What is a VAT carousel?
The mechanism of the tax carousel using the VAT construction is based on chain transactions. Several entities take part in them, and each one performs a specific function. In practice, the procedure known as the so-called VAT carousel is that the same goods are the subject of trade between the same entities. What is important, eventually they return to the original seller. This is usually a cross-border trade. It results from the fact that both intra-community delivery and intra-community acquisition are settled at a zero VAT rate.
What entities participate in a VAT carousel?
Missing trader. The definition of ‘missing trader’ is stated in art.2 of the European Commission Regulation No. 1925/2004. It says that it is a trader registered for VAT purposes, potentially conducting business with the intent to commit VAT fraud. It acquirwhes or claims to acquire goods or services without paying VAT, and then makes a supply of those goods or services with VAT charged. Yet, it does not pay the VAT due to the State Treasury. This is usually an entity ‘controlled’ by the organizer of the whole procedure. It performs basic operations, e.g. purchasing and selling goods, or issuing and receiving invoices. The main goal of this entity’s functioning is to not settle tax from the transactions. It may manifest through:
- not submitting tax declarations,
- submitting zero declarations, or
- submitting declarations with the tax properly declared but without paying it.
In practice, this entity sells goods to a buffer and issues a VAT invoice for it. But it does not pay VAT for this transaction. To make it difficult to detect the procedure, these entities are liquidated after a certain period. Then, in the event of a tax inspection, it turns out that such an entity no longer exists. Moreover, the people who acted in its name never existed or were so-called straw men. They are often represented by homeless people who lent their documents to register the entity. They are usually unaware of what they were participating in.
Buffer is an entity that purchases goods from a missing taxpayer at the organizer’s request. The organizer indicates the entity from which the purchase is to take place. He also specifies the purchase amount, the invoice to be issued and to whom the goods are going to be sold.
Broker is an entity that acquires goods from the buffer and then sells them abroad using a zero VAT rate. Then it sends a tax declaration to the tax office, in which it shows an overpayment of VAT. On this basis, it claims a refund of tax.
Organizer is a person who directs the whole procedure but officially is not involved in it. He initiates and supervises the entire process of goods circulation. Finally, he obtains the fraudulent VAT from the broker.
What penalties can you face for participating in a VAT carousel fraud?
It is important to know that participation in that procedure is often complex in nature. The behaviour of a person, even seemingly uncomplicated, may have features of various crimes. Including crimes found both in the Penal Code and in the Penal Fiscal Code.
The Penal Code
Analyzing the possible consequences of participating in the VAT carousel under the Penal Code, it is necessary to point out the following, most commonly used, legal qualifications of the alleged crimes.
- Participation in an organised criminal group (art. 258 of the Penal Code). Thisrefers to participation in an organized group or association with the goal of committing a crime or fiscal crime. The violator is subject to the penalty of deprivation of liberty from 3 to 5 years (§1). Establishing or managing such a group or association is punishable by imprisonment from 1 to 10 years (§ 2).
- Material forgery of invoices (art. 270a of the Penal Code). It refers to the use of a false invoice, the counterfeiting or alteration of an invoice in terms of factual circumstances that may be significant in determining the amount of a public law claim or its refund, or the use of such invoice as authentic. The violator is punishable by imprisonment from 6 months to 8 years (§ 1). But, if the violator commits this act against invoices or invoices containing a total claim, the value of which or the total value of which exceeds five times the amount of property of great value, or if he made this crime a permanent source of income, he is punishable by imprisonment from 3 to 15 years (§ 2). However, if the violator’s behaviour meets the above criteria, but is qualified as a minor offence, he faces fines, restriction of freedom or imprisonment for up to 2 years (§ 3).
- Intelectual forgery of invoices (art. 271a of the Penal Code). It refers to issuing invoices with a total due amount of substantial value or substantial aggregate value, by certifying untruth with respect to factual circumstances that may have significance with regard to establishing the amount of due public receivable or its refund, or refund of other receivable of a fiscal character, or uses of such invoices as the authentic ones. Such crime is subject to the penalty of deprivation of liberty for between 6 months and 8 years (§1). If the perpetrator commits this act with respect to invoice or invoices with the value or aggregate value of total due amount exceeding a quintuple value of property of great value, or who has adopted commission of crimes as a regular source of income, is subject to the penalty of deprivation of liberty for a period of 3 to 15 years. Yet, if the violator’s behaviour meets the above characteristics, but is classified as a less serious offence, he is subject to the penalty of a fine or deprivation of liberty for up to 2 years (§3).
