IBFD International Tax Academy - Belgrade, 16 December 2008 Head of the VAT Knowledge Group Editor of the International VAT Monitor and EU VAT Compass New Forms of VAT Evasion after Serbia's Accession to EU Walter van der Corput

© 2008 IBFD International Tax Academy 2 IBFD –Independent, non-profit organization –Founded in Amsterdam, the Netherlands, in 1938 –Main activities: –publications: books, journals, loose-leafs, CD-ROMs, databases and online products –documentation, library –information (not advice) on request –courses (International Tax Academy – ITA) –government consultancy

Int'l VAT Monitor – EU VAT Compass © 2008 IBFD International Tax Academy 3 Bi-monthly journal covering VAT worldwide: articles, VAT news, VAT case notes Pocket-size travel companion: VAT Directive, ECJ VAT case law, Options taken up by the Member States

Legal framework after accession to EU © 2008 IBFD International Tax Academy 4 SB Serbian VAT Act provisions of Directive 2006/112 written and unwritten Community principles: −tax neutrality −effectiveness −equal treatment −non-discrimination −prohibition of abuse of law −protection of legitimate expectations −legal certainty −proportionality "special measures" (Art. 395: simplification, prevention of tax avoidance, evasion) national procedures -assessment and refund -penalties -appeals, etc

© 2008 IBFD International Tax Academy 5 EU: harmonized of VAT system VAT Directive 2006/112 Serbian VAT Act transposition into national law national Supreme Court European Court of Justice (Luxembourg) EU Commission: action based on infringement of Community law interpretation disputes between taxable persons and tax authorities national tax court(s) preliminary questions on the interpretation of EU Directives inter- pretation ECJ inter- preta- tion VAT Directive takes precedence over VAT Act doubts about interpretation VAT Directive

VAT fraud and avoidance © 2008 IBFD International Tax Academy 6 VAT fraud and avoidance −input tax deduction in respect of meals, entertainment to employees, business associates, shareholders, etc −input tax deduction in respect of private consumption −failure to account for cash sales to final consumers −failure to register above registration threshold (EUR 50,000) −false input tax claims: fake transactions VAT and income tax parallel interest −report domestic transactions as 0% exports or manipulation of place-of-supply rules relating to services −non-remittance of VAT debts −mixed supplies: manipulation of the "pro rata" (transactions between "connected parties")

Manipulation of place-of-supply rules © 2008 IBFD International Tax Academy 7 SB (VAT rate: 18%) B advice invoice B's FE BE In Belgium, the services of lawyers are exempt from VAT From 2010, services subject to the reverse charge mechanism must be listed recharge

© 2008 IBFD International Tax Academy 8 Missing-trader fraud services: +little input tax − high price requires expert knowledge less suitable for fraud goods: −high input tax less suitable for fraud, unless input tax can be avoided: −intra-Community acquisition −postponed accounting on importation Victim ("innocent" trader) to be persuaded by: −low purchase price, or −intermediate supplier in pre-arranged deal with third party VAT: broad base + high tax rate → perfect conditions for fraud However, VAT has a built-in safety mechanism

© 2008 IBFD International Tax Academy 9 VAT's built-in safety mechanism VAT 20%, all prices exclusive of VAT 22-20= = importer % = % = % = customs authorities % = 96 tax authorities 20-16=4 4 = (= 0% x 125) whole- saler goods 100 exporter goods 110 customer abroad goods 125 goods 80

Cross-border B2B trade before accession © 2008 IBFD International Tax Academy 10 supply of goods B UK B SB 0% export 18% import VAT −customs export procedure −customs export document −periodic VAT return −payment import VAT to customs authorities −deduction import VAT through periodic VAT return −customs import document −customs import procedure SB UK

Cross-border B2B trade after accession © 2008 IBFD International Tax Academy 11 B UK B SB 0% intra- Community supply 18% intra- Community acquisition −evidence of transport −customer's VAT identification number on invoice −VAT return −recapitulative statement (VIES) −(Intrastat return) −VAT return: liability + deduction acquisition VAT −(recapitulative statement) −(Intrastat return) SBUK supply of goods

© 2008 IBFD International Tax Academy 12 VAT Information Exchange System (VIES) customer X (B SB ) SB supplier A BE intra-Community supply: 100 supplier B SK intra-Community supply: 50 suppliers C NL intra-Community supply: 200 D intra-Community supply: 100

