1. The Latvian approach for tackling VAT fraud
Irina Andrejeva
State Revenue Service of Latvia
Trilateral Conference on “ Tax and social fraud”
April 20, 2012 The Hague

2. International transaction chain under general VAT scheme (standard case)
Company A
(supplier)
Company B
(intermediary)
Company C
(exporter)
LVL 90 +
VAT LVL 0
LVL 100 +
VAT LVL 22
LVL 110 +
VAT LVL 24,20
LVL 120 +
VAT LVL 0
VAT return
Calculated VAT LVL ,80 -
Input VAT
LVL 19,80 =
VAT due to pay
LVL 22
Calculated VAT LVL 24,20 -
Input VAT
LVL 22 =
VAT due to pay
LVL 2,20
VAT return
Calculated VAT LVL 0,00 -
Input VAT
LVL 24,20 =
VAT refundable
VAT return
VAT due LVL 22
VAT due LVL 2,20
VAT refund LVL 24,20
STATE BUDGET
VAT revenue 0 LVL

3. International transaction chain under general VAT scheme (fraud case)
Company A
(supplier)
Company B
(intermediary)
Company C
(exporter)
LVL 90 +
VAT LVL 0
LVL 100 +
VAT LVL 22
LVL 110 +
VAT LVL 24,20
LVL 120 +
VAT LVL 0
Missing Trader
VAT return
Calculated VAT LVL 22 -
Input VAT
LVL 0 =
VAT due to pay
LVL 22
Calculated VAT LVL 24,20 -
Input VAT
LVL 22 =
VAT due to pay
LVL 2,20
VAT return
Calculated VAT LVL 0,00 -
Input VAT
LVL 24,20 =
VAT refundable
VAT return
VAT due LVL 22
VAT due LVL 2,20
VAT refund LVL 24,20
STATE BUDGET
VAT revenue 0 LVL

4. VAT difference from other taxes
VAT significantly differs from other taxes: Taxpayer is granted possibility to benefit by getting VAT refunds from the state budget (real money) even in case when there were not any VAT payment made ever to the state budget, i.e. steal the money from the budget

5. Protection of the VAT system
The goal
Not allow non-compliant and potentially risky companies to join the VAT system as well as timely identify those members of VAT system that are already possibly involved in artificial transaction chains aiming to avoid paying VAT to the budget or steal VAT from the budget – cause the losses to the budget
Available mechanisms
Pre-registration controls
Post-registration controls
De-registration from VAT registry
Tools
Early warning system for changes in registration data of legal persons
Problems
The behavior of the company may change after acquiring VAT number in result of changes in company’s registration data – additional controls are needed
Relatively simple and easy procedure of company registration in Registry of Enterprises

6. VAT registration early warning system
The goal of Early warning system is to help timely identifying taxpayers, whose possible aim is tax evasion
Analysis is performed every day on registration data of all legal persons
Analysis results are used:
to make decision on registration or refusing of registration in VAT register;
to start activities for de-registration procedure.

7. VAT registration early warning system
Risk criteria
Information on addresses and phone numbers
Legal address is acknowledged as risky
Official’s declared place of residence is acknowledged as risky address
Company’s or official’s phone number is acknowledged as risky
Information on officials
Actual or former official is acknowledged as risky person
Change of company’s loner official
Official has no declared place of residence
Information on characteristics
Company is involved in transaction chain
Criminal procedure is initiated (for company and official)
Official is connected to fictitious company

8. Detection and Prevention
Information
Legal aspects
IT tools
International cooperation

9. Information sources 1. Taxpayers' registration information
Registration information about legal persons is electronically received from Registry of Enterprises: name, tax identification number, address, officials, shares.
Registration information about natural persons is electronically received from Registry of Population: name, surname, relatives, address etc.
Information on branches, taxes, phone numbers etc. reported to tax administration by taxpayer
2. Information from tax returns, reports and statements
VAT return with annexes (input tax, turnover, IC acquisition, recapitulative statement)
Annual report
Corporate income tax return
Personal income tax return
Statements on social contributions and personal income
Others (returns on natural resources, excise returns etc.)
3. Information on tax payments

10. Information sources
4. Information on actions taken by tax administration
tax controls
VAT refund claims
risk analysis
enforcement
communication with taxpayer, visits etc.
5. Information from tax administration departments
customs information – all data from customs returns – SAD (Customs Department)
criminal cases (Financial Police Department),
actions taken in the excise field (Excise Department)
6. Explanations registry
explanations on companies economic activities given by the officials of risky companies
7. Registry of Fictitious companies
companies assumed by tax administration as risky ones and meeting certain criteria (e.g. registered, using the documents of the third persons; company‘s owner or official is person without place of residence; information on company is included in Explanations Registry; can not be found at the company’s legal address as well as at owner’s or official’s place of residence etc.)

