Anti-Fraud Measures in the Czech Republic: Conflict and Controversy

Charles Riordan
August 1, 2016

This blog was last updated on July 30, 2021

The principle of open borders between European Member States, leading to a single, united economy, is at the very heart of the European Single Market, including the Czech Republic, which is a member. But the lack of cross-border trade barriers has hidden drawbacks. Since its inception, the Single Market has been vulnerable to a type of fraud that exploits the reduced oversight inherent in intra-Community trade – and this so-called “missing trader” or “carousel” fraud, which targets value-added tax (VAT), is estimated to cost Member States roughly 50 billion Euros in revenue each year. Finance Minister Andrej Babiš of the Czech Republic has recently embarked on a targeted campaign to eliminate VAT fraud in his country. To this end, the Czech Republic has overhauled its national VAT laws, and introduced stricter reporting requirements for domestic suppliers. But the Czech campaign has not stopped at the country’s borders; instead, Minister Babiš has challenged the European Council to develop and test a controversial new means of collecting VAT, which would represent a major derogation from EU law.

“Missing Trader” Fraud and Cross-Border Trade

In its simplest form, “missing trader” fraud occurs when a business collects VAT on a supply of goods, and then ‘disappears’ without paying the VAT to the tax authorities. The legal framework for the intra-Community acquisition of goods facilitates this type of fraud. Under Article 200 of Council Directive 2006/112/EC (the “EU VAT Directive”), a business making an intra-Community acquisition of goods is liable for VAT in the Member State of acquisition. This means that VAT on intra-Community acquisitions is self-assessed via a VAT return, rather than paid to the supplier. Unfortunately, this provision makes it easy for “missing traders” to withhold the VAT that should be self-assessed on the acquisition, in addition to the VAT collected on a subsequent sale of the goods. More sophisticated variants of this fraud have also been developed and have resulted in even greater losses for governments.

The Czech Republic’s Stance

The Czech Republic has introduced a number of measures to combat “missing trader” fraud. A new reporting form called the “VAT Control Statement,” which is used to identify suspicious transactions, was introduced by the Ministry of Finance in January of 2016. More recently, Parliament approved an amendment to the national VAT Act directed against “missing traders” with no physical presence in the country. But the most ambitious measure by far is a proposal to institute a generalized “reverse charge mechanism” (RCM) program within the Czech Republic. The RCM would shift liability from the supplier to the customer at all levels of the supply chain, and remittance of VAT would only occur upon a sale to a final consumer (i.e., a non-taxable person). Under this system, suppliers would not collect VAT on sales within the supply chain, and “missing trader” fraud would, in theory, be eliminated. The RCM proposal, however, is completely inconsistent with the EU VAT Directive, and cannot be implemented without the unanimous consent of the other Member States.

Conflict with the European Council

To win support for the RCM, Minister Babiš has engaged in fierce negotiations with the European Council, at one point threatening to withhold his support for a package of high-profile corporate tax avoidance measures. This resulted in a written commitment by the European Commission to present draft RCM legislation at a future Council meeting. What this means for a future RCM program is unclear, as serious opposition still exists among the other Member States. But Minister Babiš has clearly succeeded in pushing the issue to the top of the EU’s agenda on VAT.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Charles Riordan

Charles Riordan is a member of the Regulatory Analysis team at Sovos specializing in international taxation, with a focus on Value Added Tax systems in the European Union. Charles received his J.D. from Boston College Law School in 2013 and is an active member of the Massachusetts Bar.
Share this post

Hungary Supplemental Insurance Premium Tax
EMEA IPT
July 11, 2022
Extra Profit Tax: An Introduction to Supplemental IPT in Hungary

This blog was last updated on October 28, 2024 Update 7 October 2024 by Edit Buliczka Hungarian Tax Office Updates IPT Declaration Form for 2023 The procedure necessary to correct an underdeclared premium figure in Hungary can be complicated. The complexity of a correction for return form 2320 has become even more challenging. Following a […]

2025 bond project
North America Tax Information Reporting
November 4, 2024
The Insurer’s Guide to the 2025 Bond Project

This blog was last updated on November 4, 2024 The regulatory landscape for insurance companies is undergoing significant changes with the Principles-Based Bond Project which is set to take effect on January 1, 2025. These changes, driven by the National Association of Insurance Commissioners (NAIC), will impact how insurance companies classify and value bond investments, […]

E-Invoicing Compliance EMEA VAT & Fiscal Reporting
November 1, 2024
New ViDA Proposal Set for ECOFIN Approval

This blog was last updated on November 1, 2024 The Council of the European Union has released a new proposal regarding the VAT in the Digital Age (ViDA) reform. The proposal aims to modernise and streamline VAT systems across the EU, notably e-invoicing and Continuous Transaction Controls (CTC). Members States will review it on 5 […]

what is peppol
E-Invoicing Compliance North America
October 29, 2024
What it is PEPPOL?

This blog was last updated on October 29, 2024 Peppol E-invoicing explained: What it is and how it works The global adoption of electronic invoicing is accelerating. Governments worldwide are pushing to adopt e-invoicing to digitally transform their national systems and, often, to close the VAT gap. While many countries have introduced their own e-invoicing […]

remote sellers sales tax
North America Sales & Use Tax
October 28, 2024
Will Congress Act to Simplify Remote Seller Sales Tax Collection

This blog was last updated on October 29, 2024 When the United States Supreme Court ruled in 2018, that South Dakota’s law imposing sales tax collection requirements on sellers without in-state physical presence was constitutional, it did not grant states free reign. States are still responsible for ensuring that their sales tax requirements are manageable, […]

dtc shipping laws for craft spirits
North America ShipCompliant
October 23, 2024
Why It’s Time to Reform DtC Shipping Laws for Craft Spirits

This blog was last updated on October 23, 2024 While wine lovers have enjoyed the convenience of direct-to-consumer (DtC) shipping for nearly two decades, the craft spirits market is still not afforded the same access. Outdated and restrictive spirits shipping laws have kept the spirits industry from fully leveraging the benefits of DtC shipping, leaving […]