The TVA-Carousel

In the previous chapter, I questioned the ratio of costs when drinking a cappuccino – 8 pence for coffee and 37 cents for TVA. Well, that’s the reality in London, but I doubt there is much of a difference to Bucharest.

TVA is with 700 billion EUR each year the first source of income in European states. Still, there are huge deficits in collecting the TVA – between the amount a state could and what he really collects.

According to consultant Pricewaterhouse Coopers (PwC), with 41%, Romania has the highest deficit in TVA-collecting in the EU.

In other states as Hungary (24%) or Poland (27%) the figure is somewhat better, but still high compared to Finland or Holland with about 6%.
In toto, the TVA-deficit in Central and Eastern Europe is 27 billion EUR each year.

What’s the reason behind this high deficit in Romania besides certain local administrative inefficiencies?

Daniel Anghel, TVA specialist of PwC points out, that the TVA defrauding schemes used in the past in Western European countries are now replicated in Central and Eastern European countries.

And TVA-fraud is surprisingly simple.
The fact that goods, traded between member-states of the EU are TVA-free is the foundation.
Other ‘incentives’ to commit TVA-fraud are the high returns and the difficulties to prove, meaning convictions are sparse.

The very basic fraud-version is called ‘missing trader’ and goes like this:

A company imports goods TVA-free from other EU-country, popular are mobile phones, computer chips or mp3-players, then sell the goods to domestic buyers, thereby charging them local TVA. The trader then disappears into thin air without paying the tax to the state.

A more sophisticated modus opersandi is the carousel with a continuous re-export and re-import of goods.

The Scotish gentleman Shahid Ramzan did exactly this. He set up several company’s and began trading from a bedroom at his home. A phone, a fax and access to internet were enough to cash-in TVA payments of £5,6 millions within 18 months. Here’s how the carousel spins:

Company A
Exports goods to B within the EU. Export sale is TVA zero-rated.

Company B
Buys goods from A. Pays no TVA on purchase since export by A is zero-rated but charges local TVA on sale to domestic C. Disappears without remitting the TVA to revenue authority.

Company C – the buffer
Buys goods from B at TVA-inclusive price, and sells to D, charging TVA. C may be unaware of the fraud and there may be multiple buffer companies between B and D.

Company D
Pays TVA on purchase from C.
Exports goods to A in another EU country and claims a refund for TVA on exported goods. In effect, reclaims the TVA not paid by B.

Small real payments to disguise the big scam is the idea behind the further evolution of the carousel-fraud, called ‘contra trading’.

This involves setting up two overlapping carousels spinning between various EU countries and outside.
One of the transaction-chains is legitimate, the other isn’t. The legitimate chain makes small TVA payments in one country to disguise a much bigger reclaim in another.

This article has not the purpose to promote TVA-fraud, on the contrary: it should be a top-priority for the law enforcement to prevent these crimes.

Now, we return to the stock market.
We explore factors that could become increasingly important for customers and thereby for the success of a company in the next chapter:

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