Missing Trader Intra-community Fraud Research Articles

The definitive VAT system and its impact on tax collection

Value Added Tax (VAT) is a significant source of fiscal revenues in the EU. However, the VAT treatment of cross-border supplies enables large-scale tax frauds, such as the Missing Trader Intra-Community (MTIC), which takes each year billions of euros from Member States' public budgets. In 2016 a definitive VAT system was proposed by the European Commission to respond to the shortcomings of the current temporary system. This new system should reduce the possibilities of MTIC fraud for intra-community transactions through the collection of VAT by the supplier in the same way as for domestic transactions. The tax collection by the supplier would impact the administrative costs of the financial authorities. This paper contributes to the discussion about the advantages and disadvantages of the newly suggested system. The analysis focuses on the study of the change in administrative costs and VAT revenues for individual Member States and across the EU. The results are that after implementing the definitive VAT system, total administrative costs of the Member States would increase at least by EUR 107 million, whereas total VAT revenues would rise by EUR 40 billion. This indicates the overall positive impact of the definitive VAT system for the EU. However, individual Member States would not benefit equally. The net exporters, whose intra-community supplies exceed the intra-community acquisitions, would spend more than others for the collection of VAT in connection with the international trade of goods.

The Effects of the RCS’s Application in the Value Added Tax Collecting Process on the Perception of SME Taxpayer in Korea’s Trade Activity: Transparency and Fairness in Trade

Value Added Tax (VAT) is the largest source of global tax revenue. However, it faces issues of tax avoidance, such as the black-market and missing trader intra-community fraud. Many studies have postulated that the introduction of the Reverse Charge System (RCS) will contribute to the enhancement of transparency and fairness in trade for small and medium enterprises (SMEs) that supply goods or provide services. This study analyzes SME taxpayers’ perception of transparency and fairness in trade resulting from the introduction of the RCS into the South Korean VAT system. In B2B transactions that handle gold, copper, and steel scrap, large companies often abuse their bargaining power over smaller firms by not paying VAT with their purchase or reducing the prices to equal VAT, leading to low trade transparency. When it comes to gold, copper and steel scrap trading, the imbalance in bargaining power results in one of the parties being unable to reap maximum benefits because of unfairness. SMEs with relatively weak bargaining power suffer from unfair trading practices such as price cutting and the imposition of VAT by their counterparts. Since the introduction of the RCS, however, SME taxpayers appear to believe that trade fairness has improved. This study’s findings reveal that SMEs are more likely to perceive improvement in trade transparency and fairness since the implementation of the RCS, indicating that the RCS has exerted a positive influence on SMEs. This study provides important policy implications for countries that intend to implement the RCS by offering empirical evidence of its benefits.

Cost of the MTIC Vat Fraud for European Union Members

The Value Added Tax (VAT) fraud is one of the most endemic economic crimes within the European Union. Its most disruptive form, the Missing Trader Intra-Community (MTIC) scam represents a real threat for the further economic and fiscal integration of the Union. The aim of this paper is to explain the mechanisms and to assess the magnitude of the MTIC fraud based on macroeconomic data. A macroeconomic model using panel regression is developed in order to link the amount of VAT collected across the member countries to their respective trade gaps. Using this model the VAT gap is identified based on the difference between the theoretical VAT and the observed amounts. The results emphasize that the MTIC fraud alone accounts for almost 94 B€ in 2014 across the 28 Union members representing 0.67 % of Union's GDP.

