Missing Trader Intra-Community Fraud (MTIC) which causes high tax losses by exploiting intra-Community VAT systems in transnational deliveries is one of the most frequent forms of white-collar crime committed with the aim of tax evasion. It causes the tax authorities billions of Euros of tax losses but can also drive innocent businessmen who are unknowingly drawn into the MTIC into financial ruin.
Honest businessmen are exposed to particular dangers if they are unknowingly drawn into MTIC and fall into the hands of "missing traders". Missing traders are people who appear in legal transactions under the cover of corporate shells, do not satisfy their VAT obligations and in most cases disappear from the market again when they go insolvent. The companies which commit the fraud generate profit from the MTIC. Whilst the other companies do not have to pay tax owing to input tax relief the missing trader disappears from the market as the only VAT debtor.
The honest businessman can be faced with financial and criminal tax law risks (not only in Germany) mainly for two reasons. Firstly, there is a problem if this businessman delivers goods to a businessman resident in other Member States and the latter turns out to be a missing trader (see below under I.). In the second situation the businessman purchases goods from a missing trader in Germany (under II.). In both cases the businessman is faced with the threat of criminal law investigations by prosecuting authorities (see below under III.) and also considerable financial fines. Sometimes these problems arise also when a solvent businessman is involved but not directly in contact with the missing trader.
I. Tax Relief for Intra-Community Deliveries
If the purchaser in the other EU country turns out to be a missing trader the tax authorities may refuse to give the German businessman tax relief for the intra-Community delivery pursuant to §§ 6a, 4 no. 1 b VAT Act and demand subsequent taxation on the delivery of goods which was previously declared tax-free.
In practice there is an increasing number of cases in which the German tax authorities, encouraged by the decision of the CJEU of 07.12.2010 – C-285/09 (case "R"), based on vague suspicions assume involvement in an MTIC and revoke the tax relief for the intra-Community deliveries.
Despite taking all the necessary precautions a company cannot rule out involuntary involvement in an MTIC. If the tax authorities now assume collusive practices with the perpetrator the "punitive taxes" of 19 % often have to be paid from a trade margin of a maximum of only 2 % - a burden which is very difficult to bear. There are two ways in which to try to avoid liability from involuntary involvement in an MTIC. The first level is the factual approach, i.e. providing proof of the conditions for tax indemnity of the intra-Community delivery in the form of accounts and invoices in accordance with §§ 17a – 17c VAT Implementation Regulation. Hereby, in particular, a correct invoice must be provided pursuant to §§ 14, 14a VAT Act and, with effect from 01.01.2013, a due and proper confirmation of arrival (§ 17a (2) VAT Implementation Regulation). With effect from 01.01.2012 this "confirmation of arrival" replaces the previous proof of dispatch (§ 17a (2) old version). However, its use only becomes obligatory from 01.01.2013. In the transitional period no complaint will be made if the previous proof of dispatch is used. Moreover, in particular, if the purchasers are new and unknown a "qualified" query should be placed with the Federal Central Tax office according to § 18e VAT Act in answer to which the businessman will receive confirmation of the validity of the VAT ID number and the address. The documentation relating to this query must be kept, § 17c VAT Implementing Regulation. If the relevant documentation is not provided or if the query had not been made at the time of delivery the contractual partner should be provisionally charged the VAT initially in the form of a deposit (without a separate VAT certificate). The contractual partner should only be reimbursed once all the relevant documents have been provided. If proof of invoicing and accounting requested cannot be provided the tax authorities and case law assume that the conditions for tax-free intra-community delivery are not satisfied. In this case the taxpayer then bears the burden of proof that it does exist (cf. for example Nuremberg Tax Court, decision of 10.11.2009 – II 18/2006).
The second level is the legal one: Under prevailing case law the factual level is not necessarily enough to exclude liability. This is because the German tax authorities tend to apply the principles of the CJEU decision of 07.12.2010 – C-285/09 (no tax indemnity for intra-community deliveries if there is active involvement in an MTIC) also in cases of neutral aiding and abetting. Liability is confirmed thereby if the purchasers knew of the criminal activity. The tax authorities are very quick to assume that parties have such knowledge. In general the conduct of the tax authorities is very questionable. In addition there is absolutely no statutory basis for the character of the "punitive tax". At the same time the situation is very precarious for the companies involved because they first have to meet the requirements of the tax office and thus run into liquidity problems.
II. Input Tax Relief in Missing Trader Cases
If the businessman purchases goods from a missing trader in Germany the question is whether he can be refunded by the tax authorities for the VAT invoiced by the missing trader as input tax (§ 15 VAT Act). In the view of the Federal Tax Court, following the decisions of the CJEU (decision of 12.01.2006 – C-354/03 and decision of 12.01.2006 – C-355/03) businessmen who take all measures which can reasonably be expected of them to ensure that their turnover is not involved in fraud, whether as tax evasion or other fraud, must be able to rely on the lawfulness of this turnover without running the risk of losing their right to input tax relief.
Therefore it is important whether the businessman recognised or should have been able to recognise with the diligence of a prudent businessman that the initial turnover is involved in the VAT fraud. In this respect as well we would recommend requesting confirmation has already set out above under I. regarding the VAT identification number.
We would suggest particular care when the businessman is considering purchasing goods at a price clearly below market price. In such cases the businessman will find it more difficult to prove that he has applied the required diligence; possible (innocuous) grounds for the preferential treatment should definitely be critically examined and documented.
III. Criminal Law Risks
In both situations there is a high probability that the criminal prosecution authorities will also commence investigative proceedings against the well-intentioned businessman owing to (aiding and abetting) tax evasion (§ 370 Tax Code as read with § 27 Criminal Code). The Federal Court of Justice (decision of 20.10.2011 – 1 StR 41/09) considers that aiding and abetting has taken place if the documentation duties of §§ 17a ff. VAT Implementing Regulation have not been complied with. In its view that this constitutes concealment from the tax authorities. Ultimately the issue is whether the businessman acted with intent, i.e. whether he knew or should have known the background behind the deliveries.
If the above recommendations for action are observed there is a good chance of being able to avoid such suspicion. Nevertheless, we would definitely recommend involving a legal advisor to effectively counter the conduct of the investigative authorities which is in some cases very aggressive and in order to bring the investigations to a close quickly without suffering further legal disadvantages.
Dr Björn Demuth
Partner - CMS Hasche Sigle
Associate - CMS Hasche Sigle