Value-added tax greetings from China - Is third-country tax fraud finally being stamped out?

06.06.2017 08:02 Uhr PSI
Value-added tax greetings from China - Is third-country tax fraud finally being stamped out? | Value-added tax greetings from China - Is third-country tax fraud finally being stamped out?

Value-added tax greetings from China - Is third-country tax fraud finally being stamped out?

There’s something afoot in the EU. Third-country providers are busily deploying online sales platforms to siphon off sales. Without tax ID – and without paying the required value-added taxes, of course. They’re causing serious damage no just to the tax authorities but also to intra-European trading. Now, following years of lethargy, the EU and tax authorities are finally making a move.

In the wake of Donald Trump’s political antics, free-trade sentiments from China are increasingly animating the headlines in the business press. The Middle Kingdom is sensing an opportunity to ascent to become the preeminent nation leading the free-trading West, which just shed the US. Free trade and environmental protection – those are the two powerful buzzwords the aspiring leaders from Asia are propagating with fervour.

Is the New Silk Road a one-way street for trade?

At the same time, the “world’s workbench” is eagerly enlisting support for its giant project: the New Silk Road. The Chinese will be pumping $900 million into their new, once-in-a-century project, with which they aim to conquer and dominate world trade.

International criticism has zeroed in on the suspicion that the New Silk Road will function as a one-way street. The gigantic trade route, it is said, has been conceived and designed, and is being implemented, primarily to move exports. Everyone, including the promotional products industry, knows how this trading game really works.

Thus far, the level of (disruptive) traffic of import goods moving the other way hasn’t come close to the export activities of the Asians. After all, they’d really prefer to keep production at home. It’s the same old song and dance generations of Western politicians have performed over and over again. With scant success, as we all know. The prospects of future political efforts to generate more two-way traffic, i.e. a genuine exchange of goods, look better.

Combat obvious tax fraud?

Also promising is the authorities’ fight on another trade route, which is slowly gaining momentum. While it seemed to take forever for the sluggish bureaucratic machine to reach its operating temperature in this case, too, we have to concede that it really is in motion now!

What is this about? Tax fraud that’s as massive as it’s obvious, perpetrated by Chinese companies on online platforms like Amazon or eBay. This undoubtedly frustrates tax authorities while distorting competition and damaging private businesses. There’s plenty to complain about for the promotional products industry, too.

An inconceivably large number of Chinese traders are peddling promotional items for agreeable net prices. The secret behind their irresistible pricing policy is the value-added tax they save. These busy sellers are happily kicking back the 19 per cent VAT surcharge to themselves and to their customers, making for a strong impulse to click “Buy” – because price is king, especially on the Web. The fact that this is strictly illegal at the same time matters to these smiling third-party sellers about as much as a sack of potatoes falling over somewhere in Germany.

Honey, I shrunk the value of goods!

De facto, traders selling third-country goods to Germany commit a crime if they fail to declare import VAT on an invoice and fail to pay regular taxes to the tax office.
Of course said online providers love to take advantage of the rule that exempts shipments valued at less than €22 from taxes altogether. That’s why they’re so keen on shrinking the value of goods down to the appropriate level.
Plus, the addresses listed by Chinese online providers – seen when clicking on the respective websites’ legal notices – are usually pure fantasy. This number is unobtainable. Tax ID? Almost as rare as a Blue Mauritius. Often one and the same provider is behind a number of different seller accounts. Poor prospects for tax investigators whose job it is to enforce the law permanently and across the board: damages in the form of lost tax revenues incurred by the German tax office alone reach multiple billions of euros year after year.

European promotional products industry loses millions

Insiders estimate sales lost by the European promotional products industry to be in the tens of millions annually. The promotional products industry has been demanding stricter enforcement actions by the tax authorities for a long time already.

But this is no trivial task for these agencies, considering how understaffed they are. In Germany, the tax office in Berlin-Neukölln is responsible for China-based providers. Given the billions of euros in damages, however, something is finally being done about this unfortunate matter.

In May, for instance, a group of federal- and state-level German experts met to discuss the plugging of tax loopholes on the Web. The European Commission generally favours reforming the VAT laws governing online trading by making the tax exemption for lower-value goods a thing of the past.

Amazon raids

In addition, authorities conducted raids last year of several Amazon fulfilment centres and the company’s Germany headquarters in Munich. The retail giant itself has not been accused of any wrongdoing yet. But government agencies are considering prosecuting the local operators of the digital sales platforms in place of the real perpetrators.

Which isn’t all that far-fetched. Amazon, after all, acts as fulfilment partner for its sellers, takes care of warehousing and delivering the goods, and handles payments. Sellers are only supposed to pay VAT themselves, nothing else. It’s hardly surprising, then, that experts are getting a whiff of aiding and abetting tax evaders.

There is some evidence that the platform operators will in the foreseeable future be treated as taxpayers under tax law and required to directly deduct the VAT due from the invoice. This is no problem from a technical perspective and would be fulfilment in the truest sense. Tax fairness and a level playing field would finally be restored.

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