VAT Fraud in the Customer Chain - The German Perfect Storm Cases

Abstract:     
German civil and criminal courts have not always agreed over whether to allow a taxpayer to zero-rate intra-Community supplies when the taxpayer making the supply knew (or should have known) that his buyer in the other Member State intended to fraudulently evade VAT as a missing trader. This is no longer the case. Zero-rating of intra-community supplies is now being denied in German civil and criminal courts.

This paper considers how far Germany appears to be extending the law in this area. In 2011 six cases were heard by the Bundesfinanzhof (German Supreme Tax Court) that demonstrate both (a) the civil court’s adoption of criminal analysis and (b) the development of a (should have known) middle ground between actual knowledge and absence of knowledge of fraud in the customer chain.

After the December 7, 2010 decision by the Court of Justice of the European Union (CJEU) in Criminal Proceedings against R (“R”), the Bundesfinanzhof made it clear that it would follow the reasoning of the German criminal courts. Civil courts have now denied taxpayers the right to zero-rate dispatches to another Member State, when the taxpayer knew (or should have known) based on objective factors, that its buyer intended to use the transfer to fraudulently evade VAT in the other Member State.

The unfortunate outcome may be that a single transaction can be taxed twice: once through the denial of the zero-rate on dispatch, and a second time through an enforcement action in the buyer’s jurisdiction.

This is an aggressive approach to combating missing trader fraud. There do not appear to be comparable efforts in other Member States.

Two elements of the German cases considered here are noteworthy. First, these are cases that involve fraud in the customer chain rather than the more typical fraud in the supply chain – in other words these cases look forward to fraud in future transactions, rather than backwards at fraud in historical transactions. Secondly, the questions in these six cases involve the denial of a zero rate on an intra-community supply rather than the more common denial of a deduction on a domestic purchase.

Number of Pages in PDF File: 18

Keywords: Criminal Proceedings against R, Alex Kittel, Recolta Recycling, Mahagében kft, Péter Dávid, VAT, MTIC, Fraud, Perfect Storm, V R 28/10, V R 30/10, V R 46/10, V R 50/09, V R 3/10, V R 19/10

JEL Classification: K14, K19, K34

working papers series