Tax revenue losses in the field of value-added tax (VAT)
Losses of tax revenue in the ranges of tens of billions of euros – Bundesrechnungshof points out ways to fight VAT fraud and avoidance.
As a result of VAT fraud and avoidance, Germany’s federal and state treasuries suffer losses in the range of tens of billions of euros each year. These are caused by a variety of practices examined by the Bundesrechnungshof - some of them fraudulent – used in various lines of business. These practices occur or are facilitated as a result of legal provisions currently in force. The Bundesrechnungshof holds that it is imperative to close the obvious loopholes in the law. Furthermore, it perceives the need for strengthening control mechanisms.
The Bundesrechnungshof has summarised its proposals in a report which it is going to submit today to Parliament and Federal Government. The Bundesrechnungshof’s President Prof. Dr. Dieter Engels, stated: “With this report, we want to assist Parliament with taking quick and effective legislative action in order to prevent further material losses to the federal and state budgets.”
The Bundesrechnungshof’s proposals merely aim at enforcing existing tax claims and not at increasing taxes or costs. They have been designed mainly to eliminate the following deficiencies:
In the case of intra-Community carrousel fraud, goods are supplied by a domestic trader via a chain of intra-Community contractors and fictitious companies through which they eventually return to this original supplier. The fictitious or ‘brass-plate’ companies do not remit the VAT received from their customers to tax administration. They abscond to another country with the VAT payment received or use these payments to reduce the price of the goods in order to obtain a competitive advantage. The legislative measures taken so far to fight VAT carrousels have not brought about the desired success. Therefore, one of the Bundesrechnungshof’s proposals is to extend VAT liability to traders that can reasonably be assumed to have known of the fraudulent practices of their business contacts. This applies e.g. to cases where they were offered merchandise under mysterious circumstances at unusually low prices.
Chain fraud in the building industry is committed by building contractors who purposefully use chains of subcontractors to conceal that the ‘unofficial contractors’ who provide gangs of workers and the subcontractors at the lower levels of the fraud chain pay neither tax nor social security contributions. The situation has not improved in spite of the withholding tax on building services introduced last year which has to be collected by the recipient of the services. This new arrangement is almost totally ineffective because the local tax offices exempt more than 95% of recipients of building services from the duty to withhold the tax. Thus, the intended shift of the taxation to the recipients of the building services practically does not take place. The dishonest recipients of the services also benefit from the exemption. If they submit an exemption certificate, they may deduct input VAT and business expenditure from this tax liability even if they were aware that the contractor is evading his duty to pay tax. Therefore, the Bundesrechnungshof suggests the tax administration adopt more restrictive practices when it comes to granting exemptions from the duty of withholding the tax. Furthermore, tax offices should make targeted checks in connection with applications for exemptions where circumstances suggest that there is a risk of misuse. Furthermore, the Bundesrechnungshof recommends that the tax liability connected with building contracts should be shifted. Among other measures, the Federal Ministry of Finance should consider arrangements imposing tax liability on the general contractor.
- The Bundesrechnungshof estimates that global assignments and real estate transactions by traders facing insolvency result in annual losses of VAT revenue in the magnitude of hundreds of millions of euros. Under a global assignment, the borrower assigns all his trade receivables to the lender as collateral for the loan. When the lender collects these receivable, current law does not require him to remit to the tax administration the VAT included in the gross amounts collected. Even if the borrower becomes insolvent, the lender may retain the VAT at the expense of the public treasury. The same situation arises where a trader having payment difficulties sells business premises subject to VAT, usually under pressure from his bank, and the latter retains the gross purchasing price including the VAT paid by the purchaser. The Bundesrechnungshof recommends that joint and several liability for the VAT owed should be introduced. Where real estate transactions subject to VAT are involved, the losses in tax revenue could also be avoided by a legislative provision that imposes VAT liability on the purchaser. Furthermore, the entry of the new owner in the land register could be made contingent upon payment of VAT liability, and arrangement which already applies to real property transfer tax.
The public treasury suffers further considerable losses by deliberately planned insolvencies of lessees and by other types of insolvencies. It is quite common for traders to claim – as their last transaction – the refund of input VAT, even if they are no longer able to pay the amount of the invoice including VAT. In its report, the Bundesrechnungshof suggests that a legal provision should be restored that was revoked effective 1 January 1999 and that gave the tax authorities the status of a preferential creditor in insolvency proceedings.
The Federal Ministry of Finance incorporated some of the Bundesrechnungshof’s suggestions in the 2004 Bill Accompanying the Budget and the 2003 Tax Amendment Act. Decisions are still pending with respect to intra-Community carrousel fraud, the imposition of tax liability on general contractors in the building industry and the preference of tax claims in insolvency proceedings.