Missing trader fraud
Within the European Union, member states charge VAT at differing rates on goods as a form of indirect taxation.
In other words, a business does not charge VAT on the sale of goods sold to buyers in another member state.
Although missing trader fraud is most common in the EU as a result, it is also seen in other jurisdictions that have a value-added tax, such as Singapore.
The benefit of introducing contra-trading is that it makes it more difficult for the tax authorities to detect a connection between the VAT reclaim by the broker and the default by the missing trader, which now occurs in a different supply chain.
The biggest platform was offshore First Curaçao International Bank (FCIB), which was closed by the Netherlands authorities in 2006.
In a real case there can be many buffers, all helping to blur the link between the final reclaim and the original importer, which will vanish.
[9][10] In 2002 it was reported that former employees of a company based in Stoke-on-Trent had first identified the opportunity of using mobile phones in this way, many of whom were subsequently investigated by the British police.
In order to escape detection by the authorities, fraudsters would register companies for VAT without mentioning mobile phones.
[11] In some cases, fraudsters were caught out by claiming to trade mobile phones that had not yet been released for public sale.
[12] Due to efforts by the EU to combat fraud in relation to electronic goods in the late 2000s, fraudsters have since moved onto other asset classes such as precious metals, power, carbon emissions allowances and telecommunications.
[9] However, as recently as 2019, a large-scale mobile phone missing trader fraud was identified operating out of Hungary.
[16] One option available to governments in the EU is to deny traders their right to deduct input tax using the Kittel principle developed in case law of the Court of Justice of the European Union (CJEU).
The CJEU had previously clarified, in a decision called Bond House (C-354/03, C-355/03 and C-484/03, issued 12 January 2006), that a taxable person's right to deduct VAT is not affected by the possible fraudulent nature of other transactions in the chain, if the taxable person has no knowledge or means of knowledge of the fraud.
[1] From 1 June 2007 the UK introduced changes to the way that VAT is charged on mobile phones and computer chips to help combat fraud in relation to these areas.
[19][20] In 2010, the reverse charge mechanism was extended to services in order to combat MTIC fraud in the carbon market.
[9] On 1 August 2012 the European Commission adopted a proposal for a Quick Reaction Mechanism (QRM) that would enable member states to respond more swiftly and efficiently to VAT fraud.
One of the priorities adopted was to disrupt the capacity of organised crime groups and specialists involved in excise and MTIC fraud.
[23] In June 2017, the Canadian government revealed that it had been targeted by a carousel fraud, with the Canada Revenue Agency identifying $52 million in allegedly fraudulent requests for sales tax refunds and rebates over a five-year period.
The scheme was orchestrated by fraudsters based in the United Kingdom, resulting in the tax authorities in both countries conducting a series of raids.
