## htnea2023001 — Example of a Single Tax Loss Transaction and Corresponding Contra Transaction

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### Introduction and objectives
- Primary aim of tax administration: collect the right amount of taxes and duties at the right time and engender confidence in the tax system.
- Four broad categories of taxpayer obligation: (1) registration in the tax system, (2) timely filing or reporting of requisite taxation information, (3) reporting of complete and accurate information, and (4) payment of taxation liabilities on time.
- Purpose of a taxpayer compliance program:
  - identify and react to the most significant risks by intelligence-led and evidence-based methodology;
  - organize compliance risk identification, risk prioritization and compliance strategy planning;
  - allocate finite resources to achieve maximum impact.
- Segment taxpayers (e.g., small, medium-sized, large businesses; individuals; type of tax—direct or indirect) to better identify and deliver risk treatments.
- Measuring the tax gap contributes to identifying noncompliance in a taxpayer segment and the behaviors that led to the gap.

### Scale, evolution, and organized crime linkages
- VAT refund fraud is global, organized by networks that adapt to countermeasures and launder proceeds offshore where regulatory controls are weak or negotiable.
- EU VAT gap figures:
  - 2013 EU published VAT gap: almost €170 billion, of which cross-border (refund) fraud accounted for approximately €50 billion.
  - By 2019 EU-wide VAT gap: €134 billion in nominal terms and 10.3 percent as a share of the VAT total tax liability.
- Examples outside the EU:
  - Australian case: $A700 million estimated lost to fraudulent GST refund claims over a five-year period, representing a loss of about 5.5 percent of net GST receipts for the five-year period.
  - 2022 ATO detection: potential fraudulent GST refund claims in the amount of about $A850 million.
  - Operation PROTEGO countered false GST refund claims involving nearly 29,000 individuals.
- Organized crime linkages: VAT refund fraud often connected to other serious crimes (drug and tobacco smuggling, human trafficking, identity fraud, terrorism); tax crime among top three sources of illegal money laundered through the international banking system.
- Europol 2022 estimate: large-scale, criminally organized VAT refund fraud costs EU revenue authorities about €50 billion annually in tax losses.
- Europol estimate for carbon trading fraud: the EU probably lost at least €5 billion VAT because of carbon trading fraud.

### MTIC (carousel and acquisition) fraud typologies and mechanics
- Distinction emphasized: tax avoidance (legal) versus tax evasion/fraud (illegal). Focus is on VAT refund fraud (theft of revenue).
- MTIC features:
  - Transactions deliberately complex and contrived to impede VAT audit verification.
  - Primary motive for certain registrations: to steal VAT.
- Two main MTIC forms:
  - Carousel fraud: missing trader imports zero rated, sells domestically at VAT-inclusive price then disappears without paying VAT; intermediaries (“buffers”) disguise links; goods re-exported VAT free.
  - Acquisition fraud: missing trader acquires goods VAT free from another member state, charges VAT on onward domestic sale to a buffer, then fails to account for VAT due; requires a legitimate end customer.
- Common actors/roles (roles interchangeable across carousel and acquisition fraud):
  - Organized criminals, missing/defaulting VAT registered traders, buffer traders, broker traders (carousel only), end customers (acquisition only), peripheral roles (freight forwarders, warehousing traders).

### Contra (offsetting) MTIC fraud: purpose and mechanics
- Contra fraud uses two contrived supply chains—a tax loss chain beginning with a missing trader and a contra chain that offsets refund visibility.
- Core mechanics (illustrative Transactions A–C):
  - Transaction A: Broker 1 purchases goods in the UK (standard rated), exports them zero rated, and claims an input tax deduction for the export consignment.
  - Transaction B: Broker 1 acquires goods zero rated from another EU member state of equivalent value to Transaction A, sells at standard rate to a buffer company, which sells to broker 2.
  - Transaction C: Broker 2 exports the goods zero rated, generating a VAT refund claim; Broker 1 submits a VAT return for nil net tax because its input tax (from A) offsets its output tax (from B); Broker 2 submits a VAT return for a VAT refund or reduced net tax liability.
- Financial and concealment dynamics:
  - Broker 1 receives payment from contra transactions that includes the VAT amount; broker 2 reclaims that VAT portion as a refund—broker 2 finances, until its VAT return, all or part of the VAT element of the fraud.
  - The tax loss and contra transactions need not match one-for-one; money flows are circular and may be consolidated or split to disguise circularity.
  - If contra and tax loss transactions occur in the same VAT period, VAT received by broker 1 may pass down tax loss chains and be dissipated outside the jurisdiction.
  - Evidence gathering is impeded because money often flows through banks outside the jurisdiction and because goods may not exist in either chain; fraudsters ensure supporting documentation exists.

### Commodities, migration to intangibles, and market effects
- Historically targeted high-value, low-volume goods: cell phones, computer microchips; other commodities: precious metals, copper, razor blades, scrap metal.
- Fraud trading volumes often bore no relation to commercial market capacity and distorted trade statistics.
- Policy responses had market effects:
  - UK domestic reverse charge on computer chips in 2007 coincided with exports to Ireland falling and parliamentary questions about GDP effects.
  - After reverse charge on cell phones in 2007, exports to Dubai declined rapidly despite prior claims of market dominance.
- Fraudsters adapted to intangible products and services (cross-border services, carbon credits, energy trading, mobile phone airtime) to frustrate detection.
  - Carbon credit fraud involved trading permits across circuits and repeatedly reclaiming VAT; Europol estimated up to 90 percent of all carbon market volume in some member states was related to fraudulent activities at peak.

