Carousel Fraud

VAT systems grasp for brass ring.

September 27, 2007
by Chris Walsh

For more than a year, the European Union (EU) has been battling with a worrying and very significant rise in the incidence of Value Added Tax (VAT) fraud. This battle has mainly centered on “Carousel Fraud,” a scheme in which businesses make false tax refund claims and then disappear with their ill-gotten refund checks before the auditors can catch up with them. This phenomenon has triggered a renewed energy around revamping the European VAT system on several fronts. This article will highlight a few of the improvements that should be of special interest to U.S.-based multinational companies.

Fraud Prevention

Individual country reactions to VAT fraud have varied, but there is one area of general agreement — if taxpayers are made to self-accrue VAT rather than having the tax being charged between separately-registered entities, it would help to stem the flow of fraudulent VAT claims.

Here’s why. Under the VAT self-accrual method, the taxpayer has to charge himself tax and then take a credit for that same tax simultaneously, thereby creating a “wash” as far as the tax is concerned. To that end, the U.K. has implemented a new policy that requires business purchasers of certain goods (such as cell phones and computer chips) to self-accrue any VAT that is due rather than having the supplier charge the tax. Over the coming months, we can expect the list of countries taking action on fraud prevention to grow rapidly and the methods they employ to combat this growing menace to become more diverse as EU-wide anti-fraud measures are unveiled. The implications for businesses are unclear at this point but are likely to include a greater emphasis on self-accrual of VAT, even in respect of domestic transactions.

Place of Supply of Services

Under current EU legislation, identifying the appropriate country in which to tax cross-border supplies of services can be an extremely complex affair, especially in areas such as telecommunications, transactions conducted over the Internet, and leasing. The European Commission recognized this issue some time ago and has recently been running a consultation exercise to solicit views on how their position could be improved to provide greater taxpayer certainty. New legislative proposals for B2B (business-to-business) transactions are now being circulated, the thrust of which is moving the place of supply to the place where consumption takes place. This should simplify the current situation, under which the place of supply could be where the supplier belongs, where the customer belongs, where the services are carried out, or a whole host of other possibilities. While it is too early to give this measure a whole-hearted thumbs-up (the plan is to implement it sometime between 2008 and 2010), any simplification to the present system has to be welcome.

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Chris Walsh is the VAT Practice Leader for Vertex Inc., which provides tax technology products and process management services worldwide. With 20 years of indirect tax experience, Mr. Walsh has been active in value-added and indirect taxes in more than 30 countries. At Vertex, he serves as a VAT resource expert to both internal and external clients and has responsibility for managing the Vertex® Value Added Tax O Series® product.