11. Information sources – VAT return
Report on the input tax and tax amounts included in the VAT return is annex of VAT return – an integral part of the VAT return and consists of three parts:
Input tax for the goods acquired and services received inland
Input tax for the goods and services received from the MS of the EU
Tax for the goods supplied and services supplied
Following information is provided in each part of the report:
counterparties (name, VAT number)
transaction date
transaction value
type of transaction
!!! This information gives huge possibilities to detect risky transactions at early stage

12. Information sources – Third party information
Registration information on companies, nongovernmental organizations, political parties etc. (registration number, name, officials, owners, address, phone number etc.)
Information about insolvency procedure
Registration information on natural persons (identification number, name, surname, passport, status, marriage, relatives etc.)
Information on real estate (name, owner, address, documents related to real estate etc.)
Information on issued permits for timber cutting, cut timber amounts
Information on contracts between state and private companies on forest logging
Information on bank accounts' numbers of legal persons
Information on issued permits for construction
Information on licenses issued (construction, transportation, operations with metal scrap etc.)
Information on companies with detected illegal employees

13. Information sources – Third party information
Information on registered vehicles, tractors, aircrafts, ships
Information on administrative penalties imposed
Information on invalid documents
Information on issued work permits and residence permits
Information on border with third countries crossing facts by third country citizens
Information on transactions with carbon credits made by persons registered in Latvian Emission Trading System
Information from VAT Exchange information System (VIES) on IC-supplies made to Latvian taxpayers and on IC-supplies between other EU member states’ taxpayers
Information from EUROFISC network
Information on amounts of acquisitions of goods and services made by the Bulgarian and Romanian taxpayers from Latvian counterparties
Information on international information exchange (SCAC requests, MLC, requests on direct taxes)

14. Legal aspects
Detailed information on all domestic and cross-border (IC and import both for goods and services) acquisitions for which input tax is deducted as well as out-coming transactions – obligation of each taxpayer
an integral part of VAT return
submission is obligation of each taxpayer
Detailed information on transactions with counterparties where the value of each transaction is below LVL 1000 (~ EUR 1422) but the total value exceeds LVL 1000 (in force since )
Special transaction type code to identify transactions made using CPC 4200
Reverse charge
transactions with timber (since )
transactions with scrap metal (since )
construction services (since )

15. Technical aspects – IT tools
Other information sources
Tax information system (TIS)
Central Customs information system
Information system for state officials declarations
Information exchange system
VIES
DATA
WAREHOUSE
State Land Service
Ministries
State Forest Service
Others
Queries

16. Technical aspects – control possibilities
Taxpayer A
Taxpayer B
To identify mismatches in the data declared in VAT returns of the both supplier and customer cross-checks of the VAT returns data is performed:
Domestic transactions
Correspondence of the data on acquisitions reported in VAT return by the customer (taxpayer A) including acquisitions made under the reverse charge mechanism with data on made supplies declared in VAT return by supplier (taxpayer B) – possible illegitimate deduction of VAT input tax in case of mismatch
Correspondence of the data on made supplies reported in VAT return by the supplier (taxpayer A) including transactions made under reverse charge mechanism with data on acquisitions declared in VAT return by customer (taxpayer B) – possible underreporting of turnover in case of mismatch

17. Technical aspects – control possibilities
VIES data
Taxpayer C
Customs data
Taxpayer A
To identify mismatches in the data declared in VAT returns of the both supplier and customer cross-checks of the VAT returns data is performed:
Cross-border transactions
Correspondence of the data on IC-acquisitions reported in VAT return by the customer (taxpayer A) with data on made IC-supplies declared by supplier in other EU MS – possible involvement in carousel fraud scheme, illegitimate application of VAT 0% rate, failing to fill in the VAT return in case of mismatch
Correspondence of the data on import or export of goods declared in VAT return of the taxpayer with customs data from SAD (single administrative document)

18. Technical aspects – control possibilities
Illegitimate deduction of input tax
Transactions with counterparties assumed as risky by tax administration. Taxpayer assumed to be risky one in following cases:
de-registered from VAT register
de-registered from VAT register after the transactions made
have "fictitious" feature
the criminal process is initiated
“negative discrepancy” is detected
the explanation is submitted that officials have no connection to the enterprise and its economic activity
“buffer” company

19. Indicators of the “buffer” company
Technical aspects – control possibilities
Indicators of the “buffer” company
huge turnover per one employee
VAT payable to budget fluctuates by LVL 0 (even if turnover is huge)
no bank accounts are registered in Latvian banks and the turnover is huge
transactions with risky taxpayers
small number of employees (1-3), low salaries
small number of business partners who are supplying goods or services to taxpayer (2-5 companies)
changes of company’s officials
company’s official is connected to risky company
taxpayer can not be found at reported addresses

