How to catch the VAT crooks

One of the major challenges of the border-free European Union is VAT fraud, and in particular the variance where input VAT is claimed based on fraudulent invoices for non-existing business activities. This carousel (“Missing Trader”) fraud goes beyond the fairly academic discussion about tax evasion vs. tax avoidance; we are talking here about the mob:

“According to Europol’s representatives, it is estimated that 40-60 billion euro of the annual VAT revenue losses of Member States are caused by organised crime groups and that 2 % of those groups are behind 80 % of the missing trader intra-community (MTIC) fraud.”

The European Court of Auditors has recently issued a sensible set of recommendations to both member states and the European Commission.

Typically this is not the type of document that I would promote on this blog, but this paper is actually worth its salt and the conclusions make sense.

Download (PDF, 1.02MB)

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Let’s meet up at Avalara’s first tax conference

If you are interested in automated tax compliance, you may want to look into attending Avalara’s first tax compliance automation conference. This will happen on May 10 and 11 in New Orleans. I will be one of the VAT speakers.

Avalara’s CEO, Scott McFarlane, says:

“Since 2004, we’ve been maniacally focused on disruptive innovations that accelerate the inevitable automation of one of the “last frontiers” – transactional tax compliance. CRUSH is yet another way to deliver value to you: connect with your peers, spend time with Avalara executives and technologists, meet our exclusive network of prestigious partners, and learn from industry experts in training sessions for CPE credits.

Today, we lead the market in transactional tax compliance solutions. It’s why we’ve assembled a terrific daytime program with outstanding sessions, panelists and tax thought leaders. Our evening social events include discovering outstanding New Orleans cuisine in the city’s finest restaurants.”

You can register through Avalara’s homepage (the link is on the top of your screen):

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IPT – spotlight on VAT

The Institute for Professionals in Taxation (IPT) is the professional organization in the U.S. for practitioners in direct and indirect tax. They honored me last year with the “VAT Article Of The Year” Award.

I am now featured in their monthly publication – see below!

While you are at it, please take a moment to consider participating in IPT’s annual VAT Symposium, which will be held in Indianapolis, IN, from September 21-23, 2016.

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Crippled by VAT penalties

Almost every time that I teach a seminar, someone asks a question like “What are the chances of getting caught?” or “I have never been penalized – why would I bother with a VAT strategy?”.

My former colleague Jim Burberry, who is now a VAT partner at RSM in the UK, commented on the following – unfortunate – situation.

A UK VAT group had an annual VAT liability of 4 billion sterling (!), but nevertheless ran a deficit in that year of 9 million. The year was 2012, a leap year (like 2016!). The VAT payable over the preceding filing period was due on February 29, but the company missed that date and paid the VAT only one day late, on March 1.

HMRC imposed a routine penalty, which is a percentage point of the unpaid VAT. Depending on the circumstances (think recidivism), the percentage can be anywhere between 5% and 25%. But in any event the penalty – like everything in VAT – does not depend on the profitability of a company.

The penalty was UKP 277,185 was probably relatively small compared to the company’s total expenses. But it was still an unnecessary expense, incurred in a loss situation where the company was probably in cost-cutting mode anyway.

Jim says:

‘Every case is determined on its merits, but the tribunal’s decision underlines how important it is for companies to be on top of all their VAT payments to the taxman.

‘This decision also suggests that it would be extremely hard to identify a situation in which the size of a penalty could be challenged on the basis of proportionality. This should serve as a warning to others, particularly businesses with significant VAT liabilities.’

In this day and age, I find it unbelievable that a company with billions in sales does not have the capability to monitor their VAT position in real time, and ensure timely payment (or reclaim) of the correct VAT amount.

With the various competing tax monitoring tools that are available, all ERP systems can be upgraded to include at least the barest of reporting tool or dashboard. Implementing these tools are not invasive upgrades that take months to get running, but these are rather straight-forward databases. All depending on the scope and breadth of the organization, of course.

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VAT focus on U.S. online sellers

PWC Denmark writes about the Danish tax authorities being mindful and going after “remote vendors” – but this is a global trend. If you are selling online downloads (apps, music, games, video etc.) to individuals in the EU, Russia, South Africa etc. etc. you must be VAT registered and pay VAT at the destination country’s rate.