### Case studies and enforcement outcomes (selected)
- Deutsche Bank carbon emissions case:
  - June 2016 German court: seven former Deutsche Bank AG managers found guilty; judge described a “criminal business model” resulting in €145 million of fraudulent VAT refund claims.
  - 2011 convictions: six men found guilty of defrauding €260 million in false VAT refund claims.
  - Deutsche Bank paid VAT arrears and penalties totaling €220 million; prison sentences imposed on individuals involved.
- HMRC denial example:
  - 2006 HMRC denied a VAT refund claim of £6.8 million from a business with trading activities typical of MTIC fraud.
  - The company had turnover of £108 million in a 44-week period after switching to CPUs with no prior experience.
  - HMRC found hallmarks of MTIC fraud and applied the ECJ Kittel ruling to refuse deduction entitlement.
- Latvia 2010 example:
  - First six months: 9.5 percent (LVL 23.6 million) of VAT refunds were claimed by 36 percent of refund claimants using fictitious transactions.
  - Same period: 3.4 percent (LVL 249.9 million) of VAT input tax deductions were based on known fictitious transactions.
  - In the previous three years the SRS detected and deregistered more than 5,000 bogus businesses.
- Hungarian Customs and Excise Tax Office (October 2009):
  - Organized group operated across Germany, Slovakia, Austria, and some Asian countries.
  - Bogus invoice factory provided approximately 80 companies with fraudulent invoices; total of 38 companies involved.
  - Estimated cost to the Hungarian government about US$10 million in lost revenue.
- South African Revenue Service (SARS) examples:
  - 2015 allegation: between 2005 and 2008 a businessman claimed more than R250 million (US$18.75 million) in fictitious VAT refunds.
  - 2016 arrests: suspects claimed refunds based on fictitious invoices valued at R823 million (US$61.73 million).
- Australian examples:
  - 2013–2016 gold GST refund fraud: estimated cost $A700 million over 5 years; fraud stopped in 2016.
  - 2008–2009 pattern: many small refund claims that were quickly detected and acted upon.
  - 2022 scheme: large numbers of fictitious businesses, fictitious invoices, and credential sharing via social media.

### Statistical observations and HMRC MTIC estimates
- MTIC trading patterns respond to legal and administrative countermeasures rather than normal commercial factors (timing effects linked to court rulings and policy changes).
- UK MTIC loss and impact estimates (HMRC reported sequences):
  - Peak losses in 2005: £4.5 billion to £5.5 billion.
  - UK estimated to account for 25.4 percent of all EU losses from carousel fraud at peak.
  - MTIC fraud estimate for 2014/15: between £0.5 billion and £1 billion (within same range as 2013/14).
  - MTIC fraud estimate fell to less than £0.5 billion in 2016/17 (from between £0.5 billion and £1 billion in 2015/16 and from peak of £2.5 to £3.5 billion in 2005/06).
- HMRC Table 1 reported sequences (by year sequence shown in source):
  - Attempted fraud (upper bound): 5.5, 4.5, 2.5, 2.5, 1.5, 1.0, 1.0, 1.0, 1.0.
  - Attempted fraud (lower bound): 4.5, 3.5, 1.0, 1.0, 1.0, 0.5, 0.5, 0.5, 0.5.
  - Impact on VAT receipts (upper bound): 4.0, 3.0, 2.5, 2.5, 1.5, 1.0, 1.0, 1.0, 1.0.
  - Impact on VAT receipts (lower bound): 3.0, 2.0, 1.0, 1.0, 1.0, 0.5, 0.5, 0.5, 0.5.

### National responses, cooperation, and countermeasures
- EU-level and national measures:
  - EU Commission proposals (2009) and action plan (April 2016) emphasized improved cooperation, information exchange, and short-term and medium-term tax policy and administration actions.
  - Proposals included EUROFISC, direct access to national databases, common minimum registration/deregistration standards, temporary reverse charge mechanisms, and establishing a robust single European VAT area treating cross-border transactions like domestic transactions.
- Reverse charge mechanism (Box 5):
  - Mechanism shifts obligation to pay output tax from supplier to customer while customer retains right to deduct VAT; results in net nil tax position at each business stage and removes MTIC fraud opportunity.
  - Trade-offs: ad hoc domestic reverse charges can undermine the transaction trail used for audit and may argue for more fundamental policy responses.
  - UK experience:
    - June 2007: domestic reverse charge for wholesale trade in computer chips and mobile phones.
    - July 2009: reverse charge applied to carbon credits.
    - Legislative changes stopped MTIC carousel fraud in these commodities and reduced revenue losses.
- UK comprehensive MTIC strategy (since September 2000):
  - Centrally coordinated intelligence gathering and risk analysis.
  - Enhanced VAT registration checks and preregistration visits.
  - Centralized and automated credibility checks on repayment claims; HMRC uses TRUCE profiling and Connect analytics.
  - Use of security provisions, joint and several liability, reverse charge in targeted sectors, targeted prosecutions of orchestrators, monitoring cross-border movements with UK Border Force.
- Slovak Republic action plan (2012, implemented 2013–2014) selected measures:
  - Financial guarantees for high-risk traders at registration; joint and several liability; extension of domestic reverse charge; evidence of intra-community deliveries; tax guarantees for third-country imports.
  - Specialized tripartite teams (Project Cobra) of tax specialists, investigators and prosecutors.
  - Criminal law changes: new offense of tax fraud; stricter penalties; specialized courts; reorganized police task forces.
  - Administrative changes: recapitulative statements with VAT returns; detailed VAT ledger reports required since January 1, 2014; Joint Analytical Center merging databases; targeted actions against major suspicious companies; recruitment with IT expertise.
- Slovak outcomes:
  - Project Cobra (2012–2017) audit and investigation activity resulted in VAT adjustments totaling €807 million, of which about €152 million was accounted for by VAT refunds.
  - Improvement in accuracy of returns data from around 80 percent to 96 percent.
  - Decrease in the VAT compliance gap from 41 percent of potential collections in 2012 to 26.3 percent in 2017.

