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A common fraud on VAT is the missing trader intra-Community (MTIC) fraud, commonly known as “carousel fraud”. This happens when a trader manages to pocket the VAT originally due to the tax authority. The problem of MTIC fraud requires a strengthening of the control measures at the stage of the registration of the VAT taxpayer. Stronger control measures can be achieved via smart VAT Registration Certificates based on technologies such as CERTUS®, a combination of a breakthrough digital seal technology protected by the blockchain with a secure QR code applied to documents.
“Carousel fraud” can take place because a taxpayer importing a good or a service typically does not have to pay VAT on these imports, while he can proceed to sell this good onward in the domestic market, where he will charge a price including VAT. In this context, a rogue taxpayer – such as a newly registered taxpayer with a few employees akin to a “shell company”– could disappear before having had to submit a VAT return or before effecting a VAT payment to the tax authority, generating a fiscal loss. Indeed, there can be a long time-lag between the onward sale of the imported good – including VAT – on one side, and the filing of the tax return and the payment of the VAT to the tax authority, on the other side.
The main enablers of this fraud are: (i) the registration of the VAT taxpayer; (ii) the place of taxable transaction; (iii) the zero-rating for VAT on imports; and (iv) the opportunity for deferred payments for VAT on imports. Various compliance schemes – such as audits – have been adopted by tax authorities to address this fraud, but they are typically ex-post measures.
The problem of MTIC fraud requires a strengthening of the control measures at the stage of the first enabler, i.e., the registration of the VAT taxpayer. Thanks to emerging technologies, this can be done along three dimensions:
• First, the tax authority should issue a Smart Tax/VAT Registration Certificate to all taxpayers, in the form of a QR code, and not just a simple PIN/tax number.
• Second, the taxpayers must be required to add this secure QR code to most, if not all, of his invoices.
• Third, the buyer must be given the means to check this QR code, thus ensuring that the supplier is a correctly registered taxpayer and that the invoice is legitimate, before agreeing to the invoice and effecting the buy.
This QR code should include relevant information about the taxpayer (PIN, name, address, etc.), including possibly the (expected) turnover of the company and its field of activity. The tax authority could add an information field setting the invoicing limit for the taxpayer’s transactions. The benefits of such secure QR code include: (i) ease of application to a digital invoice as well as to a paper-based invoice, (ii) the possibility by the tax authority to expire or revoke altogether the Smart VAT Registration Certificate, (iii) the ease of verification of the status of the taxpayer through a check via a mobile App or a WebApp.
Such smart VAT Registration Certificates are based on our CERTUS technology, which combines a breakthrough digital seal technology protected by the blockchain with a secure QR code applied to documents. This QR code is impossible to tamper with or forge. CERTUS enables independent and universal verification, safeguarding the value of holders’ documents and the reputation of issuing authorities. Personal and sensitive data are never stored, neither directly nor in an encrypted format, in any database or on the blockchain; only the indecipherable digital seals needed to verify a secure mark are secured by the blockchain to ensure their lifelong immutability. The data of the selling taxpayer is safeguarded. Indeed, checking the validity of the QR code accesses neither the supplier’s database nor that of the tax authority. The cryptoseal is signed on the KSI Blockchain, used as a trust anchor.
Beyond the VAT-specific use of Smart VAT Registration Certificates, this type of smart registration certificates could be used for other types of taxes (property taxes, customs) and even at the broader level of the government for securing official documents (company registrations, conformity documents, attestations, permits, origin certificates) or legal records (notarial acts, wills).
This is a summary of the published chapter “The Potential for Emerging Technologies and Blockchain to Better Secure VAT” in Tax Law and Digitalization: The New Frontier for Government and Business Principles, edited by Jeffrey Owens and Robert Risse, available here: Tax Law and Digitalization: The New Frontier for Government and Business – Principles, Use Cases and Outlook | Wolters Kluwer Legal & Regulatory.