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European Journal of Applied Sciences – Vol. 12, No. 2

Publication Date: April 25, 2024

DOI:10.14738/aivp.122.16523

Burianova, O., & Urbanek, J. F. (2024). Carousel Value Added Tax Fraud: Why It Is Difficult to Face. European Journal of Applied

Sciences, Vol - 12(2). 72-77.

Services for Science and Education – United Kingdom

Carousel Value Added Tax Fraud: Why It Is Difficult to Face

Burianova, Olga

University of Finance and Administration,

Estonska 500, 10100 Prague 10, Czech Republic

Urbanek, Jiri Frisons

University of Finance and Administration,

Estonska 500, 10100 Prague 10, Czech Republic

ABSTRACT

The paper deals with the issue of carousel fraud on value added tax. It is a well- known fact that the collection of value added tax is threatened by tax fraud. A

scenario of possible carousel fraud will be presented in the paper. The research

question is: Why it's difficult to face VAT carousel fraud? Based on a simple example

of carousel fraud, the opportunities of fraudsters are derived. The hexagon of tax

fraud is presented as an entity that defines itself in a crisis interface with the entity

of the tax administrator. In the crisis interface, it is possible to examine the risks of

value added tax collection. A simple illustrative scenario of carousel fraud and the

hexagon of tax fraud suggests that tax collection systems are not able to totally

counter carousel fraud.

Keywords: Value Addet Tax, Carousel Fraud, Hexagon of Tax Fraud.

INTRODUCTION

VAT is an important part of financing the EU budget. The continuous collection of VAT

for the fulfillment of budgets is a very important task. According to the European Commission’s

study ’VAT GAP in the EU Report 2021’, published on 02.12.2021, EU countries lost an amount

of EUR 134.436 billion to VAT evasion in 2019 [1]. The study and final report on the VAT tax

gap in the EU-28 member states mentions a potential loss of €164 billion in VAT collection in

2020 and cites the economic impact of the coronavirus pandemic on the EU member states as

the main reason [2]. The 2023 report shows that Member States lost around €61 billion in VAT

in 2021, a decrease from the €99 billion reported in 2020 and therefore an improvement

compared to previous years. This amount represents revenue losses due mainly to such factors

as VAT fraud, evasion, avoidance, non-fraudulent bankruptcies, miscalculations, and financial

insolvencies [3]. It is necessary to identify the potential threats to VAT collection as part of the

risk management process. Every system has its weak points. One of the threats to VAT

collection is carousel fraud. This paper deals with the issue of carousel VAT fraud. The authors

consider the research question: Why it's difficult to face VAT carousel fraud?

METHODS

The basis for determining the methodology to meet the objectives set out in this article is to

link qualitative research. For the purposes of this paper, the method DYVELOP /dynamic vector

logistics processes/ [4]. The DYVELOP method uses the following special terminology for the

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Burianova, O., & Urbanek, J. F. (2024). Carousel Value Added Tax Fraud: Why It Is Difficult to Face. European Journal of Applied Sciences, Vol - 12(2).

72-77.

URL: http://dx.doi.org/10.14738/aivp.122.16523

purposes of this article: The Entity is all that exists or what can only be imagined in human

consciousness on any scene. Dominance is the dominant aspect of the scene. Domains = real

time - t and environment- ENV are dominant entities that are independent of the controlling of

human consciousness. The processor (PrS), the entity species, fulfilling the role of

transformation of inputs into emerging new things (products), is the object in the role of the

structural thing, the regulation of which is performed by an external controlling actor from a

defined environment.

EXPERIMENTS AND ANALYSIS

Carousel Fraud Scenario

The scenario presents a possible example of a fraudulent VAT chain system. The scenario takes

place in real time (monthly tax period) with real actors and in the real tax environment of the

Czech Republic and the EU. Diagram of the tax fraud chain Figure 1 is only a part a really big

chain. The missing trader was contacted by Buffer (PrS 1) who secured a profitable commodity

of chemical fertilizers and sprays for retail chains. Chemical fertilizers and sprays are traded

within four EU countries and subsequently delivered to the fifth country EU [5]. The actual

transportation of goods serves before the tax administrator as a means of proof that economic

activity is actually taking place according to the VAT Act.

Fig 1: Case of Chain Trade.

Missing Trader prepared an operational plan for the chain store, incl. tax calculations, i.e., who

is participating in the fraud and what the entry and exit prices will be. Business corporations

are also involved in the chain of fraud, for which there is a presumption of trustworthiness in

front of the tax administrator, thus eliminating the problem of possible control activities of the

state and the easy process of VAT collection. Missing Trader singled out such corporations and

personally approached them for cooperation. In our case, they are actors known as Profit

Takers. The task of the Profit Taker (PrS 4, 6, 7, 11, 12) and Broker (ENV PrS 5, 8) is to establish

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European Journal of Applied Sciences (EJAS) Vol. 12, Issue 2, April-2024

business corporation accounts at the branches of various banks, to ensure possible over-limit

withdrawals at the banks and to pass these financial amounts on to the Missing Trader, who

will further redistribute and ship them. In this way, other deals resulting mainly from the

specific four will be financed EU countries. Hundreds of thousands of dollars are withdrawn

from accounts every day. The annual turnover is in the amount of CZK 100 million. Profit Taker

and Broker, executives of trading corporations, also arrange negotiations before state

authorities according to the instructions of Missing Trader.

’Buffers’ (PrS 2, 3, 9, 10) were included in the number only to complicate the situation when

fraud was detected by the tax or customs office. They thus obscure the links in the chain with

their number of links in fraudulent activity. Missing Trader negotiated with other actors the

possibility of storing goods, their transport and advertising. Missing Trader continuously and

occasionally addresses potential candidates – individuals and offers the possibility of

negotiation in business corporations. Missing Trader’s in the search poses as an organizer and

’manager’. A person who has a so-called ’scratch’ and therefore is looking for a representative.

The goods are imported from the EU by hired transporters to negotiated warehouses. As

possible means of real economic activity for state authorities, not only tax documents, delivery

notes and travel notes are used. Profit Taker (PrS 4) organizes an advertising meeting in the

warehouse, where it presents to real buyers of goods its properties and method of production.

Photographic documentation is taken from the event, which will serve as evidence that

economic activity is being carried out in accordance with the VAT Act. Buffer (PrS 3), which is

an active participant in fraudulent conduct, has, according to the extract from the public

register, more subjects of business, namely purchase and sale, intermediary, accounting and

financial consultancy and advertising activities. Due to its scale, it can offer a variety of goods

and services. Its specialties include advertising services of various nature, which are projected

on large screens. Payments for advertising activities overestimates. This offers

an opportunity for those interested in legalizing their proceeds (from crime). As part of a

functional strategy, the tax administrator monitors possible scenarios for the progress of tax

proceedings and indicates risk combinations. the tax administrator assesses the tax returns of

approx. 150 payers per month, he must assess them individually on a case-by-case basis.

Assessment is based on time and information intensive. The tax administrator is bound by the

deadline for the refund of any right to deduct, so it must proceed in the tax proceedings without

delay. The Figure 2 represents the possible initiation of tax proceedings in a fraudulent chain.

It can be inferred that the fraudulent VAT chain system has the ability of timely adaptability

and camouflage.