What is the linkage of Customer Due Diligence (CDD) and Value Added Tax (VAT)?

In this world where margins are shrinking & financial fraud are taking innovative shape, if organisation/ individual choose NOT to deposit the VAT collected from the clients, to the Federal (Tax) Authority, will it not tantamount to fraud?

Just to take this a step forward, who is responsible for the same, is this going to pin-point purchaser (other party) in the transaction, for understanding the same let's get to the topic.

In the international tax regime, there is something called 'Missing trader fraud', where fraud is committed when goods are sold at a price that include the VAT but the seller never pays the VAT he received from the sale, to the Tax Authority. Complex corporate structure & networks of companies are often used to repeatedly sell the same goods and disguise the fraud.

This is not a new phenomenon, this is persistent in the international market & enough of guidance provided by Internationally Tax Authorities on the subject.

The answer is effective

"Customer Due Diligence (CDD)"

What is CDD?

CDD information comprises the facts about a customer that enable an organisation to assess the extent to which the customer exposes it to a range of risks. These risks include fraud (Including Tax Fraud), money laundering, terrorist financing, credit default etc.

CDD should comprise of:

1. Due Diligence on parties and products in a transaction - does it makes perfect sense.

2. Validation of available documentation, due diligence on companies and retention of documents used for assessment.

3. Organisation / Individual, needs to review the tax procedures to validate if they are fit & capable to prevent /identify VAT fraud. Where required it needs to enlist expert help to ensure this challenge is met properly.

4. Effective Training is done for the staff in the organisation as prevention strategy.

Execution is one part; however effective documentation is the key.

To understand the cost of non-compliance, just identify top 5 traders & amount of VAT claimed by you. Imagine one of the traders is classified under 'missing trader fraud', this can be the loss which you need to absorbed immediately. Just to remind you this does not include penalties & prosecution which may be imposed, if you were found guilty in the process.

Is your organisation capable to handle this or had stated thinking on these lines. Let's not be complacent to the topic in discussion, just initiate the assessment, especially with one time traders and supply chain participants.

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