Introduction of the Quick Reaction Mechanism: Solution to Tax Evasion on Fuel Market in the Czech Republic or Belief only? Bc. Michal Semerád, Ing. Pavel Semerád, Mgr. Petr Koráb Department of Accounting and Taxes, Department of Finance Mendel University in Brno xsemera4@node.mendelu.cz, pavel.semerad@mendelu.cz, petr.korab@mendelu.cz Abstract The present paper focuses on Council Directive 2013/42/EU which enables the European Union member states to be flexible in proposing legislation on value-added tax evasion reduction. Introduction of Quick Reaction Mechanism (QRM) allows adoption of measures without the consensus of other EU member states. In this paper we aim to evaluate the measures in QRM as the solution for value-added tax on fuels evasion reduction, regarding the Czech Republic. We also estimate the reaction to GRM from the side of firms conducting tax evasion. We conclude that QRM may help reduce carousel frauds. In other areas, such as frauds at petrol stations and manipulation with tax on imported oils, the mechanism may not work Key Words Fuels, Missing Trader, Quick Reaction Mechanism, Tax Evasion, Value Added Tax Introduction Tax evasion is an important problem. European Comission (2013) estimate the loss from tax evasion at 193 bill. EUR. Tax evasion and related frauds work using similar schedules (F. van Brederode, 2008). They are based on tax exemptions in intracommunitary trades. If goods are delivered to a different state than the country of the origin of goods, the taxpayer can use a law reduction of tax. On the other hand, a subject accepting the subject of taxation has a duty of paying the tax. He nevertheless requests for tax reduction and his tax duty is zero. Because he provides taxable supply, he has a duty of paying the input tax, as this trade is not a subject of VAT tax. If we set a hypothesis, that the tax will be a subject of tax evasion, then the firm will go bankrupt. There ais no money to pay the tax in the case of bankruptcy (Mattauschová, 2012).
This is an example of carousel fraud. The result is a non-contact company without own assets, financial resources and owners exploited for this kind of fraud. Mattauschová (2012) argues that these people may be homeless people, and ill and disabled people. It should be highlighted that growing of so called Missing Traders is a problem of all member states. Each member state struggles with tax evasion on a different commodity. This problem has been neglected for a long time, and member states were blamed for being unable to collect taxes (Diviš, 2013). Rules for tax administration were set in several directives. None, however, allowed for a flexible reaction to the frauds. Recently, because of the problems with tax evasion Quick Reaction Mechanism was introduced through Directive 2013/42/EU. A Member State may, in cases of imperative urgency and in accordance with paragraphs 2 and 3, designate the recipient as the person liable to pay VAT on specific supplies of goods and services by derogation from Article 193 as a Quick Reaction Mechanism ( QRM ) special measure to combat sudden and massive fraud liable to lead to considerable and irreparable financial losses. In the Czech Republic the VAT tax frauds on fuel are estimated to approx 4-8 bill CZK However, since the methodology of calculation is not made public, it is possible to argue that the figures may be far higher. Fuels may be commodities for which the Czech Republic unsuccessfully demanded introducing reverse charge mechanism. It may be now possible to demand an exception through QRM. Objectives and methodology In this paper we aim to evaluate the measures in QRM as the solution for value-added tax on fuels evasion reduction, regarding the Czech Republic. We also estimate the reaction to GRM from the side of firms conducting tax evasion. As the methods of analysis we used systematic review of literature related to the topic of tax evasion. Results and Discussion Czech Republic struggles with tax evasion for a long time. Shifting between frauds on value-added tax and excise duty on mineral oils may be identified. In the beginning 1990s the problems were mainly connected with adding light fuels into the petrol and oil. The overall loss has not yet been estimated. After the Czech Republic joined European Union in 2004, tax evasion was mostly detected in value-added tax.
