When people refer to ‘tax evasion’, they are rarely talking about VAT. The criminal non-payment of VAT, as distinct from its elder siblings – Income Tax and Corporate Tax, is universally known as VAT Fraud. The name reflects none of the grudging respect for the brilliant wheezes of talented white collar crooks . No, sir. While income tax and corporate tax are carefully molded to reflect the sophisticated progressive and tax neutral economic societies they serve, VAT is the thug in the system. Slapped on in all its simplicity with little room for mercy, VAT attracts evaders of the same ilk. VAT fraud – as the blunt name broadcasts – tends to be crude, and its perpetrators often stupid.
Take the most prevalent VAT fraud in the European Union – Carousel Fraud. Products literally continually circulate between countries – an importer pays no VAT, charges VAT on sale and pockets what he receives without reporting it, there are a number of legal ‘buffer’ sales between various parties in the same country culminating in a sale to one of the importer’s accomplices . He makes a sale back to the original country with zero rate VAT and reclaims the VAT paid. That reclaim is the tax authority’s contribution to the fraudsters’ coffers. Then, abracadabra, the whole process can start again. So, how do they get caught? One possibility is catching the fictitious invoice in the books of the purchaser from the importer – but that is a bit hit and miss. The authorities are more likely to strike lucky thanks to a combination of low IQ and complacency on the part of the criminals. Thus, some years ago a gang was caught carouselling mobile phones (for some reasons mobile phones are a favorite) because they didn’t bother changing the plugs on the chargers when they passed between France and England and back again. Then there was the bunch who realized they didn’t need so many mobile phones, so they filled the top of every box with legitimate items and padded the rest with bricks. And what about the geniuses whose invoices showed them selling the latest iPhone that hadn’t yet hit the market?
Slightly cleverer were the Spanish who, a few years back, decided to make use of the differentiated VAT rates in their country. Theatergoers in one, out of the way, town were given, in exchange for their money, a carrot accompanied by a piece of paper with their seat number on it. The carrot was not liable to VAT, while a theater ticket was. There is no record of how many patrons were refused re-entry after a bathroom break in the intermission because they had eaten their proof of purchase.
Well, according to reports, the Israeli tax authorities are about to try something new – prevention in place of detection. If their plans go through, anybody issuing an invoice for more than 5000 shekels (about US$1500) will have to contact the tax authority to receive authority for the transaction, obtaining a unique number to be included on the invoice. That number will be crucial for the recipient to be able to reclaim the VAT. The result is expected to be a dramatic drop in fictitious invoices.
Unfortunately, the plan is also likely to lead to a dramatic drop in economic activity. The other great example of transactions requiring tax authority approval is that of payments abroad that attract withholding tax. The wait for the simplest of transactions can be painful and economically damaging. Business must be allowed to function efficiently. Putting a bureaucrat in the way smacks of the socialist economy this country started out with and jettisoned long ago.
If the loss to the nation’s coffers is really the billions the tax authority claim it to be, it makes much more sense to increase the number of VAT inspectors while working towards a system that allows invoice numbers to be paired by computer between seller and buyer untouched by human tax authority hand.
It can only be hoped that street-sense prevails.