Corruption and Organized Crime Bridging Criminal and Economic
Corruption and Organized Crime: Bridging Criminal and Economic Policies Countering Organized VAT Fraud in Enlarged Europe Lessons from Bulgaria June 23 -24, 2006, Sofia, Boyana Conference Center Dr. Konstantin Pashev Center for the Study of Democracy Konstantin. pashev@online. bg
“Sizing” the problem q EUR 60 billion a year according to EC estimates Germany: EUR 18 billion; UK from GBP 1 -2 billion in 2004 -2005 fiscal year to 5 billion in the last fiscal year and a forecast of 7 billion in the current one. q Bulgaria Revenue authorities’ estimates: EUR 150 million annual average of detected fraud, but this is between a half and one fourth of total fraud, i. e. according to most conservative estimates of 50 % detection rate tax fraud amounts to over EUR 300 million, i. e. over 20 percent of VAT revenues. World Bank estimates for 2002 point at EUR 450 million (33% of VAT revenues). I. e. the leakage as a percent of VAT revenues is 4 -5 times bigger than in Europe.
Conventional tax evasion vs. organized fraud q Individual evasion: hiding of tax liabilities q Undervaluing of sales receipts through recording of lower prices or quantities q Overvaluing of spending on inputs q The size of the fraud is limited to the size of the value added at each stage of the supply chain
Conventional tax evasion vs. organized fraud q Network VAT fraud: net cash inflow to the crime network from the abuse of the right to VAT credit q The objective is not to reduce tax liability but to siphon VAT credit. q Conventional evasion goes with real transactions, while here paper transactions and fictitious traders prevail q There accomplices up the supply chain as well as in the tax and customs administrations and other law enforcement agencies q The size of the fraud is unlimited
Conventional tax evasion vs. organized fraud q The borderline between abuse of credit for VAT evasion and VAT drawing may seem elusive and a matter of scale rather than content q Individual evasion implies complicity by suppliers, or clients, and it is often done through recording of nonexisting transactions. q But drawing of credit in Bulgaria usually implies VAT audit, i. e. it cannot be done without pre-fixed fraudulent network with the collusion of senior level tax and customs officers. q It has important practical implications: q The Bulgarian penalty code for instance contains provisions against tax evasion, but not against VAT fraud as a crime network.
The mechanics of organized fraud q Fictitious exports q The smallest network on the border of individual and network VAT crime: comprises only the beneficiary and accomplices from the tax and customs offices q Missing/Insolvent trader fraud
Carousel Fraud
The Bulgarian Experience q Conventional barriers to the abuse of tax credit q Deduction from future tax liabilities instead of net cash refund q Refund is only after tax audit q Principle of joint liability q The VAT account q Additional safeguard against the missing/insolvent trader fraud q Relief from the principle of joint liability for compliant taxpayers
X-type VAT fraud (with VAT account) VA: 10000 13200 VA: 1000 VAT +2200 11000 VAT -2200 11000 If O sells on the domestic market the scam effect is EUR 2200 (the tax collected from the cash buyers). With a fake export the effect doubles
The challenge of the single market q Physical border control on the cross-border flow of goods is no more applied to intra-community trade q Voluntary VAT registration below the threshold q Pressure towards differentiated rates
May the credit mechanism be replaced q The self-enforcement advantages: built-in safeguards against conventional evasion q Taxing final sales only? q The alternative subtraction method of charging VAT q The problem for exporters. The value of tax on inputs remains in the export price q The problem for suppliers of tax exempt goods, or goods charged at lower rates q The problem for investors q Reverse charge system
Reducing the normative opportunities for the abuse of credit q Barriers to the use of prices deviating from the market ones? Only as input in the risk-assessment rather than grounds for legal action. q Barriers to the registration of fake undertakings through strengthening controls at entry? A better tool would be to make transfer of ownership possible only after VAT audit q Reducing the opportunity for evading responsibility by the organizer - Optimizing the principle of joint liability
Reducing the normative opportunities for administrative discretion and corruption q Standard of service for processing of refund application q Personal responsibility for the auditor who has refused the refund without grounds as proven in court procedure q Improving the effectiveness of audit q Modern risk management system based on information system with incentives for companies with e-invoicing q Optimizing the audit system: principles of selection of firms and auditors and administrative accountability q Corruption risk assessment through monitoring of individual audit performance
Sanctions q The administrative sanctions need to be tied to the size of the fraud. q Criminal liability for participation in fraudulent VAT network
Monitoring and evaluation of the impact of the anti-fraud instruments A sound standardized methodology of assessing the size of the fraud is most important Thank you
- Slides: 15