### Technology, analytics, and operational imperatives
- Modern tools (artificial intelligence, blockchain, “big data”) increasingly used to detect noncompliance and combat VAT fraud.
- IMF-supported hackathon example: winning solution detects fraud using VAT electronic invoices and machine learning to analyze sales and purchase patterns rapidly.
- Operational imperatives for effective enforcement:
  - Identify areas of greatest risk and prevent or tackle fraud early.
  - Deny fraudsters access to proceeds and increase financial risks for participants and facilitators.
  - Coordinate interventions across government departments and external stakeholders; consider establishing a special antifraud unit with tax administration and other agencies.
  - Ensure sufficient human resources focused on behavioral change rather than temporary fixes.
  - Empower tax administrations to cooperate and exchange intelligence with law enforcement, customs, and financial institutions.
  - Criminal investigation and prosecution, asset recovery, and dissuasive criminal sanctions are essential.
  - Use risk-based information requests and a combination of targeted, dynamic interventions supported by continual data collection and monitoring.
- Implementation caveats:
  - No single administrative intervention will resolve VAT refund fraud.
  - Reverse charge mechanisms remove opportunities for MTIC fraud but also remove transaction trails used for audits and are often ad hoc; strategic, cooperative approaches are critical.
  - Short-term measures should improve information exchange and cooperation between tax administrations and law enforcement; long-term strategies require structural policy choices.

*Source — htnea2023001 — How to Combat Value-Added Tax Refund Fraud (IMF How to Note).*

### 1. Example of a Single Tax Loss Transaction and Corresponding Contra Transaction   12

### 1. Example of a Single Tax Loss Transaction and Corresponding Contra Transaction   12

### Introduction: VAT refund fraud and taxpayer compliance
- Primary aim of tax administration: collect the right amount of taxes and duties at the right time and engender confidence in the tax system.
- Four broad categories of taxpayer obligation: (1) registration in the tax system, (2) timely filing or reporting of requisite taxation information, (3) reporting of complete and accurate information, and (4) payment of taxation liabilities on time.
- Purpose of a taxpayer compliance program: identify and react to the most significant risks by intelligence-led and evidence-based methodology, organize compliance risk identification, risk prioritization and compliance strategy planning, and allocate finite resources to achieve maximum impact.
- Segment taxpayers (e.g., small, medium-sized, large businesses; individuals; type of tax—direct or indirect) to better identify and deliver risk treatments.
- Measuring the tax gap contributes to identifying noncompliance in a taxpayer segment and the behaviors that led to the gap.

### Background: scale and evolution of VAT refund fraud
- VAT refund fraud is global, organized by networks that adapt to countermeasures and launder proceeds offshore where regulatory controls are weak or negotiable.
- The EU “VAT gap” context:
  - 2013 EU published VAT gap: almost €170 billion, of which cross-border (refund) fraud accounted for approximately €50 billion.
  - By 2019 EU-wide VAT gap: €134 billion in nominal terms and 10.3 percent as a share of the VAT total tax liability.
- Examples outside the EU:
  - Australian case: $A700 million estimated lost to fraudulent GST refund claims over a five-year period, representing a loss of about 5.5 percent of net GST receipts for the five-year period.
  - 2022 ATO detection: potential fraudulent GST refund claims in the amount of about $A850 million.
  - Operation PROTEGO countered false GST refund claims involving nearly 29,000 individuals.
- Organized crime linkages: VAT refund fraud often connected to other serious crimes (drug and tobacco smuggling, human trafficking, identity fraud, terrorism); tax crime among top three sources of illegal money laundered through the international banking system.

### Types of VAT refund fraud covered
- Distinction: tax avoidance (legal) versus tax evasion/fraud (illegal). This note focuses on VAT refund fraud (theft of revenue).
- VAT evasion forms: from unregistered cash-economy evasion to complex refund frauds.
- Two main forms of MTIC (missing trader intra-community) fraud:
  - Carousel fraud: import goods zero rated from another EU member state, sell through contrived domestic chains, re-export VAT free; missing trader acquires goods zero rated then sells at VAT-inclusive price and goes missing without paying VAT; intermediary “buffers” disguise links.
  - Acquisition fraud: missing trader acquires goods VAT free from another member state, charges VAT on onward domestic sale to a buffer, then fails to account for VAT due; requires a legitimate end customer; fraudsters often undercut genuine traders’ prices.

