VAT fraud has been plaguing the EU, with billions being stolen over the years by white collar criminals. In 2016 alone, according to the European Commission, EU countries lost a staggering 147.1 billion euros in VAT related fraud, or an estimated 12.3% of total expected VAT revenue. This is the so called VAT gap, the difference between expected VAT revenue and that which is actually collected.
The fraud occurs usually in the missing trader form, or in the related carousel fraud, in which crooked traders exploit weaknesses in the tax structure.
Shockingly, the money defrauded has been linked to terrorism. In 2010, American soldiers operating in Afghanistan found documents in one of Osama bin Laden’s hideouts, linking his organisation to VAT fraud committed in Europe. Investigators estimate that some 420 million EUR of defrauded VAT money in the EU is directly used to finance terrorism.
EU countries have been implementing all sorts of methods to fight VAT fraud, with varying success.
In Poland, with VAT revenue accounting for almost 40% of the Polish budget, sealing the VAT gap was crucial to the Polish budget and economy. Between 2008 and 2015, Poland lost some 260 billion PLN due to VAT fraud, scam and theft and the VAT gap stood at a staggering 23,9%, or almost twice as high as the EU average.
Sealing the VAT gap became a priority of Mateusz Morawiecki, who in 2016 was put at the helm of the Polish Ministry of Finance. His strategy, a step-by-step approach, implementing increasingly intrusive measures relied on three main pillars: modern legislation, effective administration and close cooperation with business.
Measures introduced included solutions available in other countries, such as the single audit file or the split system mechanism, and combined them with Polish innovations, which mostly involved the implementation of tech solutions and the use of Big Data analysis.These combined solutions allowed the Polish Ministry of Finance to finally catch up with the criminals who had tended to be a step ahead with their carousel fraud.
The measures worked, with Poland lowering the VAT gap from 23.9% in 2015 to between 7 and 12% in 2018 (depending on metrics used), placing Poland below the EU average. As the director of the Polish Institute of Economics, Piotr Arak puts it in his piece for the World Bank ‘Tax compliance is the cornerstone of safety nets: Lessons from Poland’, “Poland has been able to increase taxes without increasing tax levels.”
Following a Polish Economic Institute report “The reduction of the VAT gap in Poland in 2016-2017”, which shared Polish VAT best practices to a foreign audience of experts, to help reduce the EU VAT gap, an awareness campaign has now been launched.
Posters and billboards informing people about the links between VAT carousel fraud and terrorism have been put up in four key European cities; London, Brussels, Berlin and Madrid. Passersby are then referred to a website, www.stopVATcarousel.pl , which outlines the problems and presents the Polish solutions to VAT fraud.
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