Every VAT/GST allows missing trader fraud. The fraud is simple, and can be simply prevented (with technology). The fraud arises when a business makes a purchase without paying VAT, collects VAT on an onward sale, and then “disappears” without remitting the tax. Missing trader fraud is common in high-value/low-volume goods sold across borders – computer chips and cell phones are the classic examples. But the fraud easily migrates when pursued. It operates well with goods as wide ranging as xenon bulbs, automobiles, and earth moving equipment.
The recent appearance of MTIC fraud in tradable CO2 permits and VoIP is a very serious warning for the global VAT system. The size and scope of these frauds make it very clear that this missing trader fraud is huge and it is spreading. The speed with which it spreads is a reflection of the technology that makes it work. In tradable services this fraud has no boundaries.
Three technology solutions are presented here. The RTvat and the VNL are applied to all transactions in a VAT system. The RTvat changes the underpinnings of the VAT. Moving it from an invoice to a settlement system. The VLN on the other hand, leaves the basic structure of the VAT untouched, and simply adds an encrypted “tracer code” to every invoice. The D-VAT accomplishes much of what the VLN does, but uses certified tax software. The D-VAT can be applied selectively (to suspect classes of supplies). It is also a voluntary system (admittedly with a number of incentives to get businesses to “sign-up”). The D-VAT is the only solution that can be extended to cover B2C transactions.
Richard T. Ainsworth,
VAT Fraud - Technological Solutions
Available at: https://scholarship.law.bu.edu/faculty_scholarship/1470