### Example structures and mechanics (MTIC)
- Key structural elements introduced with the single market (destination principle) effective January 1, 1993: intra-community supplies between VAT-registered traders were zero rated on dispatch; VAT payable in member state of consumption.
- MTIC features:
  - Transactions deliberately complex and contrived to impede VAT audit verification.
  - Primary motive for certain registrations: to steal VAT.
- Common players/roles in MTIC schemes (roles interchangeable across carousel and acquisition fraud):
  - Organized criminals: orchestrate activity, often offshore, involved in other serious crimes.
  - Missing or defaulting VAT registered traders: import VAT free, sell domestically charging VAT, then go missing without paying VAT.
  - Buffer (intermediary) traders: buy/sell domestically, charge and reclaim VAT to disguise unpaid VAT origins.
  - Broker traders (carousel fraud only): buy domestically then sell to other EU states or outside EU and submit VAT refund claims.
  - End customers (acquisition fraud only): legitimate customers whose purchases enable acquisition fraud.
  - Peripheral roles: freight forwarders, warehousing traders exploiting large volumes.

### Contra (offsetting) MTIC fraud: rationale and mechanics
- Contra fraud concept: two contrived supply carousel chains—one begins with a missing trader (tax loss chain) and the other is the contra chain.
- Mechanism:
  - Broker 1 participates in tax loss chains and also acquires (imports) goods in contra transactions. The domestic onward supply in the contra chain creates output tax that reduces or negates input tax broker 1 would otherwise claim for tax loss transactions.
  - Broker 1 files a smaller refund claim (or no claim), avoiding detection by risk processes that target significant refund claims.
  - Broker 1’s acquired consignments are exported zero rated by Broker 2. Broker 2 reclaims input tax from the tax administration as a refund.
  - Broker 1 receives payment from contra transactions that includes the VAT amount; broker 2 subsequently reclaims that VAT portion as a refund. Thus broker 2 finances, until its VAT return, all or part of the VAT element of the fraud.
  - If contra and tax loss transactions occur in the same VAT period, the VAT received by broker 1 from contra transactions may pass down the tax loss chains and be dissipated outside the jurisdiction.
- Purpose of contra structure: conceal fraud-related sales and reduce visibility of fraudulent refund claims to tax authority risk detection.

### Illustrative figures and references in the source
- Figure 1: Risk Management Process Model (operating context; identify risks; assess and prioritize risks; analyze compliance behavior; determine treatment strategies; plan and implement strategies; monitor performance against plan; evaluate compliance outcomes).
- Figure 2: A Simple MTIC VAT Carousel Fraud.
- Figure 3: Example of a Simple MTIC VAT Acquisition Fraud Scheme.
- Figure 4: Example of an MTIC VAT Contra Carousel Scheme.

*Italicized: Source — htnea2023001 - 1. Example of a Single Tax Loss Transaction and Corresponding Contra Transaction   12 (PDF).*

### Box 1. Example of a Single Tax Loss Transaction and Corresponding Contra Transaction

### Box 1. Example of a Single Tax Loss Transaction and Corresponding Contra Transaction

### Example transaction chain (Transactions A–C)
- Transaction A
  - Broker 1 purchases goods in the UK, standard rated for VAT purposes, in a transaction chain that commenced with a missing trader.
  - Broker 1 then exports those goods, zero rated for VAT purposes, to another country. Broker 1 subsequently claims an input tax deduction in respect of this export consignment.
- Transaction B
  - Broker 1 then acquires goods zero rated for VAT purposes from another EU member state of an equivalent value to those purchased in transaction A.
  - Broker 1 then sells those goods at the standard rate for VAT purposes in the UK to a buffer company, which in turn sells them to broker 2.
- Transaction C
  - Broker 2 exports the goods to another country zero rated for VAT purposes, thus reducing their net tax liability, or generating a VAT refund claim.
  - Broker 1 subsequently submits a VAT return for nil net tax, since its input tax claim and output tax are an equivalent offsetting (that is, the input tax deduction relating to transaction A minus the output tax liability relating to transaction B equals a net tax liability of zero).
  - Broker 2 submits their VAT return for a VAT refund or with a reduced net tax liability.

### Mechanics and significance of contra transactions and money flows
- The tax loss transaction and the contra transactions need not match one for one.
- Fraud orchestrators move an amount of money, including the VAT portion, from the contra transactions to broker 1, who uses the money to fund the VAT portion in the tax loss chains.
- The money passes down the tax loss chain and is dissipated; the VAT portion is then claimed back from the tax administration by broker 2 as input tax.
- The contra, or offset, transaction chain forms part of an overall scheme to defraud the VAT administration because it functions as an extension of the original transaction chains commencing with a missing trader.
- In contra chains the money flow is always circular, although payments may be consolidated or split to disguise this fact.
- Because the money will normally flow through one or more banks that are outside the jurisdiction, obtaining the financial information necessary to demonstrate the carousel is difficult.
- The fraud relies on the presence of circularity in the transaction chains.
- It is possible that no goods exist in either the contra or tax loss chain or both; fraudsters will therefore ensure supporting documentation exists in the chain.

### Commodities, evolution of MTIC carousel fraud, and intangible products
- Traditionally in the EU, MTIC carousel fraud was limited to the intra-community VAT free supply of high-value, low-volume goods.
- Notable goods traded in carousel frauds: cell phones and computer microchips; other commodities included precious metals, copper, razor blades, and even scrap metal.
- Trading volumes in frauds bore no relation to the capacity of the commercial market and distorted national trade statistics.
- Examples of policy responses and market effects:
  - Following the introduction of a VAT reverse charge by the UK in 2007 on computer chips (CPUs), exports to Ireland fell and there were questions in the Irish Parliament about the impact on GDP.
  - In 2006, a Dubai-based subsidiary of a mobile phone manufacturer claimed to have 110 percent of the Middle East cell phone market; exports of cell phones to Dubai declined rapidly following the introduction of a VAT reverse charge on cell phones by the UK in 2007.
- Organized criminal groups adapted by switching to cross-border services and intangible products to frustrate detection; carbon credit trading under the EU ETS was a carousel fraud.
  - Carbon credit fraud case features:
    - Criminals registered to trade carbon permits, bought permits in one EU country from another VAT free, sold with VAT added, then became missing traders, stealing the VAT.
    - More sophisticated variants involved sending carbon permits around a circuit among various countries, reclaiming VAT repeatedly before detection.
    - Europol estimated up to 90 percent of all carbon market volume in some EU member states was related to fraudulent activities at the peak of the fraud.
    - Europol estimated the EU probably lost at least €5 billion VAT because of carbon trading fraud.
- Changes in commodity prices have intensified MTIC fraud profitability; in 2022, Europol estimated large-scale, criminally organized VAT refund fraud costs EU revenue authorities about €50 billion annually in tax losses.

