Traditional problems with the evasion and siphoning of value added tax

In the tax practice, the cases with avoiding and transferring taxes are quite common, which causes a lot of problems.

Avoiding a tax is an action (or inaction) from the payer, orientated towards evasion (or usage) of specific facts and situations. This is usually done in order with avoiding the payment, or paying much more small amounts of the legally owed taxes. This is the reason why avoiding paying a tax leads to decreasing the incomes in the budget.[1] The schemes for siphoning the Added Value Tax are different, but still could be separated in two basic groups.

In the first type, object of buying and selling are goods and services, with highly increased price. This is achieved by buying and selling the good many times between related firms, registered in the tax departments in the entire country. In many of the cases, there isn`t a bought or sold good at all, but just printed invoices. The cost of the good or the service, object of the deal, is increased several times somewhere in the beginning of this chain. The firm, that increases the cost, calculates the value added tax, but doesn`t deposit it in the budget. After several times of buying and selling a particular good, a firm appears that exports the good (in most of the cases this export is fictional), and then requires recovering the tax credit.

The second type of schemes is related to real goods, with real producers and exporters. The goods are mostly agricultural, and begin they way from entities, which are not registered in the Law on VAT, and so on they don`t calculate and pay taxes over the goods. But their clients usually are registered on the Law on VAT, and are obligated to calculate and pay taxes, without having a tax credit for discount.[3] This way, the temptation to avoid the tax, even though it had been calculated, is great. They buy the good with a tax invoice, use a tax credit, and after that they sell that good, they hide the turnovers, in order not to pay the taxes. This way, they harm the national budget twice. First, they hide their turnover and pay no profit tax in the end of the year; and second—they siphon VAT from the system. After the good is being transferred among a few buyers, it reaches an exporter, that realizes a real export, after he had accumulated huge amounts of the good, and submits an application for tax credit recovery. In the investigation of such schemes, it`s difficult to determine the real organizer, and if the end exporter is acting on his good will, or he is a conscious participant in the chain of siphoning.

Usually, a scheme for VAT siphoning is impossible to work without the so called phantom-firms. These firms have no legal or tax registration, or haven`t been registered in the Law on Value Added Tax, but still print tax invoices. [3] As a rule, these firms have no real assets, and it`s impossible for the tax entities to collect anything from them. Fake tax invoices are constantly printed under the name of these phantom-firms. In Bulgaria, it`s hard to determine the real damages from the illegal siphoning of finances from the national budget under the form of tax credit. This is due to the fact that few of these legal violations could be ascertained. The damages to the state in cases like these are not small.

It also impossible to determine the annual damages to the state from income evasion of firms, subjects to Value Added Taxation. The amount of these damages is also not so small. In Bulgaria, the VAT over about 25 % of the real sales is being evaded every year.

The reasons for these violations, which reflect significantly over the national budget, could be classified by different points of view. But it could be strongly concluded, that these violations are done by two basic facts. The first fact is related to the desire of the businessmen (especially in these days) to gain as much money as they could and to gain it fast. The second fact is related to the real possibility to do this. Removing this possibility is not just desirable, but really plausible.

The schemes become realizable when there is tax administration staff involved in them. This is the reason why the staff selection and the morality of the staff are crucial in that process. By this mean, the principles, regulated in the Tax Procedure Code, are the ones, which the tax staff should follow in the determination and collection of tax claims.[2]

Basic and unconditional principle in the tax administration`s work is the lawfulness . According to ar.5, when applying their rights and obligations, the tax administration entities must follow the Constitution, the Laws, and the International agreements, which Republic of Bulgaria is part of. [2]

Other important principle is the impartiality in the work. The staff is obligated to objectively determine all of the facts and situations, regarding the rights, the obligations, and the responsibilities of the tax subjects. Meanwhile, when following this principle, the tax entities could apply some specific rules, but they must not become overpowering, and to divert from the basic legal frames.

The independency as a principle, is crucial for providing lawfulness and impartiality in the work of the tax administration, as well as for preventing bureaucracy and corruption. On the other hand, the application of this principle must be strongly related to laws observation. An independency, lead by breaking the law, could be quite dangerous.

The conscientiousness is a constant and important principle in the behavior of the participants in tax procedures. This rule, even though it is part from the moral law, is supported with the certain obligation for keeping the determined deadlines, when executing the actions of tax procedures.

The tax administration staff is obligated to keep in secret and not to use the data and the facts, defined as an official secret , for other types of actions. This is a specific type of individual data, concerning the tax subjects, such as: sources, type and quantity of the profit, the income and the expenses; the amount of the determined and paid taxes; the used tax preferences and etc. According to the last changes in the Tax procedure codex, the court can order the tax administration to show information from the tax files of physical and legal entities to the prosecutor, the investigator and the entities from the Ministry of Internal affairs, in case when there`s an information about committed crimes. [2] The risk here is that the information about the investigated entity could reach the criminal organizations, due to the ‘carelessness’. There is no sure way for the information to remain protected, after it had been printed or copied for the needs of the police department. There is no guarantee that some staff members aren`t bribed, even though they were carefully selected. This leads to the conclusion that the access to the tax declarations must not be clarified as a right, but also as an obligation. There also has to be added a mechanism for holding the people, who use this information, in charge, if they try to use it for different activities. So far, there isn`t such a mechanism.

Positive aspect of the changes in the Tax procedure codes, which additionally motivates the tax staff, is the increased amount of material stimulation. This allows the staff from the Tax Policy department to receive a part of the incomes from discovered violations. [2]