Agency doesn’t receive a payment of VAT and also pays the returns. On the other hand, by benefiting from the fraud of this VAT carrousel, the companies that form part of the plot are able to sell their merchandise at prices below the market price, giving an unfair competition advantage against other companies and businesses in the same sector, to which it causes great losses. As mentioned before, consumer electronics, computer or telecommunications items, which are relatively easy to put into circulation in any country of the European Union, are often the most affected by VAT carrousel. 

In the absence of official figures by the German authorities the fraud is difficult to quantify accurately. It is estimated that only in Germany the VAT carousel could mean a loss of nearly two billion euros, being the second country in the Union European Union most affected by this scheme, after the United Kingdom.