International VAT\GST Fraud and How to Stop It

October 16, 2018

An EU wide VAT\GST fraud organized crime group was recently exposed, and the damage to the EU economy is estimated at EUR 60 million. The fraud schemes affected several countries, including Belgium, Bulgaria, Germany, Hungary, Italy, Portugal, Romania and Spain,
The case highlights a growing problem the European Commission knows well – VAT\GST fraud is costing the European Union plenty.
How much are governments losing to fraudulent VAT\GST claims? According to one estimate, a total of 50 million Euros (nearly $58 million) are lost each year. Some of it is part of organized crime that takes advantage of the enormous number of VAT\GST laws prevalent across the EU.
There are currently no fewer than 28 different regimes for VAT\GST claims, making it extremely difficult for the EC to monitor VAT\GST collections and returns. The variance from country to country also opens doors for fake claims across borders.

Common Types of VAT\GST Frauds

One of the most common forms of VAT\GST fraud is called the Missing Trader fraud. This involves selling goods to a buyer across the border. The seller charges VAT\GST on the purchase, but fails to report submit the funds to the host country. The buyer, who indeed paid the VAT\GST and has a record of the payment, is eligible to receive a VAT\GST return. The tax authority then returns the money that it never received from the fraudulent seller. The Missing Trader, in this case, is the seller, who disappears without passing along the funds that were paid through him to the government.
Another common VAT\GST swindle operation is known as the Carousel Fraud. It involves a series of fraudulent sales and purchases, each time adding more VAT\GST to the total and finally disappearing through a shell company without paying the funds to the appropriate governments. When such deals are made over multiple borders, they are difficult to track, especially when they end with an honest purchase over a border with VAT\GST paid on the last deal and a return claim filed. In fact, the fraudster could claim VAT\GST returns at various points in the series of sales, keeping the carousel moving without making any actual VAT\GST payments.
Both types of fraud are likely to target high-priced goods so that they generate the maximum amount of VAT\GST through a minimum number of sales. Products such as computer chips, mobile phones, and jewelry. Although there are numerous exceptions, the frauds are usually carried out by organized crime cells that are adept at the deceptions.

What Can Be Done to Stop It

Because the fraud directly impacts tax collection across EU governments, it harms all EU residents, either through cuts in budgets due to underpayment of taxes or through new taxes directed towards compensating for the missing funds. Naturally, the European Commission has considered a series of steps to combat the fraud. The most recent proposal involves improving information sharing among the different countries in order to improve oversight.
The system will speed up data analysis on cross-border trades and establish teams of tax authorities consisting of members of various countries. That way information on tax payments can be checked by one state and confirmed by another in the shortest possible time.
The new system should close the gaps that have allowed the Missing Trader fraud and the Carousel fraud to reach such high levels.
In addition, the government of the UK, which may be the hardest hit of all EU governments, has already announced an independent plan to move all tax reporting to the digital realm. The plan, known as Making Tax Digital, will begin next year with VAT\GST reporting, making it easier to track how payments are made and claims against those payments from abroad.

A Better Way to Track VAT\GST Payments and Claims

The UK government appears to be heading in the right direction when it comes to moving all tax information to the digital space. There is no easier way to keep information available to all relevant authorities simultaneously.
Of course, honest and hardworking citizens have already found ways to ease the way they file and collect VAT\GST returns. In fact, the old way may have caused significant losses to the governments, but it also caused a substantial number of small businesses to leave their own money on the table because of the time and effort it took to fill out the forms.
An app that can keep track of all the relevant documents for VAT\GST payments and for claiming returns is clearly the best possible option. And when that solution involves artificial intelligence to handle some of the heavier processing, it promises to be a strong line of defense.
Meanwhile, it helps to know how to handle VAT\GST claims at all the difference EU countries. For the complete story on recovering VAT\GST, download our eBook .
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