Law Commons^™

Vat Triangulation With A Us Middleman Vstr, C-587/10, Richard Thompson Ainsworth

Faculty Scholarship

It is not every day that an American firm finds itself in the middle of an EU VAT controversy that significantly develops the law. However, the September 27, 2012 decision of the European Court of Justice (ECJ) does just that. The case is Vogtländische Straβen-,Tief- und Rohrleitungsbau GmbH Rodewisch (VSTR) v. Finanzamt Plauen.

In November 1998 Atlantic International Trading Company (AIT), an American company established in New York, NY, purchased two stone-crushers from VSTR, a firm established in Germany. AIT quickly re-sold the stone-crushers to an end user established in Finland. The VSTR/AIT contract was “ex works,” that is AIT …

Vat Fraud & Triangulation, Richard Thompson Ainsworth

Faculty Scholarship

Missing trader intra-community (MTIC) fraud has received a lot of domestic enforcement attention. True cross border enforcement (joint or coordinated multi-Member State audit) has been limited. There are signs that this is changing as the Member States become more aggressive in their search for revenue.

Along with this shift in enforcement focus, triangulation analysis has moved from being an interesting aspect of the MTIC fraud structure to the central element in a larger understanding of how a fraudster thinks and how he carries out his fraud. We are coming to understand that triangulations are not only the mechanism of how …

The Tax Expenditure Budget Is A Zombie Accountant, Steven Dean

Faculty Scholarship

Like a student blocking his access to the internet to help him study, governments across the globe rely on commitment devices to generate fiscal discipline. From the collapse of the Congressional Supercommittee in the United States to the near-cataclysmic failure of a mechanism designed to prevent the European Union debt crisis, the evidence suggests that faith in such commitment devices is misplaced. This Article focuses on one such device that stubbornly refuses to stay dead: the tax expenditure budget. Created to guard against abuse by publicizing the costs of tax subsidies then resurrected as a bean counter, the tax expenditure …

Real-Time Collection Of The Value-Added Tax: Some Business And Legal Implications, Richard Thompson Ainsworth, Boryana Madzharova

Faculty Scholarship

Recent estimates of the level of VAT fraud in the EU are commensurate with the EU budget. With the Green paper on the future of VAT, the European Commission stressed the urgency and necessity of comprehensive VAT reforms. This paper analyses the business and legal implications of the recently proposed split-payment mechanism, which, if implemented, would move VAT’s method of collection to real-time. The discussion is positioned in the context of two increasingly visible trends in the EU – the general shift towards greater reliance on indirect taxation and the growing popularity of electronic payment instruments. The potential implementation of …

The Hidden Limits Of The Charitable Deduction: An Introduction To Hypersalience, Lilian Faulhaber

Faculty Scholarship

Behavioral economics introduced the concept of salience to law and economics. In the area of tax policy, salience refers to the prominence of taxes in the minds of taxpayers. This article complicates the literature on salience and taxation by introducing the concept of “hypersalience,” which is in many ways the mirror image of hidden taxation. While a revenue-raising tax provision must be hidden for taxpayers to underestimate their tax bill, a revenue-reducing tax provision – such as a deduction, exclusion, or credit – must be more than fully salient for taxpayers to underestimate their tax bill. In other words, the …

Vat Fraud In The Customer Chain - The German Perfect Storm Cases, Richard Thompson Ainsworth

Faculty Scholarship

German civil and criminal courts have not always agreed over whether to allow a taxpayer to zero-rate intra-Community supplies when the taxpayer making the supply knew (or should have known) that his buyer in the other Member State intended to fraudulently evade VAT as a missing trader. This is no longer the case. Zero-rating of intra-community supplies is now being denied in German civil and criminal courts.

This paper considers how far Germany appears to be extending the law in this area. In 2011 six cases were heard by the Bundesfinanzhof (German Supreme Tax Court) that demonstrate both (a) the …

Medical Devices Excise Tax (Mdet) -- A Market-Specific Vat?, Richard Thompson Ainsworth, Andrew Shact, Gail Wasylyshyn

Faculty Scholarship

VATs flourish in complex, clearly defined markets. New York discovered this when it converted its single-stage retail sales tax on hotel rooms, the Hotel Room Occupancy Tax (HROT), into a multi-stage European-style VAT. The HROT VAT-conversion demonstrates that (a) in a clearly defined market where (b) a single stage tax is imposed on (c) only part of a complex supply chain that (d) losses attributable to supply-chain-fragmentation can be remedied by moving to a multi-stage VAT.

The Medical Devices Excise Tax (MDET) imposes as 2.3% excise tax on the sale by manufacturers, producers or importers of clearly identified medical devises …

Mahagében Kft & Péter Dávid: Re-Directing The Eu Vat's Perfect Storm, Richard Thompson Ainsworth

Faculty Scholarship

On June 21, 2012 the Court of Justice of the European Union (CJEU) rendered judgment on two Hungarian references, Mahagében kft v. Nemzeti Adó-és Vámhivatal Dél-dunántúli Regionális Adó Fölgazgatósága and Péter Dávid v. Nemzeti Adó-és Vámhivatal Dél-dunántúli Regionális Adó Fölgazgatósága (Mahagében/Dávid). The Mahagében/Dávid decisions clarify the CJEU’s earlier holdings in the joined cases of Alex Kittel v. Belgium and Belgium v. Recolta Recycling SPRL (Kittel/Recolta).

