Countering cross‐border VAT fraud: the Bulgarian experience

Abstract

PurposeThe paper sets out to study value added tax's (VAT's) exposure to missing‐trader or carousel fraud and possible countermeasures, their costs and benefits.Design/methodology/approachIt studies the modus operandi of network fraud by distinguishing it from individual evasion. Drawing on the experience of Bulgaria, it discusses the costs and benefits of the principle of joint liability and of the VAT account, the latter being tried so far only in Bulgaria.FindingsThe study concludes that the possible solutions are in the field of optimizing risk management and the application of the principle of joint liability rather than through tighter controls at entry and on the conduct of business.Originality/valueConfronted with the drastic increase of carousel fraud, the European Commission identified the urgent need of a coherent strategy to combat it. Yet, neither the literature nor the practices of tax and law enforcement have addressed the threat adequately. Tax evasion literature is focused on the drivers and deterrents of individual evasion, while studies of VAT network crime rarely consider the preventive instruments' extra compliance costs for taxpayers. In this context, Bulgaria's unique experience with the VAT account provides useful insights to policy makers about its limitations and the application of the joint liability principle.