Recent decades have seen an increase in tax frauds throughout the European Union, brought about by globalization as well as an ever-growing interconnection of national economies.

With the provision of the abolition of internal EU frontiers, since 1993, a single market network has been created to implement trade among Member States, by the setting up of an internal area and a unique external border.

Against this background, it should be underlined the importance of VAT (Value-added-tax), a tax of EU origin adopted in the Seventies and implemented in the Member States with a view to harmonizing national legislation, in favor of the development of economic activities throughout the European Union. It consists of a sales tax – set up at a European level – that should be paid by final consumers of goods or services provided within the EU territory.

Although globalization, in general, and the creation of a single market, more specifically, have had a favorable effect, consisted in an intensification of trade, at one, they have led an increment of cross-border fraud schemes, that has a significant impact on European Union’s financial interests.

With a view to understanding the value of this matter, by drawing attention on tax evasion, it should be noted that the most common form of tax fraud scheme is the so-called “carousel fraud”, also termed MTIC (Missing Trader Intra-Community Fraud), mostly connected to revenues arising from VAT and incorrect or incomplete VAT-related documents. It includes several subjectively or objectively non-existent transactions, geared to dissimulate the actual source of the sums of money.

The smoothest pattern1 works when a seller Alfa, from Member State 1, makes advantage of the specific provision that allows cross-border transactions from one Member State to another to be taxed at the rate of 0%.

  • Alfa exports the good to the company Beta, from Member State 2, named “the missing trader”.
  • The missing trader Beta exploits the zero-rating regime, and in parallel collects VAT on its re-sell: it pays no VAT, but formally sells the good underpriced at VAT-inclusive price to a buffer company, Gamma, from Member State 2.
  • Then, it disappears without transferring the VAT to the government.
  • Gamma is interposed between the missing trader and the final transferee; it pays VAT, and it sells the good to the “broker” company Delta, charging the tax.
  • Delta pays VAT on purchase, but buys the good at an underpriced tariff. It benefits from the fraud mechanism in so far as it is entitled to claim an input credit and it is in a position to re-sell at very competitive prices.

At that point, Member State 2 will suffer the loss.

In the most sophisticated schemes, there are usually several buffer companies, and in fact some of them may even be actual legal entities in good faith, totally unaware of the fraud scheme in which they have unwillingly token part.

By carousel fraud patterns, the involved companies have a double advantage: first of all, they charge VAT without remitting it to the competent authority; secondly, as a consequence of the former profit, they exploit the competitive price to obtain a comparative edge.

On such grounds and considering the increasing reach of the issue, the EU has recently been facing the rising of cross-border tax fraudulent schemes by adopting corrective measures: therefore, on July 5th 2017, the European Parliament and the Council of the European Union have approved the Directive 2017/1371/EU2 (so called “PIF Directive”) on the fight against fraud to the Union’s financial interests by means of criminal law, establishing minimum rules concerning the definition of criminal offences and sanctions with regard to combatting those illegal activities affecting the Union’s financial interests.

In particular, the EU has tightened sanctions for tax frauds and has introduced a specific provision concerning corporate criminal liability in case of commission of certain serious crimes under the abovementioned mechanisms.

Alongside the legislative reform, EU (specifically with regard to EPPO – European Public Prosecutor’s Office) as well as other organizations (such as NTO – Network of Tax Organizations) have been implementing activities to monitor and control such transactions.

For instance, EU with the cooperation of Member States has been providing for tools and measures, aimed at reducing the number of VAT frauds by allowing national authorities to be informed on cross-border transactions and involved subjects.

Since the approval of the EU Directive, the Member States have been amending national legislations, with the purpose to be compliant with the EU regulatory framework.

By way of an example, during the last years, Italy has approved three different acts, in order to enforce EU standards. With Legislative Decree n. 156/2022, on October 4th 2022, the Italian Government has concluded the harmonization process, carried out with the purpose of reducing the trends of cross-border tax frauds.

Given that overview, it should be underlined that there may be implications even in case of involvement of a non-EU company or an EU branch of a non-EU holding company. Therefore, in this sense, even U.S. legal entities and individuals cannot be considered exempted.

More frequently than is commonly assumed, the mentioned corporations (except of the buffer companies in good faith potentially implicated) are members of criminal organizations. It entails that carousel fraud schemes may be used for other purposes, subsequent to tax evasion. Considering that with tax frauds legal entities have the chance to make money off the books, typical scenarios may include several serious crimes (such as money laundering, drug trades or terrorism) that could potentially involve non-EU corporations.

Firstly, primary attention should be paid to European branches of foreign companies, which may be directly involved in so far as they may take part into the carousel scheme: in this scenario, they will be subjected to the EU Member States legislation and jurisdiction.

Furthermore, the risk of committing serious crimes may also affect corporations without branch-offices in the EU, in relation to offences even other than pure tax fraud.

A particularly recurring scheme concerns the participation of non-EU companies, which are used for the specific purpose of transferring amounts of money abroad, in favor of hard-to-find recipients, that are linked (directly or indirectly) to European companies. This ensures the chance to complicate the fraud mechanism by making the sums of money untraceable. In this regard, relations with foreign legal entities are created by the European corporations involved in the fraud in order to meet their own needs and without reflecting the reality of business events.

Therefore, the aforementioned foreign companies are used as a channel to create money stores abroad in correlation with non-existent transactions (i.e., false invoicing) carried out by the EU corporations. In this circumstance as well, EU Member States legislation shall apply.

Overall, given for granted the theoretical interest concerning the U.S. debate on the opportunity to introduce a federal VAT in the United States, non-European companies (included the American ones) may have a practical interest in knowing the potential implications in European tax fraud schemes. As described, the possible cases of liability move on two different tracks, depending on whether the legal entity involved is a European branch of a non-European holding company or a non-European corporation, applied to mask the money transfers.