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Third-party liability and VAT fraud

Third-party liability and VAT fraud

The digitalization of the global economy and the ensuing difficulties in tax enforcement have brought the principle of third party liability for tax fraud to the fore. The wide-ranging complexities inherent in the VAT regulations have given rise to both deliberate and inadvertent fraud by companies trying to minimize their VAT exposure and maximize their VAT refunds. In a global marketplace where many international businesses have thousands of companies in their supply chain, risks become more difficult to identify and keep under control. Companies feel particularly at risk of threats such as vendor, supplier or procurement fraud.

This phenomenon has led to a strengthening of VAT anti-fraud policy across many countries around the world, with an upsurge in both legislative and administrative measures. These measures have essentially taken two forms: actions to combat VAT fraud and evasion, and processes to counter the costs of VAT fraud. Amongst the latter are measures focusing primarily on the transfer of liability to third parties, and their responsibility for the enforcement of the tax law.

And with online sales in Europe growing rapidly, it reached nearly €500B in 2016, representing 14% of total retail sales, fighting VAT fraud and evasion is easier said than done.

Challenge of relying on third-parties

For example, according to Reuters News Agency, based on a report by a government auditor, Britain is losing up to ₤2 billion ($2.6 billion) a year in VAT because of fraud by sellers using online marketplaces such as eBay and Amazon. The National Audit Office recently announced that the sellers involved are often based in China and that Amazon and eBay had failed to remove these sellers that were flouting VAT rules, even after being informed of the sellers’ non-compliance.

By law, all retailers selling to customers in Britain must collect VAT of 20% of the value of goods sold and be VAT registered in the UK (or appoint a UK-based VAT representative). Most western countries operate similar VAT systems. eBay has claimed it is committed to making its platform, where sellers advertise their goods for sale, a fair place to buy and sell. Amazon also claimed it removed any seller that is not VAT compliant.

New rules aimed at making operators of marketplaces liable for VAT not paid by a seller are starting to take effect but have been stymied by the challenges in streamlining the process across the globe. Cooperation by the online marketplaces has also been limited. Amazon opposed a proposed regulation that was due to come into force next year, under which businesses would be required to perform due diligence checks on their overseas customers; Amazon felt this was “disproportionate and ineffective.”

This is an ongoing battle that is just getting underway and will undoubtedly continue into the foreseeable future. Amazon and eBay are just two of the powerful operators of online marketplaces and they are likely to strongly oppose any legislation with the potential to negatively affect their bottom lines.

Businesses must proceed with caution

The question then becomes, with risks so high, how can businesses maximize their vat recovery while ensuring they do not inadvertently commit fraud? How should businesses treat VAT when buying or selling via an online marketplace? Will company receipts and invoices be accepted by the tax authorities and reimbursed promptly?

Fraud is not going away and continues to be on the rise, but the well-prepared business can do much to stay one step ahead and be positioned to eliminate or mitigate it.

One of the answers is to always use a certifiable and experienced financial services company who can determine which expenses truly qualify for VAT recovery and properly submit the claims. If a third-party submits the paperwork incorrectly, your organization will forfeit the VAT reclaim, potentially causing huge fines, losses of revenue and profits in the long run.

VATBox has successfully streamlined the global VAT recovery process, providing businesses with unrivaled visibility, compliance, and data integrity, and ultimately boosting its bottom line. To maximize eligible VAT refunds, many companies choose to implement our automated, enterprise-wide, cloud-based VAT recovery solution. Let us show you how your company can thrive in today’s complex financial times. Request a free demo here.

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