In the realm of financial crimes, the European Union (EU) faces a significant challenge in the form of Missing Trader Intra-Community (MTIC) fraud, also known as carousel fraud. This sophisticated criminal activity, usually perpetrated by organized groups, has severe repercussions for EU member states, resulting in substantial annual losses estimated to be around EUR 60 billion.
MTIC fraud capitalizes on the VAT-free trading arrangements between EU member states, specifically exploiting the zero-rate VAT system on intra-community trade. In a legitimate transaction, businesses can sell goods across borders without imposing VAT, provided they possess valid EU VAT numbers. However, criminals engaged in MTIC fraud exploit this system by charging VAT on goods sold, only to disappear without remitting the collected VAT to the respective government, thereby earning the label of a “missing trader.”
Carousel fraud
Carousel fraud, a more intricate variant of MTIC fraud, involves the cyclic movement of goods or services across different EU states. For instance, a UK business might purchase a product from France at a zero-rated VAT, subsequently selling it within the UK with added VAT. The trader then vanishes without fulfilling tax obligations. This process may repeat through various UK companies before culminating in the sale of the goods back to a French business, allowing the UK company to claim VAT reimbursement despite the absence of an initial VAT payment.
The EU recognizes the severity of this issue, with MTIC fraud being a top priority in the fight against serious and organized crime under EMPACT 2022 – 2025. The European law enforcement agency, Europol, plays a crucial role in identifying and dismantling criminal networks involved in cross-border VAT fraud. Additionally, collaborative efforts with Eurojust and joint investigation teams (JITs) from member states contribute to combating MTIC fraud.
Addressing the Challenges
Addressing the challenges associated with VAT fraud, particularly MTIC fraud, requires a coordinated approach. The EU has proposed an “action plan on VAT” to replace the current temporary VAT system with a permanent single EU VAT system. However, the implementation of such changes requires a unanimous vote by the Council.
It is essential to recognize that MTIC fraud is not merely a financial concern for governments; it has tangible impacts on EU citizens by depriving member states of vital tax revenue. Furthermore, the profits generated by fraudsters often fund other criminal activities, exacerbating the overall threat.
As investigations and prosecutions are currently the responsibility of individual member states, there are challenges in achieving uniformity in defining and addressing fraud cases. The establishment of the European Public Prosecutor’s Office (EPPO) could potentially enhance the EU’s ability to conduct independent investigations and prosecutions.
In conclusion, understanding the complexities of MTIC fraud and its broader implications underscore the importance of collaborative efforts, legal reforms, and technological advancements to fortify the EU’s defenses against this pervasive financial crime.
How are Asian corporate groups affected
Often, shell companies or non-existing companies are used to make such schemes more complicated and more difficult to get detected. Of course, Asian headquartered companies with subsidiaries are of interest here, as the communication with authorities far away is often more complicated.
Tax evasion crime units know this, too, of course. This is why Asian companies need to be aware of this phenomenon in order to understand why they maybe get examined by such governmental units.
The VAT-system is absolutely vital to the EU members states. This is why a lot of human capital resources are invested in this field. The likelihood to be screened as a Taiwanese corporate group in this context is way higher than in other fields.
It is recommended to have an outsourced European accounting law firm handling the VAT for Asian companies. Mistakes happen quickly and are often promptly detected by authorities.
