Definition
VAT carousel fraud is a sophisticated form of tax evasion that exploits intra-community transactions within the European Union to avoid paying the tax or to claim unjustified refunds. This type of fraud not only causes significant losses to public finances but also distorts market competition by granting illicit advantages to those who engage in it.
Mechanism of Carousel Fraud
Carousel fraud is based on the creation of a chain of companies, some real and others fictitious, that simulate commercial transactions of goods. The typical scheme operates as follows:
- Exempt intra-community acquisition of goods: A company in one EU member state buys goods from another company in a different member state. These transactions are exempt from VAT, meaning the buyer does not pay the tax at the time of acquisition.
- Domestic sale with VAT: The company that purchased the goods then sells them in its own country, applying the appropriate VAT and collecting this tax from the buyer.
- Disappearance of the company (a "dummy" company): The selling company, known as a "dummy" or "missing" company, fails to declare or remit the VAT collected and either ceases its operations or disappears, leaving tax authorities unable to recover the owed tax.
- Cycle repetition: The goods can be resold to other companies within the same country or re-exported, creating a repeating cycle that allows fraudsters to make illicit profits through improper VAT refunds or by evading payment.
Notable Cases in Spain
Spain has been the site of several high-profile carousel fraud cases that have significantly impacted tax revenues and highlighted the complexity of these schemes. Some of the most prominent cases include:
- Operation in the IT sector (2004-2006): In its ruling on March 13, 2017, the National Court convicted 17 individuals involved in a scheme through the companies DMJ and Woxter, which defrauded more than 3.2 million euros. These companies used shell companies and dummy firms to simulate fictitious intra-community transactions, enabling them to evade VAT payments and gain an unfair competitive advantage in the computer equipment market. The court emphasized that the accused had supplied computer goods at reduced prices to large retail chains, using a VAT fraud strategy that allowed them to outcompete businesses that complied with tax regulations. To achieve this, they relied on shell companies and dummy companies, which had no real economic activity, no assets, and no actual domicile, with their partners and administrators being either insolvent or non-existent, to hide the true perpetrators of the fraudulent transactions.
- Fraud in the tire sector (2017-2020): A joint operation by the Tax Agency and the National Police dismantled three criminal organizations that defrauded more than 23.5 million euros. These organizations created a network of companies that simulated transactions involving the sale of new tires, failing to remit the corresponding VAT and obtaining unjustified refunds. The fraud involved the creation of a complex structure of fictitious companies that simulated commercial transactions, allowing the fraudsters to obtain undue VAT refunds or evade payment.
- Macrojucio in Guadalajara (2014-2017): The Provincial Court of Guadalajara sentenced 23 individuals to prison terms of up to 16 years for defrauding nearly 30 million euros in VAT through the buying and selling of computer products via fictitious companies. The convicted individuals used a network of shell and dummy companies to simulate commercial operations and obtain unjustified VAT refunds, causing significant harm to the public treasury.
Conclusion
VAT carousel fraud presents a significant challenge for tax authorities, not only due to the complexity of its structure but also because of its transnational scope, which complicates detection and prosecution. The economic damage is clear, but so is the damage to the principle of tax equity and the proper functioning of the market.
From a legal standpoint, the case law of the Supreme Court and the Court of Justice of the European Union has established that detecting the fraudulent operation is not enough; it is essential to prove that the taxable person knew or should have known that they were participating in an illicit operation in order to deny them the right to VAT deduction.
In conclusion, the fight against carousel fraud requires a combination of effective legal tools, international administrative cooperation, technological systems for tax traceability, and a firm commitment from authorities to close the regulatory gaps that enable its existence. Only then can a fair tax system be ensured.
.svg)
.svg)