Stopping MTIC -- With a 3rd Invoicing Directive

A Third Invoicing Directive for the EU VAT seems to be a foregone conclusion. Corrections are needed in the Second Invoicing Directive. The hallmark of the next Directive will be its application of digital invoice technology. The Commission’s proposals will include adoption of tax-technology advances in invoice-control that are currently in use outside the EU. The next Invoicing Directive will require comprehensive e-invoicing, invoices that are digitally signed, and invoices that are fed into a system of relational databases that match transaction data across the Single Market. There will be real-time EU sales/purchases lists, and remote/real-time audit functionality. This will occur, because the true target of the Third Invoicing Directive will be missing trader intra-community (MTIC) fraud, not invoices. Improvements in invoicing will be a means to achieve a larger end.This will not be a “black swan” IT effort. The needed technology is here today; the necessary systems are tried and proven in large multi-jurisdictional tax systems; the implementation costs will be a small fraction of the €100 billion that is currently lost to MTIC fraud annually. This paper “connects the dots.” It considers Brazil’s successful digital invoicing regime in the Sistema Publico de Escrituracao Digital or Public System for Digital Accounting (SPED) and applies what has been learned to the pattern of MTIC and missing trader extra-community (MTEC) frauds in the EU. A follow-up paper will align the Croatian Fiskalizacija – IT (Fiscalization program) with the Brazilian SPED, and then consider the data security and remote audit functionality of the newly implemented Rwandan system.There is much to be learned and borrowed from these systems. Workability is assured.

VAT Fraud & Triangulation

Missing trader intra-community (MTIC) fraud has received a lot of domestic enforcement attention. True cross border enforcement (joint or coordinated multi-Member State audit) has been limited. There are signs that this is changing as the Member States become more aggressive in their search for revenue. Along with this shift in enforcement focus, triangulation analysis has moved from being an interesting aspect of the MTIC fraud structure to the central element in a larger understanding of how a fraudster thinks and how he carries out his fraud. We are coming to understand that triangulations are not only the mechanism of how the fraud is carried out; they are a cloak of invisibility that the fraudster casts upon his fraud to hide it from the authorities. Germany for example, is currently engaged in a multi-billion euro fraud investigation involving the triangulation of consumer goods and CO2 certificates. The Augsburg District Court is overseeing the investigation. The Augsburg investigation is not only uncovering triangulations that “hide the goods,” but it is also uncovering sophisticated payment platforms that “hide the money transfers.” The intent of these structures is to make the fraud fully invisible to the authorities (goods and funds) until after the trader has disappeared. The breadth of the German investigation is breathtaking, but with the Mutual Assistance for the Recovery of Claims (MARC) Directive, in effect as of January 1, 2012, this kind of comprehensive multi-jurisdictional MTIC investigation may be becoming the new norm. If so, triangulations will most certainly be at its core. This paper focuses on the developing law. It explains triangulation, triangulation simplification, and then considers several recent court decisions where fraudsters manipulated the VAT system with triangular trades. The cases illustrate both the enforcement problems with triangular trades, and highlight how the courts’ examination of triangular frauds is leading to significant developments in the VAT law. Three cases are drawn from the Court of Justice of the European Union (CJEU), and three are from national courts.

Technology Can Solve MTIC Fraud – VLN, RTvat, D-VAT certification

Technology can solve missing-trader intra-Community (MTIC) fraud. In the early 2000s, MTIC fraud mainly concerned cell phones and computer chips. By 2006, MTIC fraud was targeting services (transfers of CO2 permits and VoIP services) and was no longer limited to the European Union. MTIC fraud is now fully digitized (the supply, the movement of the product and the funding). Technology is both the causative agent and the most effective countermeasure for this type of fraud. The details of the three major technology-intensive approaches for solving MTIC fraud are known since 2007: the VAT locator number (VLN); real-time VAT collection (RTvat); and certified tax software (Digital VAT or D-VAT). This article endeavours to contribute to the debate that the European Commission has opened on this topic with its recent Green Paper, by comparing and contrasting these proposals.

