VAT fraud prevention in EU

Abstract

Each year, multi-billion amounts of tax revenue is lost all over the European Union. Due to its specif- ic nature, VAT is vulnerable to il- legal manipulation in several ways. Within time, different fraud meth- ods were identified, revealing the organized networks of tax fraud and exposing the techniques be- neath them. Gathered intelligence enabled the responsible authori- ties and institutions to develop new strategies and measurements of de- tecting and preventing VAT fraud, as well as improving present tools. The carried out research has shown that information exchange deficien - cies among EU Member States has been a long-discussed issue. Three main disadvantages were distin- guished in the exchange of infor- mation between EU Member States in the VAT field. First of all, infor - mation stored in the VIES system is not always reliable or received on time. Secondly, information is not updated fast enough due to the fact that procedures provided in EU legislation are not effective enough. Thirdly, the exchange of informa- tion on questionable transactions between EU suppliers is not suf- ficiently fast or intensive. Thus, it can be stated that the current data exchange scheme is not effective and the entire chain is not visible “from above”, therefore it is rather difficult to identify frauds quickly. It is necessary to apply a new and in- novative approach to the exchange of information both within EU and outside of it. An approach and investigation “from the top” having all the infor- mation is very necessary. Only a smart tax administration system including the information of all tax- payers of EU Member States with - out any exceptions will enable to promptly track down VAT fraud. Discussions revealed that taxpay- ers are becoming more cunning and are carrying out long-chain frauds on an international level, which are quite hard to track down prompt- ly “here and now” when not all the information from other Member States is received. The best method for information collection in the system would be if all natural persons and legal en- tities carrying out business activi- ties would provide their complete accounting data, and the tax ad- ministrator would upload, manage and process such data. If all the aforesaid data was collected in a centralized way on the level of the entire EU, then the cross-checking algorithm used in the verification system would help find the early stages of possible frauds quickly and effectively. There are, of course, certain risks, however they are sig- nificantly lower than when acting on a local level, due to the fact that cross-checking and inspection functions are not carried out in real time, but may take several weeks to complete. Such time lags result in the fact that some companies can issue large quantities of fraudulent VAT before closing. [...]