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Using algorithms to detect tax evasion

This is a fascinating read for if you want to step back from the daily grind of case law and business issues. The writers have no relationship to tax at all, and provide a refreshing and original approach to early detection of tax fraud.

“Tax evasion schemes are sequences of transactions where each transaction is individually compliant. However, when all transactions are combined they have no other purpose than to evade tax and are thus non-compliant.

Our method consists of an ownership network and a sequence of transactions, which outputs the likelihood of conducting an audit, and requires no prior tax return or audit data.

We adjust audit procedures for a new generation of evolved tax evasion schemes by simulating the gradual change of tax evasion schemes and audit points, i.e. methods used for detecting non-compliance.

Additionally, we identify, for a given audit scoring procedure, which tax evasion schemes will likely escape auditing.”

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Don’t store EU user data on a U.S. server

Are you collecting personal data from EU online or retail customers on a U.S. server? You should reconsider your data storage policies!

The European Court of Justice – the court that I often refer to on this blog for its VAT rulings – today issued a judgement that basically says that U.S. servers must not store personal data / user data of EU residents.

The reason is that the U.S. legislation does not provide adequate protection from ‘snooping’ government agencies.  The NSA security leaks that Edward Snowden exposed are specifically mentioned in the ruling.

I wrote earlier that some countries have bi-lateral treaties with the U.S. that would allow such data sharing. See here:

It now seems that these bi-lateral agreements are invalid, at least to the extent that they cover personal data. Company data (like financial data used for the VAT returns) seems safe from what I can read from the judgement (but don’t rely on that!).

Credit card data, IP addresses, email addresses etc. of EU residents is considered personal data and can no longer be stored on U.S. servers. If your company is doing that, for example because your are a online seller of downloads to EU customers, or because your are a retailer that keeps the EU customer data on a U.S. server, you may run into legal trouble soon.

The entire ruling is here:

And the press release is here:

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IPT VAT conference round-up

U.S. based VAT specialists met in Palm Springs, CA last week – the IPT VAT conference was an excellent opportunity to catch up on the latest VAT developments and network with like-minded professionals. The VAT experience of the audience varied between total newbie to the most seasoned VAT veterans, and there were sessions and development opportunities for everyone.

In the previous blog posts I already included some takeaways from the conference – there are four more that I should mention:

  • The UK authorities have started penalizing companies that submitted incorrect 13th Directive reclaims. I.e., not only was the request for a refund denied, but these companies received a penalty for wasting HMRC’s time. (This one I found very odd – would be interested to hear more…)
  • There is a tendency to off-hand reject refund claims that are filed incompletely. Tax authorities tend to be less flexible in situations where refunds are claimed without correct documentation – adding correct documents later on is not always possible.
  • Multiple speakers mentioned about the German authorities. They are getting very strict as to mentioning the exact description of goods / services sold on invoices. Without a detailed description on the invoices input VAT claims may be rejected.
  • People, Processes and Systems are the critical elements of a VAT organization. All speakers strongly suggested that building relationships across the global business (Finance, Legal, Logistics, Business Development, Sales) is crucial for managing the global VAT footprint.

See here for the program brochure and speakers list:

Next conference for me is the Vertex Exchange Conference in Orlando, FL, from October 25-28. See here for more:

I created this image in the desert of Death Valley, on my way to the IPT Conference. Click to see a bigger version.

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Archiving your electronic documents

EU businesses can store electronic documents anywhere in the EU and outside the EU, if there is a bilateral agreement with the non-EU country. Not every EU country has such an agreement with the U.S. – so EU companies that digitally store their electronic documents only on servers (“the cloud”) in the U.S., must first check if there is a data exchange treaty between the EU country of residence and the U.S.

Similarly, U.S. companies that have VAT registrations overseas, must check if the country of registration if they have a treaty with the U.S. for data exchange. If not, the U.S. company must keep their records in the country of registration.

No one will tell you this at the time of registration, but at the time of an audit this issue may pop up.

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E-commerce platforms now run a VAT risk

Starting in 2003 there have been constant developments in taxing B2C digital downloads in the EU. They first tackled sales that non-EU (read US) companies make to individuals in the EU – from 2003 U.S. digital sellers need to remit VAT on these sales. Rates vary, depending on the country of the individuals buyer.