© 2008 IBFD International Tax Academy 13 VAT Information Exchange System supplier B supplier A D suppliers C customer X (B SB ) X's intra- Community acquisi- tions: 450 VAT return X X X Quarterly EC Sales Lists X VIES X's intra- Community acquisi- tions: 400 BE SK NL SB "mismatch" (tax authorities in Member State of acquisition)

© 2008 IBFD International Tax Academy 14 Carousel fraud-1 UK (VAT rate: 17.5%) SB (VAT rate: 18%) C "broker" or "innocent trader" supply of goods VAT payment 112 A "conduit company" B "missing trader" supply of goods ( %) payment 100 SB tax autho- rities payment 17 refund 17 supply of goods ( %) acquisition VAT 18

© 2008 IBFD International Tax Academy 15 Carousel fraud-2 SB (VAT rate: 18%) C "broker" or "innocent trader" supply of goods VAT B "missing trader" VAT return: 0% intra-Community supply or export Recapitulative statement: dozens of "customers"

© 2008 IBFD International Tax Academy 16 Recovery of revenue loss C "broker" or "innocent trader" supply of goods VAT payment 112 B "missing trader" SB tax autho- rities refund 17 Recovery of the revenue loss from the "innocent trader": −denial of VAT deduction in respect of B's invoices, or

© 2008 IBFD International Tax Academy 17 Recovery of revenue loss C "broker" or "innocent trader" A "conduit company" B "missing trader" payment 100 SB tax autho- rities refund 17 supply of goods ( %) Recovery of the revenue loss from the "innocent trader": −denial of VAT deduction in respect of B's invoices, or −correction of zero rate on C's subsequent supply to A, or assessment 18/118 x 100

© 2008 IBFD International Tax Academy 18 Recovery of revenue loss Recovery of the revenue loss from the "innocent trader": −denial of VAT deduction in respect of B's invoices, or −correction of zero rate on C's subsequent supply to A, or −application of joint-and-several-liability provision

© 2008 IBFD International Tax Academy 19 Third-party liability (chain liability) ABCDE third-party liability missing trader missing trader −if, at the time of the supply, C knew or had reasonable grounds to suspect that some or all of the VAT payable in respect of that supply, or of any previous or subsequent supply of those goods, has gone or would go unpaid. Federation of Technological Industries, C-384/04. −for example, if the price payable by C was less than the lowest price that might reasonably be expected to be payable for those goods on the market, or is less than the price payable on any previous supply of those goods (rebuttable presumption). goods

© 2008 IBFD International Tax Academy 20 Recovery of revenue loss Recovery of the revenue loss from the "innocent trader": −denial of VAT deduction in respect of B's invoices, or −correction of zero rate on C's subsequent supply to A, or −application of joint-and-several-liability provision −abolition of the zero rate for intra-Community supplies: 0% → 15% −introduction of the reverse charge mechanism applicable to domestic supplies Proposed solutions (COM(2008) 109 ):

© 2008 IBFD International Tax Academy 21 Intra-Community supply: 0%  15% VAT C supply of goods VAT payment 112 A B supply of goods ( %) payment 115 UK (VAT rate: 17.5%) SB (VAT rate: 18%) UK tax authorities 15 declaration 17 deduction 17 clearing house 15 SB tax autho- rities deduction 15

© 2008 IBFD International Tax Academy 22 Intra-Community supply: 15% VAT A B (no input tax deduction) supply of goods ( %) payment 115 SB tax autho- rities clearing house UK tax authorities 15 UK (VAT rate: 17.5%) SB (VAT rate: 18%) payment

© 2008 IBFD International Tax Academy 23 Reverse charge mechanism UK (VAT rate: 17.5%) SB (VAT rate: 18%) C supply of goods 95 (no VAT) payment 95 A B supply of goods ( %) payment 100 deduction 17 declaration 17 SB tax autho- rities deduction 18 declaration 18

© 2008 IBFD International Tax Academy 24 Prevention and detection of fraud New proposed legislative measures: −increase frequency for filing VAT returns and recapitulative statements  month (COM(2008) 147 ) −Eurofisc: decentralized network for exchange of information −filing VAT returns and recapitulative statements in electronic format (COM(2008) 147 ) −clarification of exemption on importation of goods destined to be delivered in another Member State (COM(2008) 805 ) −clarification of joint-and-several-liability provision (COM(2008) 805 ) −automated access for tax authorities to basic information about businesses in another Member State −confirmation of taxable persons' name and address in VIES −common minimum standards for registration and deregistration −shared responsibility for protection of revenue of all Member States: prosecution of fraudsters, collection of taxes

Import exemption © 2008 IBFD International Tax Academy 25 SB goods customer US UK exempt importation 0% intra- Community supply supplier