Slovakia fights with VAT Gap

Mar 01, 2017

Indirect Tax Alert, March 2017, Issue 1

In autumn 2016, the European Commission presented the most recent study of the EU VAT Gap (the difference between VAT revenues that state budgets should collect and actual VAT revenues). The total amount of the EU VAT Gap is estimated to be €159.5 billion or 14% for 2014.

According to the report, Member States from Central and Eastern Europe (CEE) have some of the highest VAT Gaps in the EU - ranging from 16% in the Czech Republic, to 38% in Romania. Slovakia has the 4th biggest EU VAT Gap of 30% or EUR 2.2 billion.

The Institute of Financial Policy of the Ministry of Finance of the Slovak Republic states that increasing tax evasion is one of the major reasons for the large VAT Gap in Slovakia.

According to the Institute, over the last few years Slovakia has considerably reduced its VAT Gap: the Institute estimates the VAT Gap for 2014 was 29.5%. However, a comparison with the EU average index shows that Slovakia still has a lot of work to do in its fight with VAT fraud, which has only recently begun. The Institute says that if it reached the EU average, Slovakia could have increased its VAT revenues by around € 800 million in 2014.  

"Missing trader" and "carousel VAT frauds" are the largest forms of VAT fraud in Europe.

VAT fraud patterns used in the past in Western Europe are being replicated in CEE. Carousel and missing trader frauds have been identified in areas such as scrap metal, agriculture, textiles, IT components, mobile phones, real estate, retail and even the tradable services sector (software, licensing, data provision, emissions trading, etc.) which, unlike goods, do not need to be physically moved.

A missing trader is usually a VAT payer that supplies goods or services with VAT, collects this VAT from his customers and then disappears with it. To increase his ‘profits’ a missing trader purchases goods for resale to his customers without paying output VAT from the issued invoice to the state budget.

Carousel frauds are more complex. They involve a group of companies performing intra-EU cross-border sale of the same goods or services in a circle to achieve an illegal ‘profit’ by using the missing trader scheme over and over again.

At recent anti-VAT fraud conferences hosted by PwC in Budapest and Bucharest, officials from the Ministries of Finance and Economy of Slovakia, the Czech Republic, Hungary, Poland, and Romania called for a joint approach to combat VAT fraud and increase VAT collection.

During the conferences the participants discussed the experiences of various CEE Member States in dealing with tax evasion and the best legislative and administrative measures to combat evasion and increase VAT collection.

In recent years, Slovakia has greatly strengthened its legislative base aimed at prevention and fighting VAT fraud. The following rules have been introduced:

  • Financial guarantee required from the businesses with a bad tax history upon VAT registration.

  • Joint liability of a customer when supplier fails to pay his VAT obligations to the budget if:

    • the consideration for the supply is unreasonably high or unreasonably low;

    • supplies are performed between related parties;

    • supplier’s name is on the public black list of tax payers with a bad tax history.

  • Full transfer of the obligation to pay VAT from supplier to customer (reverse-charge) for supplies of goods vulnerable to VAT fraud. The list of such supplies is gradually being extended: from 2016 construction work and local supplies of any goods performed by non-residents became subject to the reverse-charge.

  • Introduction of the Control Statement – report giving a detailed and comprehensive list of taxable transactions performed.

  • Creation of specialised agency teams (tax specialist, investigator, and prosecutor) to address serious fiscal crimes.

All of the above measures help the state fight VAT fraud, but this fight would not bring the desired results without an effective tax audit and control system. Looking back at the tax audit practice of recent years, it can be stated that VAT frauds are becoming one of the major priorities for tax audits in Slovakia:

  • The Tax Office is paying increasingly close attention to potentially fraudulent transactions;

  • The Tax Office is becoming more sophisticated in data mining and complex analysis of the collected information;

  • Cooperation with tax authorities in different states is growing.

However, on the other hand, legitimate businesses are frequently becoming victims of the fight with VAT fraud declared by the state.

Missing trader firms are usually inaccessible or possess few or no assets. Therefore, the Tax Office cannot retrieve ‘stolen’ VAT from them. So, it tries to collect such VAT from their counterparties who were knowingly or unknowingly part of the fraud chain.

The methods used by the Tax Office to achieve this are: 

  • To hold a business jointly and severally liable for participating in a fraud;

  • To refuse a VAT deduction for supplies made to a business by a missing trader.

There are several judgements of the ECJ and Supreme Court of SR dealing with different aspects of VAT fraud and holding a third party business liable for the unpaid VAT obligations of a missing trader.

The main conclusion to be drawn from the established ECJ Case Law is that a person cannot be held jointly liable or denied the right to deduct input VAT if he did not know, and could not have known, that the trade was fraudulent.

To protect themselves from being accused of participation in VAT fraud, a business must prove that it took every precaution which could reasonably be required to ensure that they were not part of a fraud chain.

As VAT frauds are now at the top of the Tax Office’s agenda and given the ECJ’s position, businesses should consider whether they have an effective tax risk monitoring system and whether their internal controls would allow the company to prove to the Tax Office that it was sufficiently cautious and prudent in its business transactions if accused of VAT fraud.

In April 2016 the European Commission presented an Action Plan for a simple, efficient and fraud-proof definitive VAT system. It is expected that this initiative will launch a major reform aimed at simplification and the securing of intra-EU supplies of goods and limiting the scope for VAT fraud.

Hopefully, this initiative will bring fairer rules so that legitimate businesses are not accused of VAT fraud. But until then, Slovak businesses must be aware of this risk and ensure they have sufficient proof they have acted in good faith with their counterparties.

Contact us

Christiana Serugová

Christiana Serugová

Partner, CEE TLP Clients & Markets Leader, PwC Slovakia

Eva Fričová

Eva Fričová

Senior Manager, PwC Slovakia

Tel: +421 903 268 048

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