From January 1, 2015 the EU introduced rules that pull EU-resident sellers into the same framework. Thus, a EU seller of digital downloads must currently charge VAT at the customer’s country’s rate, instead of the rate of the seller’s country.

Other countries, like Albania, Ghana, Iceland, Kenya, Korea, Norway, South Africa, Switzerland, Tanzania and the Bahamas have been ogling the EU developments and have implemented similar VAT rules. And just keep in mind that B2C VAT taxation is expected to be implemented shortly in Japan, Australia, New Zealand, Canada, Turkey and Israel. Surely this list will snowball to a point where most VAT countries will have these rules.

To no one’s surprise, the major challenge for the EU tax authorities is collecting the tax from non-residents. Non-residents will be required to register in order to file and remit the tax. And even though there are significant simplifications for non-residents to register in the EU, still there is significant ‘leakage’ – many software vendors have not filed.

The EU at this time has no registration threshold for these vendors. Every U.S. company that sells software to individuals outside the U.S. must consider whether a VAT registration is required.

Now, the authorities are considering to first go after the vendors’ payment platforms to collect the VAT (and penalties / interest!) that the merchant is liable to pay. The reasoning is simple: the platform collects the money, so the platform has the cash to pay the VAT if the merchant doesn’t pay VAT. This is based on the insight in online commerce that the authorities developed – there is no EU-wide rule change, case law or any other basis.

Note that this potential collection requirement for the platform would apply even if the platform has a written agreement with the merchant that the merchant is the legal seller, not the platform!

Also, with VAT making headlines as (still) a very fraud-sensitive tax, the expectation is that authorities will start creating new laws or regulations, preceded by case law, on collecting unpaid VAT in the e-commerce world.

In the past, authorities have made similar attempts to put VAT liability on payment platforms – the VAT liability of credit card processors in Korea springs to mind. However, this new trend looks like a serious development, and platforms and merchant should be prepared – particularly in the EU.

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Trend: Submit worksheets with VAT return – UPDATED

Countries are getting serious about plugging the VAT Gap – I wrote earlier about the difference between the potential VAT revenue and the actual VAT revenue collected by European governments. See my post here:

Therefore, tax inspectors want to better understand your VAT filings and ideally would like to be able to interrogate your VAT data on a regular basis. In a number of countries the tax administration offers a so-called ‘tax covenant’, where the idea is that the company opens up its books and processes for the tax auditor as a one-off audit, and that in return the auditor only performs desktop (or off-site) audits, if needed.

Other countries simply require online access to the company’s accounting systems, or a detailed xml-type file with all relevant business data that accompanies the VAT return filing.

It turns out that Czech Republic has now made the latter a requirement. Pincvision writes:

“The new report will provide details in respect of information already provided in the VAT return. These details will include invoice numbers, details on suppliers, customers etc. The report will be submitted on a monthly basis within the same deadlines as the VAT return. Basically, all local purchases or sales would have to be included. Furthermore, for most invoices, also information on the counter party, number of the invoice, VAT amount, VAT base and tax point would have to be included. Local sales or purchases below CZK 10,000 would be subject to less detailed reporting.

Furthermore, also information on acquisition of goods and/or services from foreign entities not established in the Czech Republic with a place of supply in the Czech Republic would have to be reported.”

See here for more:

It is obviously expected that more countries will follow suit. It puts the responsibility on the local businesses to automate the VAT compliance and reporting in their accounting systems. Also, the taxpayers better ensure that the data submitted to the tax man is correct – a monthly reconciliation of the VAT data with the business data is absolutely required.


Zdenek Vajnlich, my co-presenter at the IPT VAT Conference that is currently going on in Palm Springs, CA, noted that Croatia and Slovakia have the same requirement.

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See you at the IPT VAT conference

I will spend much of this week in Indian Wells, CA at the annual VAT conference of the Institute for Professionals in Taxation (IPT). This is the only independent all-VAT conference in the U.S.

I have two speaking slots and I look forward to catching up!

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