### Case studies and enforcement outcomes
- Deutsche Bank case (Case Study 1)
  - In June 2016, a German court found seven former Deutsche Bank AG managers guilty of participating in a VAT refund fraud involving carbon emissions trading.
  - The judge described a “criminal business model” resulting in €145 million of fraudulent VAT refund claims.
  - In 2011, six men who ran sham companies that traded emission certificates with Deutsche Bank were found guilty of defrauding €260 million in false VAT refund claims.
  - Deutsche Bank paid VAT arrears and penalties totaling €220 million; prison sentences were imposed on individuals involved.
- HMRC case (Box 3, Case Study 2)
  - In 2006 HMRC denied a VAT refund claim of £6.8 million from a business with trading activities typical of MTIC fraud.
  - The two-man company had a turnover of £108 million in a 44-week period after switching to CPUs with no prior experience.
  - HMRC found hallmarks of MTIC fraud: fixed profit margins on transactions, third-party payments, recycling of CPUs, and that every transaction started with a missing trader who had failed, dishonestly, to account for the VAT.
  - HMRC applied the European Court of Justice Kittel ruling to refuse the entitlement to deduct input tax.

### Statistical and empirical findings
- Latvia 2010 example:
  - In the first six months of the year, 9.5 percent (LVL 23.6 million) of VAT refunds were claimed by 36 percent of refund claimants using fictitious transactions.
  - In the same period, 3.4 percent (LVL 249.9 million) of VAT input tax deductions were based on known fictitious transactions.
  - In the previous three years the SRS detected and deregistered more than 5,000 bogus businesses.
- Broader enforcement and pattern observations:
  - MTIC trading patterns do not appear governed by normal commercial factors but reflect fraudsters’ responses to court rulings and VAT administration strategies.
  - Examples of timing effects:
    - Trading activity in the UK associated with fraud fell significantly in 2003 and 2004 after the introduction of joint and several liability.
    - Fraud-related trading activity in the UK began increasing in early 2005 after the Advocate General’s ruling in the European Court of Justice case of Bond House.
    - Fraud levels in the UK remained low in 2007 when the ECJ ruled on the Kittel case, establishing that a trader’s entitlement to deduct VAT can be refused if they knew or should have known they were participating in a transaction connected with VAT fraud.

### Policy responses, cooperation, and recommended countermeasures
- National and EU-level measures and institutional responses:
  - The EU Commission identified lack of cooperation between member states as a “weakest link” and proposed improved cooperation and information exchange.
  - 2009 EU Commission proposals included creating EUROFISC, a decentralized network of VAT fraud experts, direct access to national databases for other member states, and common minimum standards for registration and deregistration of taxable persons.
  - The EU Commission adopted a new VAT action plan in April 2016 with urgent actions to tackle the VAT gap and long-term strategic solutions, including short-term and medium-term tax policy and tax administration actions.
  - Measures considered in the action plan include the temporary application of a reverse charge mechanism and establishing a robust, single European VAT area treating cross-border transactions like domestic transactions.
  - The reverse charge mechanism suspends VAT along the whole economic chain and shifts total VAT collection to the retail stage; it removes the self-policing nature of the current fractionated payment system.
- Implementation caveats and operational focus:
  - Key to success is member states’ strategic approach to compliance risk management and their ability to accomplish cooperative plans.
  - Short-term measures in the action plan focus on improving how information on VAT fraud is exchanged and used and on closer cooperation between tax administrations and other law enforcement authorities.
- Other notable vulnerabilities and fraud types:
  - False VAT refund claims and bogus companies registering for VAT to generate fictitious invoices pose significant risks, especially during economic downturns.
  - The zero rating of exports creates temptation for fraud where there is a dysfunctional relationship between VAT administrations and customs.
  - Intangible products (services, carbon permits, energy trading, mobile phone airtime) present heightened detection challenges and significant threats to VAT receipts.

*Italic: IMF | How to Note — Box 1. Example of a Single Tax Loss Transaction and Corresponding Contra Transaction*

### Box 4. Hungarian Customs and Excise Tax Office Case Study

### Box 4. Hungarian Customs and Excise Tax Office Case Study

### Case study: Hungarian international VAT fraud uncovered (October 2009)
- An organized criminal group operated an international VAT fraud uncovered by the Hungarian Customs and Excise Tax office in October 2009.
- The fraud operated in several countries, including Germany, Slovakia, Austria, and some countries in Asia.
- Modus operandi:
  - Imported a range of computer parts from various countries in Europe and Asia and sold them in Hungary without paying VAT.
  - Claimed exports to Slovakia, Slovenia, and Romania using forged documents to evade VAT.
  - Established a bogus invoice factory that provided approximately 80 companies with fraudulent invoices.
- Scope and loss:
  - A total of 38 companies were involved in the fraud.
  - The fake invoice factory is estimated to have cost the Hungarian government about US$10 million in lost revenue.

