VAT Talks with VAT-expert Redmar Wolf
In our new blogpost series “VAT Talks” we speak with VAT experts from all over the world to learn more about VAT, VAT fraud and everything related to VAT. For this episode we had the honour to speak with Redmar Wolf, who works as a VAT attorney with the law firm Baker McKenzie, as a professor of Tax Law (Indirect Taxes) at the University of Groningen and as a Deputy-Justice at the District court of Arnhem-Leeuwarden. In this episode we discuss the weaknesses of the VAT system, the new appreciation for the government (and maybe even for taxation!), and how Redmar’s military service resulted in his career in VAT.
How long have you been working in VAT and how did you end up in this field of work?
“I have been working in VAT now for almost thirty years. As one of the last people in the Netherlands I had to fulfil my military service (which I really enjoyed, but that is a completely different story). Before fulfilling this service I had a total of 6 years of study. After I finished my studies in Utrecht, I still had some of this time left. I decided I wanted to spend that time in Amsterdam, to follow a subject that was not offered in Utrecht. This was tax law. At that time, I had no idea what it was. After completing my military service, I started working at Baker Mckenzie. There, I received guidance from someone who worked in VAT, and that’s how I ended up in VAT actually. It was a path full of coincidences.”
Although you ended up in VAT by accident, previously you told that eventually “VAT stole your heart”, could you explain how this happened?
“Every economic activity has VAT aspects. This makes VAT a really broad field of work. Also, VAT is very international as every EU Member State has a VAT legislation that is based on the same (EU) VAT Directives. Furthermore, VAT is very dynamic, mainly due to the impressive amount of VAT jurisprudence of the EU Court of Justice.”
In your work you also encounter cases of VAT fraud. Already in 1998 you said that the system is full of loopholes. Could you explain the weaknesses of the Dutch VAT system?
“In essence, VAT is a beautiful system. However, there are two aspects that make it vulnerable to fraud. First, when a business sells something, it usually charges VAT. The VAT comes on top of the purchase price. The purchase price will be for the seller. The VAT however, needs to be transfered, on the seller’s own initiative, to the tax authority. In this way, businesses become ‘honorary tax collectors’. Unfortunately, these tax collectors do not always transfer the tax to the tax authority. They might think: ‘This VAT is mine now and I will make good use of it as well’.”
“The second aspect arises, when businesses sell goods or services between each other (B2B transaction). For example, business A will charge VAT to business B. B will pay this VAT to A. Subsequently, in the current VAT system, B can then reclaim that VAT with the tax authority. In this way, VAT is not really a cost; businesses will receive the VAT they have to pay to tax authorities from other businesses, while the VAT businesses need to pay to other businesses, can be reclaimed.”
“If you combine both aspects, the tax authority could end up with a negative tax revenue. Here step one is that the business that has to pay VAT, does not do this and step two that the business that can claim a VAT refund will do this. In this situation, tax authorities are only paying money without receiving it.”
What measures have been taken in the past to tackle this problem?
“The only measure that has been considered, mainly at the time that the current VAT system was introduced, is the idea to couple the VAT payment to the right to claim a VAT refund. This is a foolproof plan. However, at that time this was not technologically feasible yet. Therefore, payments are traced by following the path of invoices. In practice this only works with a delay. At the time tax authorities have traced the invoices, fraudsters are long gone. In case of carousel fraud” (read more about carousel fraud here) “invoices are even harder to trace as they travel across borders.”
“Governments and the EU have tried several things to fight this fraud, but fundamentally nothing has changed. Tax authorities still rely on invoices. Although these invoices can now also be issued in PDF, the idea is unchanged. What is tried, is to strengthen the collaboration between tax authorities to improve the tracing process, so that fraudsters can be caught at an earlier stage.”
“Besides, there is the idea of a reverse charge. This measure is already applied to goods that are often used in fraud schemes. With reverse charge, only the business that supplies the consumer will be paying VAT to the tax authority. Although this would help, it will also result in different types of fraud as the responsibility to pay VAT then lies with only one business within the value chain. Another problem is a practical one; changing the VAT system to a general reversed charge system, would really overhaul the complete system. Member States do not seem to be ready for such a step as they currently seem to think: although we are using a sieve to take water out of the river, we at least manage to take out a sufficient amount of water. When the complete system is changed, they do not know if they will manage to take out the same amount of water. That may well be political suicide.”
Could this be one of the reasons why only recently the VAT fraud problem, also spurred by the Grand Theft Europe project, gained political attention?
“Yes, and the current economic crisis will also be pivotal in this as government expenses are currently going through the roof. I believe this will mean a catharsis of the current fiscal situation and that people will, even more so than before, disapprove of tax evasion. The same thing holds true for fraud, there will be more pressure to really move forward and to say ‘we are going to solve this now’. In the aftermath of the crisis, governments really need these funds that are now lost. For VAT fraud that means that they can retrieve tens of billions of euros on an annual basis. To come back to the sieve comparison; as long as you have enough water in your sieve, this lost water does not matter too much, but if you really need this water due to a dry spell, it becomes a completely different story. Therefore, I think in the coming period, this will receive more attention.”
Thus, government revenue is decreasing, what will be the role of VAT to increase this revenue?