The largest will to reduce tax evasion was remarkable after unsuccessful request for reverse charge mechanism. In 2011 the Act on value-added tax defined conditions under which passing the responsibility for collected tax to the receiver of taxable supply was possible. What would the introduction of reverse charge mechanism mean in practise? Goods from refineries that are sold outside the petrol station would be sold without VAT (tax base TB). The tax would be collected during the final sales to customers. In this way, tax evasion from fuel trades could not occur. Refinary Petrol station TB TB TB TB Fuel trader A Fuel trader B Fuel trader C TB + VAT 1: Way of selling fuels using reverse charge mechanism Source: Authors work The weak point here are petrol stations. They usually do not buy fuels from a foreign trader. This means that a potential fraud does not reach the entire volume of VAT, but only its minimum size. If the margin of petrol stations is 2 CZK, then the VAT is 0.42 CZK (outputinput). To make a fraud, the seller should have only limited rent contract. If a petrol station sold 200,000 litre of petrol per month the tax fraud would be 84, 000 CZK. Is it really huge tax fraud? Since there are competitors, the margin is not always 2 CZK. Paying by card also mean additional costs. Far more likely appears to be come-back to excise tax duty evasion. General directory of customs duty monitors frauds, such as uncollected tax on imported oil from Poland which are masked as fuels. These oils are originally for made for production of heat and during construction of buildings.
1: Example of detected frauds on excise duty on mineral oils Source: Danielová, 2012 The problem of illegal mixing may be defined as a process of deliberate modification of chemical composition and physicotechnical properties of fuel which does not comply with applicable legal and technical standards. This is done without knowledge and approval of authorized government departments and government institutions with the intention of trading and selling to the ultimate customer. The aim is collecting taxes from the consumer but not declaring them and paying them. Motor vehicle fuel is blended with chemical substances, compounds and mixtures that have similar technical characteristics but a lower rate of excise tax or are exempt from taxation entirely or partially (these components are destined for off - road use or for disposal). The fuel blend can endanger life and health of consumers, cause property damage and environmental pollution (Semerád, 2012). The risk here will be high, because oils are not transported in cisterns but in trucks (Danielová, 2012). Nobody really knows where the oil ends. It is not only a problem of Europe, but also of other states. If the legislation on VAT is to be strengthened, excise duty will probably a subject of tax evasion. The European Commission is in place to harmonise excise duty in all EU member states. Conclusion Every measure to eliminate carousel frauds is welcome. QRM my help EU member states to react to tax evasion. The Czech Republic should request for tax exception on reverse charge mechanism on fuels which are since 1990s a subject of excise duty evasion. It is likely that
several firms will evade this kind of tax instead. Even in this case the loss may be huge, as the tax on oil is 10.95 CZK per litre. The result may be misleading of consumers, damage on cars and undelivered oil of good quality. Another question which arises is whether the Czech Republic will not have problems even with the quality of fuels. Acknowledgements The paper was funded by an Internal Grant Agency IGA, Grant Project No. 8/2013 called Economic Crime in the area of fuel sale : from point of view indirect taxes at the Faculty of Business and Economics, Mendel University in Brno. References Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. Council Directive 2013/42/EU of 22 July 2013 amending Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as regards a Quick Reaction Mechanism against VAT fraud. DANIELOVÁ, J., 2012: Daňové úniky a spotřební daně. PETROLsummit 12. Prague. DIVIŠ, M., 2013: K ručení za DPH možná nikdy v praxi nedojde. [cit. 2013-10-12]. Cited from http://www.euractiv.cz/print-version/interview/martin-divis-k-ruceni-za-dph-moznanikdy-v-praxi-nedojde-010666 European Commission, 2013: Fight against fraud: new study confirms billions lost in VAT Gap. [cit. 2013-10-13]. Cited from http://europa.eu/rapid/press-release_ip-13-844_en.htm F. van BREDERODE, R., 2008: Third-Party Risks and Liabilities in Case of VAT Fraud in the EU. International Tax Journal. Vol. 34. Issue 1. pp. 31-38. MATTAUSCHOVÁ, B., 2012: Princip daňových podvodů s DPH při dovozech pohonných hmot, a výsledný vliv na výběr daní, možnosti eliminace daňových úniků. PETROLsummit 12. Prague. SEMERÁD, P., 2013: Value added tax evasion and excise duty fraud on fuel market in the Czech Republic. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis. sv. LX, č. No. 2, s. 335--340. ISSN 1211-8516.