VAT Fraud: MTIC & MTEC - The Tradable Services Problem

Tradable services – VoIP termination services, mobile minutes, software as a service (SaaS), or almost any service bought or sold in the “cloud” – are a distinct class of taxable supplies. These service-based supplies both resemble and differ fundamentally from goods. They also differ from services that are consumed-on-purchase (consumed services). Tradable services are designed from the beginning for re-sale. They are hybrid supplies that behave commercially like goods, but have functional attributes that make them hard to distinguish from services generally. When determining the place of supply/ place of taxation for these kinds of supplies, their hybrid character presents difficulties. These difficulties are a doorway for fraud in some VAT/GST regimes. Tradable services are not defined, distinguished or otherwise identified as a class of supplies in any VAT/GST. Jurisdictions that adopt the EU VAT as a model have more of a problem with this omission than do those modeled after the New Zealand GST. Under EU rules tradable services are highly vulnerable to both (a) missing trader intra-community (MTIC) fraud, and (b) missing trader extra-community (MTEC) fraud. In fact, MTEC fraud is unique to tradable services, and to the EU rules. MTEC cannot arise under the New Zealand GST. In jurisdictions where missing trader fraud in tradable services is a problem, two approaches can be taken to prevent it. The jurisdiction could either: (a) adopt a statutory design solution. This would require that a clear definition of tradable services be added to the law and that these services be treated as a discrete class of services to which New Zealand-type place of supply/place of taxation rules would apply. The alternative is to (b) adopt a technology-based administrative solution without a major (substantive) tax law change. The leading solutions in this area are the VAT Locator Number (VLN) system and the certification of tax software proposal offered under the D-VAT. Considered only within the EU, options are more limited. The reason is that MTIC fraud thrives in goods as well as tradable services in the EU. Within the EU one of the technology-based solutions (broadly applied either to (a) all transactions within a vulnerable market, or (b) throughout the entire VAT/GST system) is preferable.

VoIP MTIC - The Italian Job (Operazione 'Phuncards-Broker')

On February 8, 2010 a speculative paper on the likelihood that fraudsters proficient in missing trader intra-community (MTIC) fraud might move into voice over internet protocol (VoIP) was submitted to the Boston University School of Law Working Paper Series. Prior to that paper there was very little (if any) public discussion of VoIP MTIC. There were no assessments, no arrests, and not a hint of litigation. Fifteen days later, and before final publication the financial press exploded with coverage of a massive VoIP MTIC fraud (the Operazione “phuncards-broker” investigation). The Wall Street Journal reported: An [Italian] judge…ordered the arrest of 56 people, including one of Italy's richest men as part of an international probe into an alleged $2.7 billion money-laundering and tax-evasion scheme involving two major Italian telecommunications providers. Because of the importance of the phuncards-broker investigation, this paper follows these allegations, relates them to the earlier speculative paper on VoIP MTIC, and then demonstrates why this is a global problem with a digital solution. MTIC is becoming a serious problem in such a large number of economic sectors that it is beginning to double up on itself. Not only are fraudster migrating from one type of MTIC to another, and not only is MTIC mutating from goods into services, but the proceeds of one MTIC fraud are clearly being laundered through another. A significant portion of the funds laundered through the VoIP MTIC funds in Operazione “Phuncards-Broker” came from previously successful CO2 MTIC frauds. It is only a matter of time before the true cost of MTIC is tallied.

Zappers - Retail VAT Fraud

Zappers skim cash sales at retail. Zappers are add-on programs used by merchants with electronic cash registers (ECRs) or point-of-sale (POS) systems. Zappers are smart and selective. They do not skim all sales, and they never skim credit card transactions. Although they are present in every jurisdiction, Zappers appear to be most widely used in developed economies that combine high levels of cash sales with high rates of consumption tax. Sweden, for example, has a cash-intensive economy, one of the world’s highest VAT rates (25%), and also reports that 70% of the ECRs in the country are either “… constructed for manipulation or have had software installed that allow sales to be manipulated (Zappers)…” Tax losses in the EU can be estimated at approximately $23 billion per year in the restaurant sector alone. Germany tops the list followed by the UK, France, Italy and then Spain. Country Revenue Loss (in millions) Country Revenue Loss (in millions) Austria 508.7 Latvia 58.4 Belgium 600.5 Lithuania 100.1 Bulgaria 45.9 Luxembourg 79.2 Cyprus 33.4 Malta 16.7 Czech Republic 404.5 Netherlands 1,042.5 Denmark 316.9 Poland 1,030.0 Estonia 41.7 Portugal 362.8 Finland 296.0 Romania 417.0 France [3] 3,294.3 Slovakia 183.5 Germany [1] 4,503.6 Slovenia 87.6 Greece 529.6 Spain [5] 2,160.1 Hungary 304.4 Sweden 529.6 Ireland 291.9 United Kingdom [2] 3,448.6 Italy [4] 2,806.4 TOTAL 23,593.9 This is not the only marketplace where the tax/technology intersection is problematical. On a far larger scale MTIC (missing trader intra-community) fraud is also a technology driven theft of public revenue by criminals. These frauds include the well known carousel frauds in cell phones and computer chips, MTIC fraud in CO2 permits, the yet to be fully investigated VoIP MTIC, as well as MTIC in the electricity and gas exchanges. Tax authorities are fighting back all along the technology front. There are intensive traditional audits as well as concerted efforts to blunt the effectiveness of the fraud with technology. But, if there is one distinguishing characteristic of Zapper enforcement efforts it is that here the authorities are embracing technology-based solutions. This effort to fight technology-with-technology has produced a measure of success as well as helped develop strategic partnerships around solutions. Cooperation is evident.