### Fraud techniques and inspection circumvention
- Trade facilitation reduced export examinations, enabling fraudsters to rely on fictitious sales and export documents plus the physical presence of a shipping container to circumvent inspection.
- Examples of export deception:
  - Shipping containers declared as VAT zero-rated exports of industrial machine tools found to contain scrap metal of identical weight.
  - Containers of high-value clothing found to contain used clothing for recycling that might, on cursory examination, have passed inspection.
  - In both cases, actual goods either did not exist or were sold "off record" on the domestic market.

### Comparable VAT refund fraud cases and impacts
- South African Revenue Service (SARS) examples:
  - 2015 allegation: between 2005 and 2008, a businessman claimed more than R250 million (US$18.75 million) in fictitious VAT refunds. Fraud involved false claims of exporting fish valued at more than R3 billion, fictitious purchases of fishing vessels, and false purchase invoices.
  - 2016 arrests: suspects claimed VAT refunds based on fictitious purchases with a value of R823 million (US$61.73 million) despite not operating a business or purchasing goods from suppliers.
- Australian Taxation Office (ATO) examples:
  - 2013–2016 gold GST refund fraud:
    - Fraud involved treating gold bullion as currency (not subject to GST), converting bullion to unrefined gold, selling to a refiner with GST at 10 percent, and the fraudster disappearing without remitting GST.
    - Stopped in 2016; estimated cost was $A700 million in lost revenue over a period of 5 years.
  - 2008–2009 pattern: submission of large numbers of small refund claims—quickly detected and acted on.
  - 2022 GST refund fraud scheme:
    - Involved a very large number of individuals setting up fictitious businesses and claiming GST refunds, individuals claiming GST based on fictitious invoices, and taxpayers providing login credentials to third parties who filed false GST refund claims.
    - Facilitated by false information spread via social media.

### Strategic imperatives to combat VAT refund fraud
- National fiscal autonomy requires EU member states to develop their own strategies, but globalization of criminal VAT refund fraud demands international cooperation among VAT administrations, and national cooperation among tax authorities, criminal investigators, prosecutors, and the judiciary.
- Carousel fraud is both a criminal law issue and a tax policy issue; enforcement should include criminal investigations and prosecutions where disruption and regulatory action are insufficient.
- Effective enforcement requires an effective risk management system:
  - Identify areas of greatest risk.
  - Direct deployment of human resources to achieve behavioral change rather than temporary fixes.
  - Strategies must be dynamic, adaptable, proportionate, targeted, risk based, and underpinned by intelligence data.
  - Interventions should focus on organized criminal groups and operators of suspect or fictitious supply chains while minimizing impact on legitimate businesses.
- Key objectives of any strategy:
  - Minimize impact of VAT refund fraud on VAT receipts.
  - Maximize recovery of stolen revenue.
  - Deter criminals from committing other frauds.
  - Impose civil or criminal sanctions against orchestrators and participants.
  - Ensure revenue protection and enforcement measures are not overly costly for honest traders or dampen competitiveness.

### United Kingdom: MTIC/VAT strategy highlights and interventions
- UK strategy in place since September 2000, designed to target highest-risk areas and disrupt fraud early; coordinated across HMCE/HMRC and external stakeholders (HM Treasury, UK Border Force, other law enforcement agencies, other EU member states).
- Early emphasis: enhanced VAT registration checks to detect and prevent bogus registration applications and exclude potentially fraudulent businesses from the VAT regime.
- Evolution to counter changing fraud methods, including using EU administrative cooperation mechanisms (Council Regulation (EC) No 1798/2003 and Council Regulation (EC) No 904/2010) and mutual assistance between customs agencies (Naples II Convention).
- MTIC carousel fraud peaked in the UK during 2005–06 with estimated losses of £4.5 billion to £5.5 billion.
- By 2009 the UK strategy incorporated a wide range of antifraud measures; key interventions included:
  - Centrally coordinated intelligence gathering and risk and intelligence analysis.
  - Enhanced identification of possible fraudsters at the VAT registration stage, refusing or delaying applications until satisfied of genuineness.
  - Preregistration visits where VAT applications raised suspicion of MTIC fraud.
  - Centralized and automated credibility checks on repayment claims, setting credibility parameters to match national risk.
  - Wide use of security provisions to request a security as a prerequisite to a trader supplying goods when tax was at risk.
  - Extended verifications of VAT returns from known or suspected MTIC carousel fraud brokers and denying input where it could be shown the broker had knowledge or means of knowledge of involvement in the fraud (the Kittel ruling).
  - Legislation allowing joint and several liability for stolen VAT where a business had reasonable grounds to suspect VAT would go unpaid anywhere in its transaction chain.
  - Introduction of a reverse charge system for the sale of cell phones and computer chips.
  - Conducting criminal investigations and prosecutions of the "guiding minds" behind the fraud and selective prosecutions of other participants.
  - Monitoring of cross-border movements and scanning or stamping selected consignments to identify recirculation in partnership with UKBF.

*Source: IMF | How to Note — Box 4. Hungarian Customs and Excise Tax Office Case Study*

### Box 5. VAT Reverse Charge Mechanism

### Box 5. VAT Reverse Charge Mechanism

### Mechanism description
- A VAT reverse charge transfers the obligation to pay output tax from the supplier to the customer, but the customer retains the right to deduct VAT on purchases.
- Result: at each stage a business is in a net nil tax situation, and the opportunity to commit MTIC fraud is removed.
- Scope: a reverse charge applies only to business-to-business transactions; normal accounting rules apply on sales to final consumers.

