Value-added tax evasion and model approaches for its avoidance

Tax-policy conference on 29 September 2003

On Monday, 29 September 2003, a joint conference of the Ifo Institute and the Finance Ministry of Rheinland-Pfalz took place at the Ifo Institute on value-added tax evasion and model approaches for its avoidance. The conference was opened by Prof. Hans-Werner Sinn, President of the Ifo Institute, and Dr. Günther Ackermann, Chief Editor of the journal Der Betrieb.

In his introductory presentation the Minister of Finance of Rheinland-Pfalz, Gernot Mittler, stressed that the widespread opinion at the introduction of the current value-added tax system that the new system was simple, practical and self-regulating has proved to be wrong, unfortunately. The system is, in fact, extremely fraud prone. A decoupling of the value-added tax revenue from economic growth has also been observed, with the result of regressive tax revenues in Germany since 2001. In light of the importance of the value-added tax as a main source of revenue of the German state, this is alarming. Instead of the subsequent adjustments of the system, the inherent sources of fraud must be eliminated via definite system changes (in particular, stopping the prior-tax payment flows in the enterprise segment).

Video: Gernot Mittler, Minister of Finance of Rheinland-Pfalz, 29 min.

The value-added tax is the Achilles heel of state revenue in Europe
Gernot Mittler, in: ifo Schnelldienst 2/2004

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(PDF, German, 662 KB)

Attorney Alfons Kühn, Head of the Tax Division at DIHK, stressed the necessity of stemming fraud via system changes. In the interest of honest entrepreneurs, the exceptions within the framework of Art. 13b UStG should not be further extended and made to be standard procedure, but instead the so-called Mittler Model should be introduced. Its advantages would offset the additional obligations for enterprises and would hence receive their acceptance.

Video: Alfons Kühn, Head of the Tax Division at DIHK, 34 min.

More fraud-resistant sales tax - an obligation for business and government finance
Alfons Kühn, in: ifo Schnelldienst 2/2004

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(PDF, German, 768 KB)

In the opinion of the Bavarian Minister of Finance, Prof. Kurt Faltlhauser, the pressure on the Federal Government and the European Commission must be increased in order to advance the necessary modifications and to avoid tax shortfalls in future. Although the previous measures have shown some success, they are still quite insufficient.

Video: Prof. Dr. Kurt Faltlhauser, Bavarian Minister of Finance, 35 min.

Methods for combating VAT fraud - limitations and risks of the current VAT system
Kurt Faltlhauser, in: ifo Schnelldienst 2/2004

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(PDF, German, 545 KB)

Dr. Wilfried Wagner, Head Judge at the BFH in Munich, explains the contribution that financial jurisprudence can make to the development of the value-added tax legislation. The shift of the tax debt to the recipient of services in order to combat value-added tax fraud only makes sense in exceptional cases but not as a general rule. In his opinion the taxation on transactions is a more suitable solution to the problem.

Video: Dr. Wilfried Wagner, Head Judge at the BFH in Munich , 27 min.

The value-added tax system in financial jurisprudence and from the viewpoint of legal protection
Wilfried Wagner, in: ifo Schnelldienst 2/2004

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(PDF, German, 704 KB)

Prof. Dr. Markus Achatz, Linz University, reported on the experiences gained in Austria in reducing value-added tax fraud. The transition of tax liability to the recipient of services introduced on 1 October 2002 for the construction sector seems to have had a positive influence on VAT revenue. Gradual extension to other sectors is conceivable.

Video: Prof. Dr. Markus Achatz, Linz University, 23 min.

Scope for a reform from a European legal standpoint - case report from Austria
von Markus Achatz, in: ifo Schnelldienst 2/2004

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(PDF, German, 687 KB)

Prof. Sinn presented an Ifo proposal for modifying the current VAT system in which a prior tax deduction is only possible after remitting VAT to the tax authorities. This could be achieved, for example, via a system of intervening trust accounts of the vendor into which the customer pays the gross price. From this account the value-added tax would be paid directly to the responsible revenue office and the net invoice amount would be transferred to the vendor. The special advantages of this approach would be both a complete elimination of tax shortfalls via an elimination of carrousel transactions as well as an elimination of tax shortfalls from insolvency.

Video: Prof. Dr. Dr. h.c. Hans-Werner Sinn, President of the Ifo Institute, 16 min.

The Ifo model for reducing value-added tax fraud: First pay, then reimburse
Hans-Werner Sinn, Rüdiger Parsche und Andrea Gebauer, in: ifo Schnelldienst 2/2004

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(PDF, German, 771 KB)

Dr. Barbara Hendricks, Parliamentary State Secretary at the Federal Ministry of Finance, introduced into the discussion a change from the current taxation on delivery to a taxation on transaction in combination with cross-checking.

Video: Dr. Barbara Hendricks, Parliamentary State Secretary at the Federal Ministry of Finance, 11 min.

Taxation on transaction with a cross-check procedure
Barbara Hendricks, in: ifo Schnelldienst 2/2004

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(PDF, German, 475 KB)

Christine Scheel, Chairperson of the Finance Committee of the German Bundestag, called for a clear and simple system of taxation and appealed to the Länder to collaborate. It is particularly important that changes be implemented fast.

Video: Christine Scheel, Chairperson of the Finance Committee of the German Bundestag, 12 min.

Value-added tax evasion and model approaches for prevention
Christine Scheel, in: ifo Schnelldienst 2/2004

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(PDF, German, 641 KB)

Dieter Ondracek, Chairperson of the DSTG, the union of the German finance administration, emphasised that a completely fraud-proof VAT system is not possible and that currently there is a conscious emphasis on the weaknesses of the existing system. The Mittler Model is indeed a very good approach, but because of the necessary approval of the European Commission, he doubts whether it can be implemented in the near term.

Video: Dieter Ondracek, Chairperson of the DSTG, 12 min.

A fraud-proof VAT system is not possible
Dieter Ondracek, in: ifo Schnelldienst 2/2004

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(PDF, German, 663 KB)

Alexander Wiedow (European Commission, General Directorate for Taxation and the Customs Union) has pointed out that already before the year 2000 the European Commission persistently warned against the danger of revenue shortages and called for improved co-operation. Before a general change is made, all possibilities to make the current system more fraud-proof should be exhausted. The official tax procedures should be streamlined and stimuli created for the collaboration of enterprises; implemented measures should not only be applied generally but specifically for potential “groups of culprits”.

Video: Alexander Wiedow, General Directorate for Taxation and the Customs Union, 17 min.

Press Echo

30.09.2003	Ministerium prüft neues Modell gegen Umsatzsteuerbetrug (Financial Times Deutschland)
30.09.2003	Umsatzsteuer ist Eichels Achilles-Ferse (Handelsblatt)
30.09.2003	17,6 Milliarden Euro Mehrwertsteuer hinterzogen (Süddeutsche Zeitung)

Project

Development of Recent VAT Revenues and Anticipated Fiscal Effects of Reform Proposals for VAT System

ifo Schnelldienst 2/2004

Value-added tax evasion and model approaches for its avoidance - Tax-policy conference on 29 September 2003