MTIC (VAT FRAUD) in VoIP - Market Size $3.3b

In the beginning, the VAT fraud known as missing trader intra-community (MTIC) fraud appeared to be a UK problem concentrated in the cell phone and computer chip markets. MTIC has mutated (to other commodities) and migrated (to other Member States). This paper describes how this fraud operates in the VoIP market, and how in this mutation it is no longer confined to the EU, but can infiltrate any VAT/GST anywhere. Canada, Botswana, Japan, Iceland and Jamaica (to mention a few jurisdictions) have consumption taxes that are just as vulnerable as is the EU VAT to VoIP missing trader fraud. It is somewhat problematical that the OECD’s Committee on Fiscal Affairs (Working Party 9 on Consumption Taxes) seems to be adopting rules that would facilitate this fraud as it examines VAT/GST in cross-border trade in services and intangibles. MTIC is a technology-intensive fraud. The fraud itself can take only minutes. Proceeds then travel with lightning speed through a series domestic and foreign banks (Dubai, India, Hong Kong, Pakistan, China and Russia are common). When a withdrawal is made (in cash) on the other side of the world, the stolen VAT is nearly impossible to recover. Unlike the EU Commission’s selection of five highly vulnerable MTIC markets (cell phones, computer chips, perfume, precious metals and emissions permits) that are selected for special enforcement measures in COM(2009) 511, this paper presents Dr. Michael Cheetham’s list of forty-one markets of presently active MTIC fraud. VoIP ranks as number 6 on Dr. Cheetham’s list. This paper suggests that the Commission may not be looking at the MTIC problem with both eyes wide open. It is much bigger than it appears to be. Stripped to essentials MTIC prevention is all about assurance. Where is the assurance that whenever an enterprise purchases supplies for resale with an obligation to perform a reverse charge that it will make and report this charge, and then remit the VAT on an onward sale? The important point is not who should remit the VAT; the important question is how can we be assured that whoever is charged with doing so actually does it? Technological answers to the problem posed by missing trader fraud in services and intangibles are known and well tested. The measures needed involve certification of automated systems. These are largely administrative measures, but they depend on Member State cooperation, and Commission leadership in the EU, and in the global arena they depend on international cooperating and substantive direction from the OECD.

