Richard Cornelisse

Combat VAT Fraud: Dutch Introduction Of Reverse Charge For E-gadgets

In Indirect Tax Strategic Plan, Processes and Controls, Tax News on 31/05/2012 at 8:52 am
By Richard Cornelisse

Introduction in the Netherlands of reverse charge for mobile phones, computer games, computer parts and tablets to combat VAT fraud.

The reverse charge is applicable for supplies exceeding EUR 10,000. The reverse charge is also applicable if one order results in multiple invoices – on an individual basis below the threshold  value – but the total amount of the order exceeds EUR 10,000.

Although approval is needed from the European Commission (takes approximately 10 months), the State Secretary decided due to increase of fraud to introduce already per June 1, 2012.

Because no approval is achieved yet the reverse charge is optional.  However, if  seller is not willing to cooperate this should give a signal to purchaser of possible VAT fraud and impacts negatively his good faith position and VAT deduction.

The reverse charge option should  become part of  a company’s purchase process and  has to be implemented in company’s control framework in order to safeguard the right of VAT deduction.

See also paragraph ‘Counter Measures To Combat Fraud‘ of Blog US VAT Introduction: Any Lessons To Be Learned From European VAT Fraud?

VAT Fraud / Tax Evasion

In its most basic form, VAT fraud/tax evasion works as follows.

A taxable person charges an amount of VAT for its sales. The taxable person receives this VAT from its customer, but does not pass it on to the authorities. Further, to optimize the fraudster’s profit in such a scheme, the taxable person tries to purchase the goods (or services) without VAT (cross border transactions and use of 0% rate). It is also common that the same goods are sold multiple times to a third party, unaware of the fraud (hence the name “carousel fraud”). Sale of computer parts, mobile phones and recently CO2 emission trading have been areas of substantial VAT fraud.

Above are just examples and many forms of fraud/tax evasion are possible.

‘Elvis’ Left The Building

The life cycle of the fraudulent business is often short.  The shop is closed before a tax audit takes place and the person really in charge has skipped town. Besides maybe the appointed ‘homeless guy’ as managing director the only real alternative left for the tax authorities is to try to collect the VAT from the customer.  However, if the customer can prove good faith this is not possible.

It Is All About “Good Faith”

What is good faith? Good faith has some subjective elements and is absent when the customer “knowns or should have known”. To avoid joint liability the honest trader has to prove proper internal awareness: counterpart acceptance measures and the company’s control framework should include detective and preventive controls.

In practice, is this easy to prove?

From the benchmark findings of Blog February 23 follows:

  • Management and oversight of indirect taxes are characterized by weaknesses in governance, controls and processes
  • Significant majority is just beginning to implement global VAT/GST processes and controls or has processes established in a few key countries
  • Limited existence and quality of documented processes designed to manage VAT/GST across the entire business
  • 40% of sample population has policies in the Europe, Middle East and Africa (EMEA) region

Based on the above the following questions from earlier Blogs pop up. What is the risk appetite of the company in the worse case scenario? What is the VAT Throughput? What are risky transactions (being material or not)? What needs to be done to manage these transactions (SMART goals and KPIs)?

Related Topics

Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.

  1. […] Combat VAT Fraud: Dutch Introduction Of Reverse Charge For E-gadgets « Tax Management Consultancy. […]

  2. […] Combat VAT Fraud: Dutch Introduction Of Reverse Charge For E-gadgets […]

  3. […] Combat VAT Fraud: Dutch Introduction Of Reverse Charge For E-gadgets […]

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