20. Intra-community transactions
Technical aspects – control possibilities
Intra-community transactions
Verification of VAT numbers of counterparties
VAT registration numbers of the counterparties reported in the VAT return input tax annexes and recapitulative statements are sent to EU using VIES immediately after including the data in tax administration data base
OMCTL error messages are received back from EU through VIES
Customs procedure 4200
Data reported in recapitulative statements are cross-checked with customs data on import of goods under customs procedure 4200 – determination of taxpayers right to apply the derogation
In input tax annex of the VAT return information on intra-community acquisitions of goods imported to EU under customs procedure 4200 are available – ensuring traceability
Customs data
Taxpayer A

21. Intra-community transactions
Technical aspects – control possibilities
Intra-community transactions
Illegitimate application of VAT 0% rate
counterparties have invalid VAT numbers;
large amounts of supplies but number of employees is inappropriate.
Taxpayer is a member of artificially made transaction “chain”
Large amount of acquisitions, but
small number of employees
small number of transactions
no VAT payments to the budget
all amount of goods is supplied with 0%
there is no supply within the country
Supplied goods to EU are purchased from “fictitious” counterparties ;
Taxpayer is included in EUROFISC information as suspicious counterparty;
Taxpayer’s counterparties are included in EUROFISC information as suspicious taxpayer.

22. Technical aspects – IT tools

23. International cooperation
EUROFISC
SCAC 2004 and SCAC 383 requests
Multilateral controls
International conferences, forums, experience exchange, seminars and workshops
Expert networks (i.al. informal communication of the experts)

24. Problems
Non-compliant taxpayers are always one step ahead of the tax administration
Tax administration work is fighting with consequences nevertheless it is necessary to prevent the possibility of tax fraud at the very early stage
Legislation is fragmentary adjusted to tackle certain type of VAT fraud
Exemptions and derogations from regular rules gives opportunity to non- compliant taxpayers to use bottlenecks and loopholes of the system
Mechanisms of international cooperation and mutual assistance have heavy and time-consuming procedures – time is money
Information exchange between EU member states need to be improved. Weak cooperation with third countries – improvement is needed
VAT system in EU is harmonized still the work of the tax administrations is not harmonized – different approaches are used, differences in competences, different level of knowledge, experience and expertise, difference in capacity and resources available

25. SPEED AND RAPID REACTION ARE NECESSARY
Problems
Non-compliant taxpayers are always one step ahead of the tax administration
Tax administration work is fighting with consequences nevertheless it is necessary to prevent the possibility of tax fraud at the very early stage
Legislation is fragmentary adjusted to tackle certain type of VAT fraud
Exemptions and derogations from regular rules gives opportunity to non- compliant taxpayers to use bottlenecks and loopholes of the system
Mechanisms of international cooperation and mutual assistance have heavy and time-consuming procedures – time is money
Information exchange between EU member states need to be improved. Weak cooperation with third countries – improvement is needed
VAT system in EU is harmonized still the work of the tax administrations is not harmonized – different approaches are used, differences in competences, different level of knowledge, experience and expertise, difference in capacity and resources available
SPEED AND RAPID REACTION ARE NECESSARY

26. Time for the reforms
“Value Added Tax (VAT) is paid for by citizens, collected by businesses and accounts for over 20% of national revenues. It therefore has a significant impact on every single EU citizen. However, it is now 40 years since the EU VAT system was first set up, and the regime no longer fits with our service-driven, technology-based economy. The time has come for an ambitious VAT reform.”
Aļgirdas Šemeta, Commissioner for Taxation, Customs, Anti-fraud and Audit
Brussels, 6 December 2011

27. Time for the reforms
“Missing trader intra-community fraud (MTIC) is a “EU-only” fraud. MTIC relies on EU VAT rules specific to intra-community sales of goods and supplies of services.”
Richard T. Ainsworth, Boston University School of Law
Boston University School of Law Working paper No “VAT Fraud: MTIC & MTEC – The Tradable Services Problem” (November 12, 2010)

28. Time for the reforms
Till now introduced and proposed improvements of the VAT system were “cosmetic”, not solving problems on the merits
Existing VAT system with growing number of derogations and exemptions creates loopholes that with pleasure are used by non-compliant taxpayers
VAT system by itself causes problems the consequences of which it will eventually have to fight against

29. Which of these solutions is the right and effective one?..
Possible solutions
The possible solutions are:
continue making “cosmetic” improvements in the existing VAT system but bigger attention should be paid to taxpayers right to deduct input tax (i.e. obligation for the taxpayer to inform tax administration before certain type of transaction is performed and to invite tax administration as observer as condition for getting deduction rights)
prediction of the new trends and making appropriate amendments in the legislation
changing to cash accounting principle – deduction is allowed after real payment is made not after receiving the invoice
turnover tax – tax due is calculated as defined percentage form the turnover, no deductions allowed
Which of these solutions is the right and effective one?..

30. Thank you for your attention!
Ms. Irina Andrejeva
Chief tax inspector
State Revenue Service of Latvia, Tax Control Board
Tax control planning and analysis division
Risk analysis methodology unit 
 Smilsu iela 1, Riga, LV-1978, Latvia @