The files at the centre of this investigation relate to police and tax authority investigations in several countries, including Italy, Denmark and Germany. They were obtained by the German non-profit newsroom Correctiv, which estimates that €50 billion a year is lost to European tax authorities as a result of fraud. Correctiv shared the documents, totalling 315,000 pages, with 35 news organisations and 63 journalists.
The VAT gap – the difference between the amount the European Commission expects to take in and what member states actually bring in – is €147.2 billion, with fraud and evasion largely responsible for the difference. Many of the files relate to carbon credit fraud, but how does this work?
"Typically, Trader A acquired greenhouse gas emission allowances in Member State 2 from Member State 1 without any VAT charged by the business supplier in Member State 1 (on the basis that the place of supply for VAT purposes is Member State 2)," explains BDO indirect tax partner Fionn Uíbh Eachach. "The greenhouse gas emission allowances were subsequently sold by Trader A to a purchaser in Member State 2, with Trader A being required to charge local VAT. The purchaser would recover the VAT from the tax authorities in Member State 2 but Trader A never remitted the VAT to the tax authorities. Instead Trader A retained the VAT and would typically 'disappear' shortly afterwards."
Missing trader
This is an evolution of VAT fraud that focused on high value goods such as mobile phones and computer chips. Typically a supplier in Member State 1 supplies goods to a company located in Member State 2 (“the missing trader”). The missing trader is often a new company with no real substance or activity. The missing trader receives the goods from Member State 1 with no VAT charged as it is an intra-community supply by Member State 1. The missing trader sells the goods locally in Member State 2 and charges local VAT. However, the missing trader does not remit this VAT to the tax authorities in Member State 2.
The goods can also go back to the company in Member State 1 and the supply chain can be repeated or the missing trader could have several separate entities in the supply chain prior to the sale to the third-party purchaser, and this is why such fraud schemes are referred to as “carousel fraud”,” explains Uíbh Eachach.
