Carousel Fraud in the EU: A Digital VAT Solution
Richard Thompson Ainsworth
Boston University - School of Law
Tax Notes International, p. 443, May 1, 2006
Boston Univ. School of Law Working Paper No. 06-23
Recent reports from the UK's Office for National Statistics estimate (as of May 11, 2006) that Missing Trader Intra-community Fraud (MTIC) may exceed 10 billion pounds this year.
Carousel fraud, a variant of MTIC where the same goods are sold over and over again, exploits the lingering non-certified, non-digital attributes of the EU VAT. The UK believes that carousel fraud cost the Exchequer between 1.12 and 1.9 billion pounds in the 2004-05 financial year. This article proposes that carousel fraud be eliminated in the EU through selective insertion of Digital VAT functionality into the present system. In other words, it is proposed that the digital future of the EU VAT system be accelerated. The cost of this implementation would be minimal when compared to current revenue losses.
A certified Digital VAT/trusted third-party system would eliminate carousel fraud in all targeted business segments. Under the system proposed in this paper, a business engaged in the intra-community sale of computer chips, for example, in Member State A would be notified that they were required to install certified VAT software in their ERP system, or access a free on-line encrypted program that would determine their VAT compliance (calculate the VAT, issue electronic invoices, submit VAT returns, as well as VIES, Intrastat reports). Failure to do so would result in an inability to zero-rate their intra-community sale of computer chips. Purchasers of computer chips in Member State B would be similarly notified. Failure on the part of the buyer to utilize a certified system, or to submit VAT returns through a certified service provider would result in denial of input credits on the forward sale of chips within Member State B.
Under this proposal the free market acts as an enforcement buffer between the taxpayer and the tax administration. Because certified service providers will assume all VAT filing and payment obligations of the taxpayer, the private sector will sort out legitimate from illegitimate traders. Private security arrangements will be worked out in advance among legitimate businesses that will place funds at the disposal of the intermediary in time to make payment with timely returns. In a worst case scenario taxpayers will be in the same position with respect to cash flow and VAT compliance as they were before this proposal was in place. However, in most cases they will be in a better position. They will no longer be subject to audit, or be responsible for determining taxable amounts, submitting returns or making timely payments of funds. Not only will the burden of compliance be lifted but the cost and risks associated with VAT compliance will be significantly reduced.
Number of Pages in PDF File: 8
Keywords: VAT, Missing Trader Intracommunity Fraud, MTIC, Carousel Fraud, Certified tax software, Streamlined Sales Tax, Digital VAT, D-VAT
JEL Classification: E62, H20, H25, H71, K00, K34, K40,K42, O23, O33Accepted Paper Series
Date posted: August 15, 2006
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