This lesson examines the significant challenge of VAT/GST fraud and the measures employed to combat it. It provides a specific focus on carousel fraud, known as Missing Trader Intra-Community (MTIC) fraud in the EU, due to its substantial economic impact and the specific challenges it presents to tax administrations.

Detailed Notes:

  • The Scale of the Problem: VAT fraud represents a significant revenue loss for governments. The EU’s VAT compliance gap (the difference between expected and actual VAT revenues) was estimated at €89.3 billion in 2022. Cross-border carousel fraud alone is estimated to cost the EU between €12.5 billion and €32.8 billion annually .

  • How Carousel Fraud (MTIC Fraud) Works: Carousel fraud exploits the zero-rating of intra-EU supplies. A “missing trader” in one EU country sells goods to a domestic customer, charging VAT. The missing trader collects the VAT but disappears without remitting it to the tax authority. The customer then claims a refund for the VAT they paid. The goods may be sold back through a chain of companies and exported again, restarting the “carousel” .

  • Warning Signs for Businesses: Tax authorities expect businesses to exercise due diligence to avoid being unwittingly involved in carousel fraud. Warning signs include: prices below market value, suppliers or buyers being newly registered companies with no real office, strange payment instructions, and instructions on whom to trade with. If a business knew or “should have known” of the fraud, they may be held liable for unpaid VAT .

  • Anti-Fraud Measures:

    • VIES: The VAT Information Exchange System allows businesses to verify the validity of their trading partners’ VAT numbers.

    • Joint and Several Liability: In some EU countries, businesses in the supply chain can be held liable for the unpaid VAT of a missing trader if they knew or should have known of the fraud.

    • Real-Time Digital Reporting: The EU is moving towards mandatory real-time digital reporting of cross-border B2B transactions, which will provide tax authorities with immediate access to transaction data .

    • EU Cooperation: The European Commission has proposed amendments to strengthen cooperation between the European Public Prosecutor’s Office (EPPO), the European Anti-Fraud Office (OLAF), and member states to allow for real-time exchange of information

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