Carousel fraud is also called “Missing Trader Fraud” which is the theft of Value added Tax(VAT) from the authority conducted by an organized crime gang who tries to exploit the way VAT is treated in multi-jurisdictional trading where the movement of goods between the jurisdiction is VAT-free. (i.e Exports outside the State - Zero Rated )
What is happening actually in the Carousel fraud?
Well! Fraudsters try to charge VAT on the sale of goods, and then instead of paying the output VAT to the government’s collection authority (i.e. Federal Tax Authority – FTA in the UAE), they disappear taking VAT with them and the goods subsequently are sold to another traders followed by multi chain and in the end goods are exported.
Let’s Suppose Company A in UAE buy goods from China for AED 1,000,000 and Treat VAT as RCM. Then company A sells these goods to local company B for AED 1,200,000 plus AED 60,000 VAT. Then Company B sells goods for AED 1,500,000 plus VAT AED 75,000 to local Company C. Company C export the goods from the state and charge no vat as exports are Zero Rated.
In such case the authority cannot identify the absconded party and cannot refuse the claim made from company C.
In the conclusion, here in the Example - Company A take 60,000 VAT and disappears from the scene, and Company B and Company C claim back its VAT that is being paid during the transaction occurred.
As per the chart below, Authority faces AED 45,000 loss in this case.
Note: According to a 2018 EU Parliament study carousel fraud is the most damaging type of cross-border VAT fraud with €50 billion losses on average per year - ref: "VAT Fraud" (PDF). European Parliament TAX3 Committee. October 2018.
Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.
You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax.