Missing Trader Fraud - Germany Dr. Sven Helm

Missing Trader Fraud - Germany Path of the Products Participants of a Missing Trader Fraud The basic structure of a Missing Trader Fraud Consequences for the participants Other Aspects of a Missing Trader Fraud Questions

Missing Trader Fraud - Germany Path of the Products EU- Supplier Distributor Other EU countries Missing trader Buffer I DE

Missing Trader Fraud - Germany Participants of a Missing Trader Fraud (1) EU-Supplier First part of the international supply chain The EU-Supplier sells products in cross border situations to companies in another Member State (in our case Germany). The EU-Supplier is also the last part of the international supply chain. Missing Trader (German Company) Usually letter box companies The Missing Trader can only be seen as an entrepreneur if he fulfils the requirements of Sec. 2 para. 1 s. 1 German VAT Act. Disappears without paying the VAT or uses a stolen VAT-number. The Missing Trader can sell the product at a price below the gross price (to the Buffer) because he does not pay the VAT of the supply to the Buffer.

Missing Trader Fraud - Germany Participants of a Missing Trader Fraud (2) Buffer (Germany) The Buffer buys the products from the Missing trader and sells them to the Distributor (it can also be the case that there are more than one Buffers involved). The purpose of Buffers is the concealment of the path of the goods. The Buffers do not necessarily know that they are party of a Missing Trader Fraud. It can also be the case that honest taxpaying entrepreneurs are used as Buffers for a Missing Trader Fraud. Distributor (Germany) The Distributor buys the products from the last Buffer and sells them to the EU-Supplier.

Missing Trader Fraud - Germany The basic structure of a Missing Trader Fraud (1) The transaction between the EU-Supplier and the Missing trader (Germany) Goods sold to other Member States are VAT exempt in the country of origin and are taxed in the country of destination, here Germany (Sec. 1 para. 1 No. 5, Sec. 15 para. 1 no. 3 German VAT Act). The Missing Trader has to pay VAT for the intra-community acqui-sition in Germany and gets a corresponding input-VAT deduction. The Missing Trader can sell the products at a price below the gross price (to the Buffer) because he does not pay the VAT from the following supply to the Buffer or uses a stolen VAT ID-number. He then disappears (after e.g. about 3 months). EU-Supplier Missing trader Net price: 100 € VAT: - €

Missing Trader Fraud - Germany The basic structure of a Missing Trader Fraud (2) The transaction between the Missing Trader and the Buffer The goods bought by the Missing Trader have a net price of 100.00 €. The Missing Trader pretends that the products have a gross price of 100.00 € (because he does not pay the VAT from the supply). The new net value would be 84.03 € and for earning some money he uses a margin (in this case 2%). This leads to the net price of 85.71 €. The Buffer pays a gross price of 101.99 € to the Missing Trader. This artificial reduction leads to a reduction for the further parts of the supply chain. Missing Trader Buffer Net price: 85.71 € VAT: 16.28 €

Missing Trader Fraud - Germany The basic structure of a Missing Trader Fraud (3) The transaction between the Buffer and the Distributor The Buffer sells the goods to the distributor. Outwardly it looks like a regular commercial transaction. The Buffer had paid to the Missing Trader a net price of 85.71€ and a VAT of 16.28 €. He adds a margin of 4% on the net price because he also wants to earn some money. This leads to a net price of 89.14 € and VAT of 16.94 € for the Distributor. Buffer Distributor Net price: 89.14 € VAT: 16.94 €

Missing Trader Fraud - Germany The basic structure of a Missing Trader Fraud (4) The transaction between the Distributor and the EU-Supplier The Distributor sells the goods back to the EU-Supplier and lists them in his VAT return to show normality. He adds a margin of 4% on the net price because he also wants to earn some money. This leads to a net price of 93.60 € for the Distributor. He has to pay no VAT for this transaction because it is another VAT-exempted intra-community supply (Sec. 4 no. 1b), Sec. 6a para. 1 s. 1 German VAT Act). He reclaims the input-VAT from the “invoice” issued by the Buffer. Distributor EU-Supplier Net price: 93.60 € VAT: 0.00 €

Missing Trader Fraud - Germany The basic structure of a Missing Trader Fraud (5) Result of a Missing Trader Fraud Illegal input-VAT surplus The Missing Trader makes the products by this cheaper in an artificial way and he can sell them therefore at a cheaper price and earn a higher margin. Another aim of the involved parties in the fraud can be to receive illegal input-VAT reimbursements from fully fictitious turnovers. The Buffer and the Distributor do the things “that they have to do”, i.e. They are either part of the fraud or They are at least partially correct traders Issue and receive invoices and File the corresponding turnovers with their VAT returns

Missing Trader Fraud - Germany Consequences for the Members of a Missing Trader Fraud (1) Criminal Consequences The list of criminal offences for parties to a Missing Trader Fraud is long. This list could include “marginal problems” like forgery of documents, or tax evasion as well as formation of a criminal organization. Consequences for the Missing Trader It is obvious that the Missing Trader is not acting in a legal way. He does not file a VAT return and due to this is committing a tax evasion (Sec. 370 para. 1 no. 2 resp. 1, para. 3 no. 5 German General Fiscal Code or Sec. 26c German VAT Act). Normally it can be said that the Missing Trader is also part in the formation of a criminal organization (Sec. 129 German Criminal Code). In combination with the tax evasion this could lead to an imprisonment of more than 10 years if the missing trader is also leader of the criminal organization.

Missing Trader Fraud - Germany Consequences for the Members of a Missing Trader Fraud (2) Criminal Consequences Consequences for the Buffer On the first view it is not obvious why there are criminal consequences for the Buffer if he does not know that he is part of a Missing Trader Fraud. He states all of his turnovers in his tax returns and pay resulting taxes. But entrepreneurs can only deduct input-VAT (Sec. 15 para 1. s. 1 no. 1 German VAT Act) if the invoice stems from an entrepreneur (Sec. 2 para. 1 German VAT Act) for a supply (Sec. 3 para. 1 German VAT Act). The VAT payment from the Buffer to the Missing Trader may therefore not be deductible. There is no protection of good faith in the entrepreneur status of the Missing Trader. Furthermore, there is no deduction of input-VAT if the Buffer knows that he is part of a Missing Trader Fraud or he ought reasonable to know this. He may be held liable for intentional tax fraud (Sec. 370 para. 1, 3) or for negligence (Sec. 378 German General Fiscal Code) or promoting it. Fines for the involved companies (Sec. 30, 130 Administrative Offence Law).

Missing Trader Fraud - Germany Consequences for the Members of a Missing Trader Fraud (3) Criminal Consequences Consequences for the Distributor The Distributor can deduct the input-VAT from the invoice he had received from the Buffer if the Buffer qualifies as an entrepreneur (Sec. 2 para. 1 German VAT Act) and has received a supply for his enterprise (Sec. 3 para. 1 German VAT Act). If not he can be held liable like the Buffer under German Criminal Law. In addition, he can assist to the criminal offences of the Buffer (Sec. 370 German General Fiscal Code, Sec. 26c German VAT Act and Sec. 27 German Criminal Code). All parties involved in a VAT carousel may also act and be punished for complicity. Because the VAT situation can be IN BALANCE at the level of single parties to a VAT carousel. However, they agreed in causing together an illegal input-VAT surplus and to use this to increase the margin earned.

Missing Trader Fraud - Germany Consequences for the Members of a Missing Trader Fraud (4) Tax Consequences Consequences for the Buffer (and analogously the Distributor) He may lose his right to deduct the input-VAT since he has got an invoice from a Missing Trader who does not qualify as an entrepreneur for VAT Law purposes and is therefore not able to issue a correct invoice (Sec. 14, 14a and 15 para. 1 s. 1 no. 1 German VAT Act). The Buffer may in addition be held liable for the VAT not correctly deducted by the Missing Trader (Sec. 25d German VAT Act) and for VAT shown on incorrect invoices (Sec. 14c para. 1, 2 German VAT Act). It is sufficient that the Buffer could have had knowledge that he was involved in a carousel fraud. Consequences for the Missing Trader The Missing Trader can in addition to that be held liable for the VAT incorrectly shown on his invoices stemming from a fraud transaction (Sec. 14c para. 1 and 2 German VAT Act; applicable also to “artificial invoices”).

Missing Trader Fraud - Germany Other Aspects of a Missing Trader Fraud (1) Tort cases with German financial institution involved as Distributor EUR 260m tax fraud in one case Many different cases and structures (compared to our example) Know-your-customer rules insufficient Know-your-supplier rules VERY relevant for “diligent” Buffers Extremely high criteria on checking the VAT status of a supplier developed by the fiscal administration and Courts Investigations and fines not only at the level of the Missing Trader or Distributor, but also at the level of (diligent?) Buffers! Tax Compliance (Governance) Manual necessary One of THE strategic fields of rendering tax advice Diligent entrepreneurs being threat to be involved as Buffer

Missing Trader Fraud - Germany Other Aspects of a Missing Trader Fraud (2) Already implemented fraud fighting measures: Extension of the applicability of the Reverse-Charge-Mechanism (Sec. 13b German VAT Act), e.g. on the trade of CO2 certificates (Sec. 13b para. 2 no. 6 German VAT Act) Amendment of the requirements for invoices (Sec. 14, 14a German VAT Act) Liability for the involved parties for VAT shown in invoices issued incorrectly or artificially (Sec. 14c para. 1 and 2 German VAT Act) Liability of the involved parties (i.e. Buffer) for the VAT not correctly deducted by the Missing Trader (Sec. 25d German VAT Act) Additional criminal offences (Sec. 26b, 26c German VAT Act) Duty of the Missing Trader to file a return (Sec. 18 para. 4b, 4a German VAT Act)

Missing Trader Fraud - Germany Other Aspects of a Missing Trader Fraud (3) Potential future fraud fighting measures: Further extension of the applicability of the Reverse-Charge-Mechanism (especially also to intra-community deliveries) Not only in Germany but in the EU (see the proposal of the EU Commission from end of 2016) Additional changes in EU VAT law, i.e. abolishing the destination principle for intra-community deliveries and implementing an origin principle

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International Tax Team