Policy Department C: Citizens' Rights and Constitutional Affairs ________________________________________________________________________________________
ANNEX D: NATIONAL VAT FRAUD Levels of VAT fraud in all MS are unavailable. We here present data on levels in two countries representing different features of the EU membership. It should be emphasised that not all VAT fraud is planned in advance by organised crime groups as popularly understood. Levi (2008) developed a simple typology of fraud into pre-planned; intermediate (started honest and consciously turned to fraud later, sometimes via corruption by organised crime groups); and slippery-slope (carried on trading whilst insolvent). An unknown percentage of the first two categories fit the criteria for organised crime, though all of them are ‘organised’. However, once they know how to go about such frauds, they are relatively simple to commit, and therefore are very attractive to organised crime groups. The Bulgarian SOCTA 201236 estimated that VAT fraud related to organized crime cost €350 million for 2010 – in such cases, costs are the same as benefits to criminals, with only modest deductions for business expenses and bribes. VAT fraud significantly affects the competitiveness of legitimate companies that pay their taxes, so (as in cartels) an indirect cost of fraud is to crowd them out of the market, though we are unable to place a sensible cost estimate on this. The participants in fraud schemes have high social status and potential for influence over society, since many also operate in the legal economy: a feature of Bulgarian organised crime that has been less noted elsewhere in the EU, other than in parts of Italy. After a peak in 2008, the size of VAT fraud dropped by 30%, which can be explained by the impact of the economic crisis, but also by the intensified pressure by the National Revenue Agency (NRA), the Ministry of Interior and the State Agency for National Security (SANS). However, the levels of losses incurred remain high and reach 10-11% of the VAT revenues. A good indication of the scale of this problem is the fact that, according to the NRA, nearly 20% (or about 30,000) of all active VAT-registered companies in the country are involved in different forms of VAT fraud. Bulgaria’s EU accession was followed by a significant growth in international fraud schemes: international VAT fraud more than doubled in importance – from 8% of all losses caused by VAT fraud in 2006 to 19% in 2009. These changes (and those in the UK and elsewhere) illustrate the danger of ‘freezing’ costs of organised crime without updating them. This is because control measures (such as delayed repayment of VAT and the range of measures implemented in the EU post-2013) can have a more dramatic effect than they can in other areas such as drugs that are less amenable to situational prevention. In the UK, the Exchequer Secretary estimated that at its peak in 2006 £3–£4 billion was lost to MTIC fraud; but the most up-to-date figure was now £0.5–£1 billion a year.37 Indeed, at its peak, the Treasury was suggesting that the losses could be infinite if not stopped, since with fake invoicing and fake goods, there was nothing to stop the fraudsters.38 Hence, the special permission from the EU to introduce reverse charging on a range of products then favoured by MTIC fraudsters. As with the Bulgarian case, this emphasises the dynamics of organised crime fraud costs, depending on their controllability and also on their being measured. The latter point is important because the UK Balance of Payments data were being distorted by the initially unaccounted for losses. 36
Serious and Organised Crime Threat Assessment, 2010-11, p.7, Sofia: Center for the Study of Democracy. In evidence to the House of Lords EU Committee, 2012. For excellent reviews of the technical issues, see Smith (2007); Keen and Smith (2006). 38 See the discussions in Levi et al. (2007). 37
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