Essential, vital, fundamental... These are three adjectives that could well be used to describe taxation in the business world. Taxation is one of the main pillars of any business. Whether you are a manager of a large company or an SME, you will surely agree with this statement. If you are part of the finance department of any company, you will know what we are talking about, how complicated it often is to balance all the accounts and be scrupulous in complying with your tax obligations. That is why the concept of VAT fraud may be very familiar to you.
However, this term, which sounds like a crime or administrative offense (and indeed it is), is not always something you commit voluntarily. As with many aspects of taxation, you may have committed VAT fraud on occasion without meaning to. That is why at easyap, where we have finance specialists, we want to talk to you about what exactly this type of fraud is and also offer you the tool to avoid its dreaded consequences.
What is VAT fraud?
Despite the fact that VAT (Value Added Tax) is a tax that affects both individuals and legal entities, in this article and in relation to the concept of VAT fraud, it refers to companies. In turn, it is a term closely linked to international law, more specifically to that which concerns companies from countries belonging to the European Union.
Now that we have defined the framework in which we will address VAT fraud, let's define it. As its name suggests, VAT fraud is a type of fraud in which a company, known as a fraudulent, acquires an intra-Community product without declaring it. Subsequently, it does not declare or pay VAT on the transactions it carries out with that good in its country, but it does officially charge that VAT to the final distributor of the good. Thus, both parties bear the burden of the defrauded VAT.
In this way, fraud is committed whereby the final distributor avoids paying VAT and, at the same time, gains a competitive advantage over its competitors. The latter, having paid the tax correctly, have paid more and cannot set such a low price, putting them at a disadvantage.
The types of VAT fraud that exist
However, what we have just explained is only one of the many different types of VAT fraud. As they say, where there is a law, there is a loophole. That is why we find that there are various ways of committing this fraud. In fact, they are commonly categorized as follows:
- Procurement fraud, which is what we explained at the beginning of this article and is the most widespread and common type.
- Delivery fraud, which usually consists of simulating a transaction with a company belonging to another EU member state, when in reality the transaction is domestic. This eliminates the VAT that should actually be applied to goods being traded domestically.
- The carousel fraud which is a form of tax evasion carried out by creating a business structure in which companies benefit from the fact that intra-Community deliveries are exempt from VAT. Thus, the product rotates between the companies created without ever reaching the end consumer.
With regard to VAT carousel fraud, which is one of the most widely reported types of fraud, it should be noted that the term "carousel" refers precisely to the fact that the product or merchandise passes between companies without ever reaching an end customer.
Example of VAT fraud
If you are not a tax expert, you may not be familiar with tax issues. That is why it may be best to illustrate everything in a more practical way. Let's look at an example of VAT fraud in Spain:
- STEP 1: To begin with, a company called AZUL, registered in Spain, purchases wine from a company called ROJO, which is established in another European Union member state, Italy. This is an intra-Community purchase, in which the wine is transported from Italy to Spain, so the transaction is legally exempt from VAT. The purchase made by AZUL is subject to VAT, so AZUL self-charges VAT and simultaneously deducts it. In other words, this VAT transaction has a neutral effect on the tax return.
- STEP 2: AZUL sells these wines that it has imported into the Spanish domestic market to a third company, which we will call VERDE. VERDE does pay the VAT charged and will be entitled to deduct it from the transaction. In other words, it can ask the Tax Agency to refund this tax. However, after selling the wine, BLUE disappears without having paid the VAT charged, causing double economic damage to the Treasury:
- It does not charge VAT on wines sold.
- You will have to pay the refund of this same tax to VERDE.
The role played by AZUL in this operation, when it disappears, is commonly referred to as a missing trader or missing trader , and it is this entity that bears responsibility for this tax fraud.
Shell companies have certain common characteristics, such as being newly formed companies that usually have little capital or staff and no real business structure. These companies are always managed by front men or insolvent individuals, which makes tax investigations very difficult.
- STEP 3: GREEN, which has purchased the wines from the fraudulent company, will sell them with a minimal profit margin to a fourth company called YELLOW. This fourth company will be the final recipient and will comply with its tax obligations. These are known as front or conduit companies, and their purpose is to conceal the link between the various companies involved in the operation.
A shell company is very useful for those who wish to commit VAT fraud, as it only operates in the domestic market. They are usually insolvent companies, as this allows them to avoid subsequent liability. In fact, it is common to find that many frauds of this type involve numerous shell companies to make any tax investigation more difficult.
How can you prevent VAT fraud in your company?
The Value Added Tax fraud significantly damages the tax revenues of EU member states. By designing unjustified flows, it introduces goods with uncompetitive and very low prices into national markets. The problem is that your company, without knowing it, may end up participating in one of these flows in the role of an intermediary company.
Like any other fraud, this is also a crime and is classified as such. Therefore, becoming involved in it can lead to criminal and/or administrative consequences. But don't worry, at easyap we have the tools to prevent it and protect you legally.
How can you improve the VAT self-assessment process with easyap?
The current regulation that exists at the European level is the Single European Act. However, this regulation dates back to 1993, and the business world and society in general have changed significantly since then. A key factor has played a fundamental role in this change: digitization.
Governments at all levels are pursuing tax crimes by relying on policies that encourage the use of technological systems. Traceability and greater control over corporate taxation of companies is what the Administration is seeking with measures in favor of digital transformation.
At easyap, we have been offering a digital solution for many years that complies with all the tax obligations that any company must assume. We have been implementing our invoicing system in different countries for years, adapting it to the tax requirements of each location. By implementing our solution, you will enjoy the following benefits:
- You will be adapted to the SII (Immediate Supply of Information) for the submission of VAT returns through the Tax Agency's Electronic Headquarters.
- You will also be adapted to SILICIE (Immediate Supply of Special Tax Accounting Books) and TicketBai, if you invoice in the Basque Country and have to comply with the regional tax regime of that community.
- We even we adapt the solution to the regulations of other countries, such as SAPF-PT in Portugal.
- You will outsource the task of communicating the fulfillment of your tax obligations, thereby optimizing internal resources.
- We adapt to your business level, as the cost of our solution varies depending on the number of transactions you carry out.
- You will not have to rely on your clients' accounting systems or regulatory changes, as our system collects all the information.
All this and much more is what we offer you with easyei, a system that complies with the Tax Agency, as well as other regional and autonomous tax agencies. If you want to know more, just find out how the whole process works and then contact us. Within one week we will implement the solution to prevent any VAT or other tax fraud, and you will have the peace of mind of knowing that you are complying with your tax obligations from now on.