The Morphing of MTIC Fraud: VAT Fraud Infects Tradable Co2 Permits

Missing trader intra-community (MTIC) fraud has been slowly morphing from cell phones and computer chips to other commodities. In the last few months however MTIC made a dramatic appearance in tradable CO2 permits. It closed exchanges and prompted France and the Netherlands to unilaterally change their tax treatment of CO2 trades. The UK has followed the French treatment in large measure. On Monday June 8, 2009 rumors of MTIC fraud in carbon emission permits closed the main European exchange for spot trading of European Union carbon emissions permits and Kyoto offsets. When BlueNext began trading permits again on Wednesday, June 10, 2009, the certificates, which had previously been subject to the 19.6% French VAT, were exempt (without right of deduction). MTIC fraud in tradable CO2 permits presents a high level policy dilemma – how do you aggressively pursue tax fraud without destroying the tradable permits market? Traditional tax enforcement (aside from direct pursuit of the missing trader) centers on denying deductions for VAT paid to the trader who purchased from the missing trader. This trader could well be innocent, and that is the problem. The standard of proof for allowing this deduction is whether or not this party knew or had reasonable grounds to suspect that the VAT payable in respect of the supply (or any previous or subsequent supply) would go unpaid. The underlying difficulty for the CO2 market is – even if there is no fraud – just the possibility of being denied millions of euro in VAT deductions is a significant increase in risk. On October 13, 2003 the European Parliament and the Council set out the rules for the trading of greenhouse gas emission allowances. The Directive follows from the UN Framework Convention on Climate Change and the Kyoto Protocol. The intent is to reduce greenhouse gas emissions by 8% relative to 1990 levels. The trading system began on January 1, 2005. The French, UK and the Dutch have taken self-help measures to prevent MTIC losses. None of these jurisdictions have received permission to make these changes, and objections have been raised in this regard. Each country approaches the problem structurally. The French (and now the UK) have elected (unilaterally) to treat transactions in tradable emission permits as exempt (the French exemption is without right of deduction; the UK is with the right of deduction). The Dutch have taken a different (unilateral) route – a full reverse charge regime. There is a third way, one that approaches the problem through administrative (not structural) mechanisms. It is technology-intensive, requires software certification, but is perfectly fit to a MTIC fraud problem embedded in a regulated digital marketplace. This paper presents this third method.

MTIC (Carousel) Fraud: Twelve Ways Forward; Two Ways 'Preferred' - Has the Technology-Based Administrative Solution Been Rejected?

In a May 31, 2006 Communication to the Council, the European Parliament, and the European Economic and Social Committee, the European Commission indicated a need to develop a co-ordinated strategy to improve the fight against fiscal fraud [COM(2006) 254 final]. Although the Communication considers fiscal fraud broadly (VAT, excise duties and direct taxes) the most pressing need seems to be for a VAT strategy that will effectively deal with MTIC (Missing Trader Intra-Community) or carousel fraud. To this end the Commission hosted a conference: Fiscal Fraud - Tackling VAT Fraud: Possible Ways Forward. The March 29, 2007 conference was constructed workshop-style, and divided into three concurrent sessions What was the forward? On February 22, 2008 a press release and a communication from the Commission indicated that after consideration, the ECOFIN Council of June 5, 2007 was of the opinion that two ways were preferred: ... [1] a generalized reverse-charge system, where liability for VAT payments would be shifted from the supplier to the purchaser,... [and 2] taxing intra-Community supplies of goods. Among these, the second way is preferred over the first. ... [T]he preferred system of taxing intra-Community supplies should be based on taxation in the Member State of departure and not in the Member State of arrival... Both of these solutions require significant structural changes to be made to the VAT. The Commissions assessment of these preferred ways forward is not overwhelmingly positive. These ways forward require significant structural changes. On May 31, 2006 the Commission (as opposed to the ECOFIN) had been of the opinion that an administrative (not a structural) solution was preferable. In addition, the Commission wanted a technological solution that would advance the Lisbon Strategy. Has a technology-based administrative solution to MTIC (carousel) fraud been rejected? The answer is no. No, because no such solution has even been considered. This paper makes such a proposal. The proposal is for a limited adoption of the Digital VAT (D-VAT) throughout the EU, and community-wide (and coordinated) adoption of the recently enacted French rules that remove zero-rates from high-risk intra-community cross-border transactions. This solution creates a surgical disincentive that targets the cross-border trade identified as high-risk MTIC (carousel) fraud trade. At the present time this trade is in cell phones and computer chips, if MTIC (carousel) migrates to other products so too would this solution. This proposal flexibly re-directs market forces so that the market itself becomes a barrier to MTIC (carousel) fraud. Unlike all other proposals, this approach involves no structural change to the VAT itself. It simply seeks digitization and certification of the current system.