Missing trader intra-Community (MTIC) fraud, which causes high tax losses by exploiting intra-EU value added tax (VAT) systems in transnational deliveries, is one of the most common forms of white collar crime committed with the aim of tax evasion. It costs tax authorities billions of euros in tax losses, but can also drive innocent companies which are unknowingly drawn into MTIC fraud to financial ruin.
Companies are exposed to certain dangers if they are unknowingly drawn into MTIC fraud and fall into the hands of missing traders. 'Missing traders' are people who:
- appear in legal transactions under the cover of corporate shells;
- do not satisfy their VAT obligations; and
- in most cases, disappear from the market again when they become insolvent.
The companies which commit the fraud generate profit from the MTIC. While the other companies do not have to pay tax owing to input tax relief, the missing trader disappears from the market as the only VAT debtor.
A German company can face financial and criminal tax law risks (both in Germany and elsewhere) if either:
- it delivers goods to a trader which is resident in another EU member state and turns out to be a missing trader; or
- it purchases goods from a missing trader in Germany.
In both such cases, the German company faces the threat of criminal law investigations by prosecuting authorities and also considerable financial fines. Sometimes, these problems also arise when a solvent company is involved, but is not directly in contact, with the missing trader.
If a purchaser in another EU country turns out to be a missing trader, the tax authorities may refuse to give the German company tax relief for the intra-Community delivery pursuant to Section 6(a), 4 No 1(b) of the VAT Act, and demand subsequent taxation on a delivery of goods which was previously declared tax free.
In practice, there is an increasing number of cases in which the German tax authorities – encouraged by the December 7 2010 decision of the European Court of Justice (ECJ)(1) – based on vague suspicions assume the involvement of MTIC fraud and revoke the tax relief for intra-Community deliveries.
Despite taking all necessary precautions, a company cannot rule out involuntary involvement in MTIC fraud. If the tax authorities assume collusion with the perpetrator, a punitive tax of 19% must often be paid from a trade margin of a maximum of only 2% – a burden which is difficult to bear.
There are two ways in which to try to avoid liability from involuntary involvement in MTIC fraud.
The first is the factual approach – namely, providing proof of the conditions for tax indemnity of the intra-Community delivery in the form of accounts and invoices in accordance with Sections 17(a) to 17(c) of the VAT Implementation Regulation. A correct invoice must be provided pursuant to Sections 14 and 14(a) of the VAT Act together with due and proper confirmation of delivery (Section 17(a)(2) of the VAT Implementation Regulation). With effect from January 1 2012, this confirmation of delivery replaces the previous proof of dispatch (Section 17(a)(2) of the old regulation). However, its use becomes obligatory only from July 1 2012. During the transitional period, no complaint will be made if the previous proof of dispatch is used. Moreover, if the purchasers are new and unknown, a 'qualified' query should be placed with the Federal Central Tax Office according to Article 18(e) of the VAT Act, in response to which the company will receive confirmation of the validity of the VAT identification number and the address. The documentation relating to this query must be retained (Section 17(c) of the VAT Implementing Regulation). If the relevant documentation is not provided or if a query was not made at the time of delivery, the contractual partner should be provisionally charged the VAT, initially in the form of a deposit (without a separate VAT certificate). The contractual partner should be reimbursed only once all relevant documentation has been provided. If proof of invoicing and accounting cannot be provided, the tax authorities and case law assume that the conditions for tax-free intra-Community delivery are not satisfied. In such case the taxpayer then bears the burden of proving that they have indeed been satisfied.(2)
The second approach is legal. Under prevailing case law, the factual approach is not necessarily enough to exclude liability. This is because the German tax authorities tend to apply the principles of the December 7 2010 ECJ decision (ie, no tax indemnity for intra-Community deliveries if there is active involvement in MTIC fraud) in cases of neutral aiding and abetting. Liability is thus confirmed if the purchasers knew of the criminal activity. The tax authorities are quick to assume that parties have such knowledge. In general, this conduct of the tax authorities is questionable. In addition, there is no statutory basis for the character of the punitive tax. At the same time, the situation is precarious for companies involved because they must first meet the requirements of the tax office and can thus run into liquidity problems.
If the company purchases goods from a missing trader in Germany, the question is whether it can be refunded by the tax authorities for the VAT invoiced by the missing trader as input tax (Section 15 of the VAT Act).
In the view of the Federal Tax Court, following the decisions of the ECJ,(3) companies that take all measures which can reasonably be expected of them to ensure that their turnover is not involved in fraud (whether as tax evasion or as other fraud) must be able to rely on the lawfulness of this turnover without running the risk of losing their right to input tax relief.
Therefore, it is important to establish whether the company recognised, or should have been able to recognise, that the initial turnover was involved in VAT fraud. In this respect, it is recommended that a request be made for confirmation (as outlined above) regarding the VAT identification number.
A company should take particular care when considering purchasing goods at a price that is clearly below-market price. In such case the company will find it more difficult to prove that it applied the required diligence; possible (innocuous) grounds for the preferential price should be critically examined and documented.
In both of the above situations, there is a high probability that the criminal prosecution authorities will also commence proceedings against a well-intentioned company to investigate the aiding and abetting of tax evasion (Section 370 of the Tax Code, as read with Section 27 of the Criminal Code). The Federal Court of Justice(4) considers that aiding and abetting has taken place if the documentation duties of Sections 17(a) and following of the VAT Implementing Regulation have not been complied with. In its view, this constitutes concealment from the tax authorities. Ultimately, the issue is whether the company has acted with intent (ie, whether it knew, or should have known, the background behind the deliveries).
If the above recommendations are observed, there is a good chance of being able to avoid suspicion. Nevertheless, it is recommended that legal advice be sought to effectively counter the conduct of the investigative authorities, which is in some cases aggressive, and to ensure the swift conclusion of the investigations without suffering further legal disadvantages.
For further information on this topic please contact Björn Demuth or Markus Eberhard at CMS Hasche Sigle by telephone (+49 711 976 40), fax (+49 711 976 49 00) or email (email@example.com or firstname.lastname@example.org).