Kittel/Recolta is a critically important decision. It is central to the EU’s anti-fraud effort. It is one of three legal imperatives that earlier this year appeared to be coalescing into a Perfect (enforcement) Storm.

After …

A Perfect Storm In The Eu Vat: Kittel, 'R' And Marc, Richard Thompson Ainsworth

Faculty Scholarship

EU VAT authorities are close to turning the tables on missing traders. For many years organized fraudsters have been stealing huge amounts of VAT on the domestic re-sale of exempt cross-border supplies. Losses have been enormous whether the transactions are in goods (notably cell phones and computer chips) or in tradable services (CO2 permits and VoIP). No market has been safe from the fraudsters.

Answers are developing, but these answers may look more like Armageddon than measured enforcement. Solutions are so draconian, and so all-encompassing that very few intra-community traders will feel safe from the gathering storm. The situation is …

Refund Fraud? - Real-Time Solution! Digital Security Borrowed From The Vat (Brazil, Quebec, & Belgium), Richard Thompson Ainsworth

Faculty Scholarship

This article provides support for a proposal to eliminate refund fraud in the U.S. by turning Forms W-2, and 1099 into self-certified/ self-authenticated tax documents. The proposal suggests that a “digital signature” of these documents should be taken after they are completed. The signature should then be made part of the final document.

This proposal was initially advanced in Refund Fraud? Real-Time Solution! The underlying premise of that article was that the US could dramatically reduce, if not eliminate, refund fraud if it borrowing digital security techniques from the VAT. The article did not however, explain or expand upon these …

Vat Experimentation -- New York & Illinois, Richard Thompson Ainsworth

Faculty Scholarship

US States are experimenting with VATs to solve market-specific problems with tax compliance and revenue yields. Experimentation has been going on for years. Sometimes the experiment is a success; at other times it needs more work.

Although not called VATs either before, during or after adoption – that is what these experiments are. Market-specific VATs are producing benefits long promoted by VAT advocates, notably: an increase in revenue without an increase in tax rates; increased administrative efficiency without significant costs to business; more stable deposits from fractionated payments; and lower enforcement costs from the self-enforcing nature of the VAT.

There …

Black Swans: Recapitulative Statements/Vies (Vat) & Use Tax Reciprocity (Rst), Richard Thompson Ainsworth

Faculty Scholarship

There is fundamentally no difference between a value added tax (VAT), and a retail sales tax (RST) when it comes to collecting the tax on cross-border sales. If (under a VAT) a seller is allowed to “zero-rate” cross-border sales, or if (under a RST) a seller is exempt from collecting the tax on cross-border sales, the critical enforcement question is exactly the same – how does the system assure that the buyer will self-assess (and pay) the tax?

The simple answer is that the tax administration audits. The more complicated answer notes that the effectiveness of the audit (by the …

Economic Depreciation, Accrual Taxation, And The Samuelson Theorem: An Essay On The Structure Of Capital Income Taxation, Theodore S. Sims

Faculty Scholarship

Samuelson (1964) showed that an income tax with an allowance for "economic" depreciation leads to asset valuations that are independent of their holders’ marginal rates of tax. The tax system is then "neutral," in the sense that assets have the same value to all, irrespective of whether or at what rate they are taxed. In this essay I illustrate and show formally that taxation of cash flow minus an allowance for economic depreciation leads to the taxation of value as it accrues. That is, economic depreciation and pure accrual taxation are exactly equivalent. I suggest also that the form of …

Refund Fraud? Real-Time Solution!, Richard Thompson Ainsworth

Faculty Scholarship

When seven million dependents vanished from the tax rolls in 1986 the IRS recovered three billion dollars in revenue. A simple enforcement measure was applied. Taxpayers were required to list the social security number (SSN) for any dependent they claimed on their tax return. Costing next to nothing to implement, the benefits of this enforcement action continue to this day.

A similar enforcement measure could be employed against refund fraud. Even though the solution is not as simple as that adopted in 1986, it is similar. The effort is worth making. The revenue loss is much larger. As before, the …

Transfer Pricing: Data Dumps And Comparability - Us, Uk, Canadian, And Australian Case Studies, Richard Thompson Ainsworth, Andrew Shact

Faculty Scholarship

Comparability is the heart of transfer pricing. The OECD, U.K., Canadian, Australian, and U.S. transfer pricing rules all echo one another on how critically important the comparability analysis is. Performing this analysis and proving comparability, however, is a demanding exercise.

What makes proving comparability so difficult is that the analysis is two sided. Both controlled and uncontrolled transactions must be thoroughly analyzed. Just as much effort needs to be applied to determine the functions, contract terms, risks and the economic conditions for the unrelated party comparables as is spent on analyzing the related parties (taxpayers).

But there is more to …