INTERNATIONAL TAX: European prosecutors probe VAT fraud in six countries

The European Public Prosecutor’s Office (EPPO) carried out 25 searches and other investigative measures in six countries on January 17, in an action targeting a suspected 19 million euro VAT fraud, involving second-hand mobile phones imported from Hong Kong, the United Arab Emirates (UAE) and the United States, EPPO said in a statement on January 18.

Code-named “Concertina”, the investigation, led by the EPPO in Munich, stretches across Bulgaria, Germany, Italy, Malta, the Netherlands and Slovenia.

During the searches, a large number of documents, electronic devices and evidence were seized, as well as 31 500 euro in cash and cryptocurrency worth about 40 000 euro.

Several bank accounts were frozen, with at least 88 000 euro seized so far, EPPO said.

At issue is a suspected criminal scheme whereby companies, based in several EU member states, fraudulently apply reduced VAT to the sale of second-hand mobile phones imported from the US and other non-EU countries, in order to illicitly increase their profits.

EPPO said that ordinarily, when selling second-hand goods bought from private persons in the EU, or from sellers who have already paid VAT in full for such items, the reseller may apply the so-called “margin taxation” scheme, under the conditions set out in the applicable law.

In such cases, the reseller only has to pay VAT on the profit margin they make (the difference between the price paid for the item and the price for which it is sold), and not on the full sale price of the item.

“However, it is suspected that the companies under investigation applied this provision unlawfully, charging reduced VAT when the full rate was due. The suspected fraud also allowed mobile phones to be sold at a lower market price, thus causing unfair competition,” the statement said.

According to the investigation, between 2019 and 2022, four suspects worked together to defraud Bulgarian, German and Slovenian tax authorities of the VAT due on used smartphones imported from the US and other countries, by setting up a chain of companies engaged in a seemingly legitimate intra-community delivery of goods, in triangular transactions exempt of VAT until the final destination.

“It is understood that they took advantage of the fact that several national authorities were involved along the chain of transactions, to knowingly dissimulate the eventual switch to margin taxation – despite knowing that the requirements for the application of this taxation were clearly not met.”

The companies involved in the suspected fraud are located in Bulgaria, Germany and Slovenia, and are managed by the four individuals under investigation.

The company in Slovenia bought the smartphones from companies in Hong Kong, the UAE and the US, and then sold them to the company in Bulgaria.

The goods were then sold to the company under investigation in Germany at a VAT margin rate. The same rate was applied when the goods were sold to final customers in Italy, Finland, Poland and Sweden.

The parties under investigation are suspected of having defrauded the payment of VAT in Bulgaria, Germany and Slovenia, with an estimated damage of at least 19 million euro.

“It is understood that some of the illicit profits may have been concealed in bank accounts and assets in other member states,” the EPPO statement said.