### Direct effects on fraud opportunities
- Prevented actions:
  - The missing trader cannot disappear with the VAT paid to them by their customer but owed to the tax authority.
  - Traders cannot divert the VAT due to be paid by their suppliers through third-party payments.
  - The exporter cannot claim a VAT repayment from the tax authority.
- Trade-offs:
  - Adopting domestic reverse charge mechanisms is characterized as ad hoc and piecemeal, with government playing catch-up with fraudsters.
  - The mechanism undermines the fractal character of the VAT and removes a “transactions trail” that tax administrations use for VAT audit and compliance control activities.
  - The distortions introduced in the operations of a “normal” VAT by a reverse charge mechanism might argue for more fundamental policy responses (detailed discussion beyond scope).

### UK experience and outcomes
- Implementation history:
  - June 2007: UK introduced a domestic reverse charge for wholesale trade in computer chips and mobile phones.
  - July 2009: Reverse charge applied to carbon credits.
- Outcome:
  - These commodities were the ones most commonly used in UK carousel fraud supply chains; legislative changes stopped MTIC carousel fraud in these commodities, reducing revenue losses.
- Complementary measures used in UK MTIC strategy:
  - Centrally coordinated intelligence collection from disruption and enforcement activity to refine registration risk assessment and identify shifts of fraudulent activity.
  - Use of international fora (EU and international) to raise awareness and improve information exchange and cooperation.
  - Engagement with the Financial Action Task Force (FATF) to raise awareness of laundering of MTIC proceeds through international banking; FATF recommended financial intelligence units use suspect transaction reports for suspicious money flows related to MTIC fraud.
  - Centralized and automated credibility checks on VAT refund claims; HMRC uses an automated risk assessment system called TRUCE (Transaction Risking Upstream in the Connect Environment) that profiles VAT refund claims in real time.
  - Connect: an analytical and sorting computer system introduced in 2009 linking taxpayers to more than one billion pieces of information from 28 data sources.
- Impact on MTIC losses (HMRC estimates):
  - Peak losses in 2005: £4.5 billion to £5.5 billion.
  - UK was estimated to account for 25.4 percent of all EU losses from carousel fraud at peak.
  - MTIC fraud estimate for 2014/15: between £0.5 billion and £1 billion (within same range as 2013/14).
  - MTIC fraud estimate fell to less than £0.5 billion in 2016/17 (from between £0.5 billion and £1 billion in 2015/16 and from peak of £2.5 to £3.5 billion in 2005/06).
  - Given downward trend, HMRC’s Tax Gap study no longer disaggregated this type of fraud separately from the overall VAT gap in 2017/18.

- Table 1. HMRC Estimates of MTIC Fraud (£bn.) (reported values)
  - Attempted fraud (upper bound): 5.5, 4.5, 2.5, 2.5, 1.5, 1.0, 1.0, 1.0, 1.0 (by year sequence shown in source).
  - Attempted fraud (lower bound): 4.5, 3.5, 1.0, 1.0, 1.0, 0.5, 0.5, 0.5, 0.5.
  - Impact on VAT receipts (upper bound): 4.0, 3.0, 2.5, 2.5, 1.5, 1.0, 1.0, 1.0, 1.0.
  - Impact on VAT receipts (lower bound): 3.0, 2.0, 1.0, 1.0, 1.0, 0.5, 0.5, 0.5, 0.5.

### Slovak Republic experience and actions
- Pre-action problem:
  - VAT losses grew after EU accession in 2004, with the VAT gap peaking at just over 40 percent in 2012.
  - 2012 VAT gap (Slovak Institute for Financial Policy): in 2010 amounted to about a third of the tax base (about €2.1 billion or 3.5 percent of GDP).
  - Evidence of unusually high input tax credit claimed against VAT supposedly paid on imports higher than import VAT declared—indicative of VAT refund fraud.
  - Noted large fraud cases: alleged fraudulent VAT refund claims of more than €32.7 million (2007–2010) and an (anecdotally) nearly €45 million theft by 30 companies established to submit false refund claims.
- 2012 action plan (implemented in 2013 and 2014) — selected measures:
  - Requirement for a financial guarantee for high-risk traders when registering for VAT.
  - Joint and several liability provisions.
  - Extension of the domestic reverse charge mechanism.
  - Obligation to provide evidence of intra-community deliveries.
  - Requirement for a tax guarantee in respect of goods imported from third countries.
  - Establishment of specialized tripartite teams (Project Cobra) comprising tax specialists, investigators and prosecutors.
  - Criminal law changes:
    - Introduction into criminal law of a new offense of tax fraud.
    - More stringent penalties for substantial tax crimes.
    - Introduction of courts specializing in tax crimes.
    - Reorganization of police to set up specialized task forces to combat serious economic crimes.
  - Other administrative measures:
    - Requirement that VAT traders submit recapitulative statements with VAT returns; since January 1, 2014 VAT payers required to present detailed VAT ledger reports along with periodic VAT returns.
    - Establishment of a Joint Analytical Center using merged databases to identify risks in real time.
    - Targeting major companies involved in suspicious transactions without exercising due diligence.
    - Recruiting staff with increased awareness of information technology.
- Outcomes and metrics:
  - Audit and investigation activity attributable to Project Cobra (2012–2017) resulted in VAT adjustments totaling €807 million, of which about €152 million was accounted for by VAT refunds.
  - Improvement in accuracy of returns data following recapitulative statements: from around 80 percent to 96 percent.
  - Decrease in the VAT compliance gap: from 41 percent of potential collections in 2012 to 26.3 percent in 2017.
  - Despite improvements, VAT gap had yet to return to pre-EU accession levels; much or most post-accession growth believed due to MTIC fraud.
  - Increasing sophistication of MTIC schemes observed: complex supply chains, use of legitimate buffer companies, creation of multiple companies to break down input tax claims (multi-cell fraud), missing traders with fewer assets.
  - Further legal and administrative measures introduced in 2016 to update the 2012 action plan.

- Technology and analytics:
  - Modern tools (artificial intelligence, blockchain, “big data”) increasingly used to detect noncompliance and combat VAT fraud.
  - IMF-supported hackathon example: winning solution enables detection of fraud using VAT electronic invoices and machine learning to analyze sales and purchase patterns rapidly.

### Policy implications and recommended strategy (conclusions)
- Prime objective: protect the revenue.
- Ways to achieve objective (enumerated):
  - Preventing the fraud or tackling it at the earliest opportunity.
  - Denying fraudsters access to the proceeds of their crime.
  - Increasing the financial risks for those who participate in, profit from, or facilitate the fraud.
  - Developing, implementing, and coordinating a range of interventions across government departments and with external stakeholders both nationally and internationally, with emphasis on closer working and collaboration, including establishing a special antifraud unit with officials from both the tax administration and other relevant government agencies.
  - Ensuring that sufficient resources, particularly human resources, are deployed to combat the fraud.
- Enforcement and legal framework:
  - Tax administrations must be empowered to cooperate and exchange intelligence with law enforcement agencies, customs, and financial institutions.
  - Criminal investigation and prosecution of criminal elements should be an important part of the enforcement strategy, including asset recovery and disruption.
  - Effective and dissuasive criminal sanctions are essential; without criminal sanctions, enforcement response will reward criminals and disadvantage honest taxpayers.
- Operational advice:
  - No single administrative intervention will resolve VAT refund fraud.
  - Deploy a combination of carefully planned interventions, supported by continual collection and analysis of information linked to monitoring of risk, to significantly minimize fraud levels.
  - Use risk-based information requests rather than imposing massive transaction reporting requirements that tax administrations may be unable to use effectively.

*Source: IMF How to Note — Box 5. VAT Reverse Charge Mechanism (content unit htnea2023001).*

### References

### htnea2023001 - References

### Covered topics
- VAT fraud typologies, including MTIC (Missing Trader Intra Community) and carousel fraud.
- VAT gap measurement and analysis methodologies.
- Administrative cooperation and legal instruments for combating VAT fraud within the EU.
- Cross-border enforcement, information exchange, and customs cooperation.
- Anti–money laundering aspects related to laundering the proceeds of VAT carousel fraud.
- National case studies and operational responses (Australia, United Kingdom, Latvia, Bulgaria).
- Studies and technical guidance from multilateral organizations (IMF, OECD, European Commission, Europol).

### Key referenced instruments, reports, and decisions (selected)
- Council Regulation (EC) No 1798/2003 of 7 October 2003 on Administrative Cooperation in the Field of Value Added Tax and Repealing Regulation (EEC) No 218/92.
- Council Regulation (EU) No 904/2010 of 7 October 2010 on Administrative Cooperation and Combating Fraud in the Field of Value Added Tax.
- European Commission communications and final reports on the VAT Gap: 2008, 2016, 2017, 2019, 2021.
- European Court of Justice cases: Bond House Systems Limited vs Commissioner of Customs and Excise (C-484/03); Axel Kittel vs Belgian State (C-439/04); Belgian State vs Recolta Recycling SPRL (C-440/04).
- Europol publications and news releases: Organised Crime and Threat Assessment Report (2009); carbon credit fraud news release, Dec. 28, 2010; MTIC fraud overview (2022).
- Her Majesty’s Revenue and Customs (HMRC) “Measuring Tax Gaps” editions: 2009, 2015 (for 2013–14), 2016 (for 2014–15), 2019 (for 2017–2018).
- IMF materials: The Revenue Administration—Gap Analysis Program: Model and Methodology for Value-Added Tax Gap Estimation (Hutton, 2017); IMF Working Paper WP/07/31 (Keen and Smith, 2007); International Monetary Fund Fiscal Affairs Department technical assistance report (Latvia, 2010).
- OECD publication: Ending the Shell Game: Cracking Down on the Professionals who enable Tax and White Collar Crime (2021).
- Financial Action Task Force: “Laundering the Proceeds of VAT Carousel Fraud” (2007).
- National and investigative materials: Australian Taxation Office news release, July 15, 2022; Inspector-General of Taxation “GST Refunds” (2018); CPA Australia podcast (2022); Bulgaria experience (Pashev, 2007).

### Jurisdictions and organizations emphasized
- European Union (European Commission, European Court of Justice, European Union legal instruments).
- United Kingdom (House of Lords EU Committee, HMRC publications).
- Australia (Australian Taxation Office, Inspector-General of Taxation, CPA Australia).
- International organizations and bodies: IMF, OECD, Europol, Financial Action Task Force.

*NOTE 23/01 — How to Combat Value-Added Tax Refund Fraud*

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_Source: https://www.imf.org/-/media/files/publications/howtonotes/2023/english/htnea2023001.pdf_