- Forgery of invoices with the amount of receivables exceeding 10 million PLN – the so-called VAT fraud (art. 277a of the Penal Code). It involves committing a crime specified in art. 270a §1 or art. 271a §1 with regard to invoices with the value or aggregate value of total due amount exceeding decuple value of property of great value. Such violator is punishable by imprisonment for no less than 5 years or by 25 years imprisonment (§1). Yet, if his behaviour meets the above characteristics, but is classified as a less serious offence, he may be punished by imprisonment for up to 5 years (§2).
- Increased fine (art. 277b of the Penal Code). It is worth noting that in case of conviction for a crime specified in art. 270a § 1 or 2, art. 271a § 1 or 2 or art. 277a § 1, the fine imposed in addition to the imprisonment can be up to 3000 daily rates. In practice, this means that the maximum fine may be as much as 6 million PLN.
- Fraud (art. 286 of the Penal Code). The violator, in order to gain financial advantage, induces another person to disadvantageously dispose of personal or someone else’s property by misleading this person or by exploiting this person’s error or incapability to duly understand the undertaken action. The violator is subject to the punishment by imprisonment from 6 months to 8 years (§1).
Penal Fiscal Code
Analyzing the potential consequences of VAT carousel under the Penal Fiscal Code, the following legal qualifications of the alleged offences should be pointed out.
- Tax fraud (art. 56 of the Penal Fiscal Code). It involves submitting false or incomplete declarations or statements to the tax authorities or failing to notify of changes in the data provided and thereby exposing the tax to a reduction. The offender is subject to a fine of up to 720 daily rates, imprisonment of up to 5 years, or both (§ 1).
- Omission or faulty issuance of invoice (art. 62 of the Penal Fiscal Code). It means a violation of the obligation to issue an invoice. It occurs by not issuing an invoice or receipt or by doing it in a faulty manner. It also evinces itself in refusal of issuing documents. The violator is subject to a fine (§ 1). If he issues an invoice or receipt in an unreliable manner or uses such a document, he is subject to a fine of up to 720 daily rates or imprisonment for a period of 1 to 5 years, or both (§ 2).
- Unjustified tax refund (art. 76 of the Penal Fiscal Code). It means providing false information or concealing the actual state of affairs. By this, the authorities are misled and exposed to an unjustified refund of public-law tax obligations. In particular, it relates to VAT, excise duty, refund of overpayment or its credit against outstanding current or future tax liabilities. The offender is subject to a fine of up to 720 daily rates, imprisonment of up to 5 years, or both (§ 1).
- Forfeit of financial profits (art.33 of the Penal Fiscal Code). If the offender obtained, even indirectly, a financial gain from committing a fiscal crime, the court shall impose the penalty of forfeiture of that gain. In the event of impossibility to impose the penalty of forfeiture of pecuniary gain, the court shall impose the penalty of recovery of its monetary value (§ 1). Gains obtained from committing a fiscal crime also include benefits from things or rights if they constitute a pecuniary gain obtained from the crime (§ 1a). However, in the event of a conviction for a tax crime from which the offender has achieved, even indirectly, a financial gain of high value, or a tax crime from which the offender has achieved or could have achieved, even indirectly, a financial gain punishable by imprisonment the upper limit of which is higher than 3 years, or committed in an organized group or association with the aim of committing a fiscal crime, the benefit obtained from committing the offence is considered to be the property that the offender acquired, or to which he obtained any title in the period of 5 years before committing a fiscal crime, until the date of issuance of at least the non-final judgment unless the offender or another interested person presents contrary evidence(§ 2).
So much for the theory. Yet, one must be aware that the final sentence in cases of so-called VAT frauds will depend on many aspects. For example, the degree of complexity of the factual situation of the case, or the court’s sentencing directives. The court, when imposing the penalty, must consider a number of circumstances. They are related to the degree of social harm of the act. Other factors include the type and nature of the endangered or violated good, the seriousness of the obligation violated by the offender, the amount of the public law liabilities that have been reduced or exposed to reduction, the manner and circumstances of committing the prohibited act, as well as the form of intent, the motivation of the offender, the type of violated rule and the degree of its violation.
Considering the above, each situation should be interpreted individually. Moreover, it is not uncommon that a person is prosecuted without being aware that he participated in the described procedure. Thus, it is worth using the help of an experienced lawyer. Our specialists will help to establish the optimal line of defence. It is important to show that participation in the VAT carousel was accidental and unintentional.