Tuesday, August 29, 2006

Europe is a honeypot for VAT fraud

Some years ago during the so-called 'blue flu' strike of members of the Garda (Irish Police) who went on sick leave to highlight a pay claim, I stopped a burly garda in civvies as he paraded with a placard in front of the main gates of Leinster House, site of the Houses of the Oireachtas (Irish Parliament) on Kildare Street, Dublin.

'Isn't there a law against demonstrations within some distance of here?' I asked the garda.

'Where you from?' the garda asked with a curious look, mistaking me for a tourist.

'Cork,' I responded and his expression instantly turned surly.

'If there is a law, what are you going to do about it?' the garda asked and resumed his trek as I momentarily rejected the notion of a citizen's arrest.

There are of course many laws; some generally observed and some not. The perceived gravity of an offence in Ireland often depends on the pedigree of citizen involved. A similar point could be made about Europe compared with the US, when it comes to white-collar crime.

It's inconceivable that white collar criminals in the US, would get away with billions of dollars in a well-known scam that has been ongoing for years but it is happening in Europe, with little headway being made by authorities to stem it.

The Financial Times reported on Monday, that German customs authorities are poised to make a number of arrests this week after joining forces with British investigators in a crackdown on multi-billion pound “carousel fraud”.

The scam – whereby fraudsters collect value added tax refunds while withholding payments of the tax itself – centres on mobile phones and related goods that are dispatched through complex, pan-European supply chains. The joint investigation – called Operation Sunrise – has tracked mobile phones brought into Germany by air and in vans crossing the German-Swiss border.

The collaboration is a response to escalating carousel fraud, now estimated to account for a tenth of the UK’s exports and likely to cost the public purse several billion pounds this year. Germany is also severely affected, losing an estimated 2 per cent of its VAT revenues to the fraud.

Last December, Munich's Ifo Institute estimated that Germany's annual VAT losses are €17bn ($20bn, £11.5bn) a year, or 12 per cent of total receipts, including €3.5bn lost to so-called "carousel" schemes operated by crime rings. Losses in Europe are estimated at €60bn a year, equivalent to more than half the EU's annual budget.

"VAT fraud is the Achilles' heel of public finances," said Gernot Mittler, finance minister in the German state of Rhineland Palatinate. "And with EU enlargement, it is spiralling out of control."

The current German investigation, which drew on Revenue & Customs’ pioneering use ofscanning equipment to combat fraud, follows the UK’s recent arrests of 22 people in the biggest operation of its kind.

Carousel fraud exploits the principle that, within the European Union, exporters are able to claim VAT refunds from the government while importers are obliged to collect VAT from their customers and pay it to the government. Using a complex pan-European supply chain, carousel criminals steal money every time they import and export the goods.

The checks on vans crossing the German-Swiss border at Weilam Rhein uncovered new evidence about crim-inals operating in Germany and their methods, including the location of warehouses where they store mobile phones and other goods.

UK and Irish Trade

AS far back as the late 1990s, UK revenue losses from what is termed Missing Trader VAT fraud was growing by up to three quarters of a billion pounds each year. By 2001/2002, it was costing the UK taxpayer up to £2.75 billion and it has made some Irish people very rich. In the first half of 2002, the category "Electrical Machinery (apparatus, appliances and parts)" in Irish trade statistics was inflated by more than €8 billion in respect of both import and export trade with the UK.

UK Customs & Excise detected carousel consignments of computer chips shipped to Ireland in the first half of 2002 large enough in aggregate to have supplied the entire market for that chip in Europe, Asia and Africa put together.

UK seeking "reverse charge mechanism"

The FT said today that the UK is optimistic that it will soon get the go-ahead from the EU for a "reverse charge mechanism" that will change VAT into a form of sales tax for mobile phones and other electronic goods. The danger is that fraud may migrate to other goods. A radical proposal by Germany and Austria to counter this risk was to impose a "reverse charge" on all goods and services. But the idea was a step too far for the European Commission, which ruled it out last month.

The third option - endorsed by the Commission - is changing the VAT system so that goods are taxed in the countries where they are supplied, not where they are consumed.

The fear of tax harmonisation by some EU countries including Ireland, has been a huge gift for the fraudsters.