PWC writes:

“In order to ensure that a more systematic approach is applied to the tax authorities’ enquiries, the new law authorises the authorities to request information from providers of payment solutions (e.g. credit card companies, banks etc) including the total amount received by a remote vendor from sales made to private individuals in Denmark.”

Again – Denmark is just an example. All countries that impose VAT on online sales to individuals will come after U.S. e-businesses – it’s easy money!

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Gulf States: 5% VAT by 2018

The tax-free Nirvana will come down soon – the Gulf States expect to introduce a 5% VAT by 2018. Like the potential Brexit, this will be an interesting scenario, where countries that have no history of levying tax will need to set up a tax collection infrastructure. At the exact same time, traders will have to get acquainted with indirect taxes – and VAT being a tax that is collected throughout the supply chain, no trader will be able to escape.

It is expected that the Gulf States learn from other jurisdictions that have recently started collecting VAT. Malaysia springs to mind, where VAT was introduced in April 2015. And also Singapore would be a useful example, particularly where they implemented a fairly high registration threshold. This threshold ensured that small businesses (with gross sales below US$ 800,000) would be exempt of Singapore’s GST compliance.

History dictates that managing compliance, both on the business as well as the government’s end, is the biggest challenge of implementing a new VAT / GST. This is where Malaysia is struggling most, and an area where the Chinese authorities have been most strict.

In addition, the Gulf States would be wise to look at countries like Brazil as well, where the administration pulls financial data directly from the businesses, and mandates pre-approved invoices.

With the Islamic financial system and cultural differences added to the mix, it will be an interesting process!

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Brexit: what would it be for VAT?

While the U.S. is focused on choosing its new president, Europe is looking at the UK, where a serious internal discussion is wrapping up on the issue of whether the UK should leave the European Union. On June 23 the UK will hold a referendum on the question. For background from a U.S. point of view see this NY Times article:

For VAT, a Brexit would be really interesting. I have yet to make up my mind on the matter, but here are a couple of random VAT thoughts:

  1. UK multinationals doing business in the EU would have a slightly harder time getting themselves VAT registered and comply with local rules. An EU trading company that the UK MNC would establish in an EU country would resolve most of these compliance issues. This would also apply B2C online sales of music, video, games etc.
  2. This would also apply to U.S. companies that now use their UK operations as a springboard to deliver goods and provide services to EU customers – you will want to set up operations in an EU country as well.
  3. Conversely, EU-based MNCs that want to do business in the UK may have a slightly more difficult registration and compliance process. For example, the UK may require a local fiscal representative who is liable for the EU company’s UK VAT compliance.
  4. For UK multinationals, receiving goods in the UK from the EU would no longer be an intra-EU acquisition, but rather an “import”, as if the shipper would be a non-EU country. If HMRC and Customs are smart, they would minimize the import compliance work, by for example minimizing any bank guarantees  and separate customs registrations.
  5. For exports, the rules for zero-rating to EU buyers would be simpler: there would be no more requirement for exporters to demonstrate that the buyer is a business. As long as the exporter can demonstrate that the goods have left the UK, the zero-rate would apply.
  6. No more separate EU sales lists and Intrastat filing requirements for UK traders. These statistics will be included in the import and export filings.
  7. The UK can knock themselves out with expanding their odd VAT rate structure, particularly on food. No more edicts from the EU commission. Also, the case law of the EU Court of Justice would no longer apply.
  8. The UK would need to negotiate a new free-trade agreement with the EU, which will be painful. The NY Times article writes:

    “More than 45 percent of British exports in goods go to the European Union, while less than 17 percent of E.U. exports go to Britain. Even a minor disruption in Britain’s free-trade arrangement with the European Union would be costly, and if Britain votes to leave, Brussels will exact a price, in what could be a long and difficult negotiation, for the maintenance of a free-trade deal.”

And much more, of course!

Another, more in-depth article with a historical perspective is here:

The image below shows the UK’s main trading partners, and the importance of continental EU trade.


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