“Thinking out loud, I think governments could help in simplifying the VAT system. It would not be wise to intend to increase VAT revenue by raising VAT rates as this has a negative effect on consumption, it would paralyse the economy. You could consider lowering rates to compensate certain sectors for example. So, the main question is, how could governments increase their VAT revenue. Well, by fighting fraud.”
A side effect of crises is that, often, fraud will increase. Do you foresee a rise in VAT fraud as well?
“VAT fraud thrives when international trade flourishes. Currently a lot of this trade came to a halt. Something that could potentially increase the amount of fraud in the near future is Brexit. If, in the end, no actual deal will be made to implement Brexit, a chaotic situation will occur; fraudsters feel like fish in the sea in chaotic situations and will therefore profit from that situation. This is especially true for VAT fraudsters as VAT fraud is a timing-issue. VAT fraudsters make use of the moment that the tax authorities are not aware of the fact that they are not paying their VAT. If a fraudster manages to stay out of sight of the tax authority for three months, they can shift all the stolen money to a safe location. So, I do not think the lockdown will result in an increase in VAT fraud, but a chaotic Brexit definitely will.”
To solve VAT fraud, countries started experimenting with different solutions, e.g. the previously mentioned reverse charge and also by introducing invoice reporting systems such as are introduced in Latin-America. Do you think Member States take confidentiality into account in forming these policies?
“Confidentiality and privacy are subjects that are now receiving more attention, although before no one really had knowledge about it. The recent increase in privacy and confidentiality related incidents, made governments more aware of the consequences of a lack of privacy and confidentiality. So, I do see a shift, there is more attention for this aspect during the political discussions.”
One of the potential solutions for VAT fraud are thus invoice reporting systems, and a growing number of EU Member States are implementing such a system. What do you think about this development?
“By using these systems, governments can gather a lot of information, which is amazing. However, this information needs to be used properly. The question is: is the infrastructure of the tax authority able to process all this information; you will collect a room full of paper, but if you cannot do anything with this paper there is no actual progress. In sum, the idea is very good, but the execution is essential.”
Do you believe tax authorities should receive more funds to fight fraud more effectively?
“I think this crisis will lead to a re-evaluation of the role of the government. Suddenly everyone is looking towards the governments in search of answers. The government has become the great savior. So, when all this is over, the position of the government will improve, as will that of the tax authority. I think this will lead to more money for tax authorities, so that tax authorities will be better organised. There have been several austerity rounds within the Dutch tax authority and we have seen the result thereof.”
“So, I believe that the crisis is a reassessment of the work the government does for society. This work is made possible through the taxes that are collected by the tax authority. Therefore, I project that there will be more focus on tax authorities and more funds will be allocated to the tax authority. This also means that tax authorities will have more means to fight fraud.”
Earlier, the EU proposed the definitive system to tackle VAT fraud throughout the EU. Do you think that, because of this re-evaluation of the importance of taxes, a new plan will follow soon?
“Well, the definitive system actually does not tackle the problem that I described earlier. Although the proposed idea will solve some aspects of the problem, other forms of fraud will become apparent. So the definitive system does not offer a definitive solution; the plan was already in the bin, and now probably even in the shredder. I think it is time to look for another solution to generate government revenue. Furthermore, the economy has changed and this asks for different fiscal measures.”
One of the measures that already exists, is that companies that are part of a fraudulent value chain can be held liable for the fraud committed. Do you have experience with assisting clients that were held liable in this manner and what do you think of this measure?
“Yes, I have experience with that. I do have to say that my experience with the Dutch tax authority is pretty positive in this regard. Fact is that, based on precedents at the European Court of Justice tax authorities can recover taxes from companies that did business with a fraudster if this company ‘knew or should have known’ that it was doing business with a fraudster. This is a very vague concept of course. In case a business writes down something like ‘I bought goods from a supplier, but I knew he was committing VAT fraud’ then the situations is obviously clear. However, the ‘should have known’ situation is a different story. For example, tax authorities could recover taxes by arguing that a company should have known they dealt with a fraudster as the prices of that particular supplier were unrealistically low. This results in the fact that businesses should do everything they can to not end up in a fraudulent value chain.”
“On the other hand, fraudsters will do everything they can to sell their goods without the buyer realising that their business partner is committing VAT fraud. So, they come up with beautiful stories why their prices are so low. This complicates the situation even further. Again, my experience with the Dutch tax authority in general is good. Other tax authorities however have less difficulty with saying ‘you should have known’ and then it is up to the company to provide evidence that it could not have known it, which is often very hard to do.”
If you could give the European Union one piece advice in tackling VAT fraud, what would it be?
“Make use of technological solutions. The confidence in paper invoices is very outdated. We also saw a digitalisation of the work-space within a couple of days after the lockdown was installed. For VAT, this evolution could take place as well. The fundamental problem is coupling the VAT payment with the VAT refund. If the EU can find something to tackle that fundamental problem in combination with the usage of technology, then you can really take serious steps; we are still working with a system that has been implemented 50 years ago, based on the then-available technology. So I would say that we should make a fundamental change there.”
Last question, do you have some last words for the reader to enthuse them about VAT?
[Laughing] “Civilisation starts with taxation and it is a political decision how much tax will be levied, but we now realise the importance of a strong government and a government that is well-funded. So, when you are working in VAT you can contribute to a strong government. I would not call it a vital profession, but VAT is an important field of work.”
We would like to thank Redmar again for his time and for giving his perspective on VAT. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via email@example.com
- Then called Caron & Stevens.