Supervisors: Professor Kalle Merusk, Assistant Professor Lasse Lehis
Opponent: Professor dr Joachim Englisch, University of Münster
Value added tax has become one of the main sources of income for many countries over the last 50-60 years. The popularity of value added tax arises from the fact that the administration of the tax is relatively simple, because a large burden in collecting taxes is imposed on persons engaged in business, who sell goods and services to consumers. According to some information, value added tax has so far been established in 156 countries and seven other countries are considering the establishment of value added tax by 2013. At the same time, large-scale value added tax reforms are underway in India and China. Of the larger countries, only the United States of America has not yet established a common value added tax, where sales taxes are applied. The developments related to the value added tax have been prominent in the European Union, where the regulation of value added tax has been harmonised over a long time period in order to ensure the free movement of goods and services and harmonise the regulations of Member States. Several risks, however, accompany the application of value added tax, and there are references in the related written materials that such a system is prone to tax fraud. The underlying reason for this is that the implementation of the value added tax system, on the one hand, leverages the creation of tax losses for a country and, on the other hand, cases of tax frauds are difficult to discover. Leverage means that an unlawful activity may lead to a situation where a person reduces its tax liability or causes an excess payment by deducting an unsubstantiated input value added tax. This is because the value added tax is calculated on an accrual basis and the deduction of tax does not depend on whether the seller has paid or has not paid the value added tax. In this way it is possible for value added tax to be deducted or, upon an excess payment, also reclaimed from the state in a situation where the seller has not actually paid the tax. This is what makes fraud possible. Detection of such fraud is even more difficult as the state cannot verify all transactions and cross-border transactions make the identification of related circumstances difficult and time-consuming for a tax authority. There are different data and ratios available concerning the scale of tax fraud. For example, some written materials refer to the fact that such fraud may generally account for 2-2.5% of the GDP of a country. In Germany, uncollected value added tax is estimated to total EUR 17 billion per year (that figure includes carousel fraud and the shadow economy, unsubstantiated deductions of input value added tax and bankruptcies). In the UK, uncollected value added tax is estimated to account for 13.5% of the total collected amount. The estimated share of carousel fraud is EUR 1.5 to EUR 3 billion per year; this is 1.5-2.5% of the total collected value added tax. A few years ago, the European Commission contracted an analysis, according to which the difference in the collected value added tax in 25 Member States in 2006 totalled EUR 106.7 billion (at that time, Bulgaria and Romania had not yet joined the EU and the study did not include Cyprus). On the basis of that analysis, the estimated difference in collection of value added tax in Estonia was EUR 111 million, which accounts for 8% of the collected tax. In Greece, the same ratio was 30. Irrespective of which study or method is used, all figures reflecting tax fraud are significant and therefore the European Commission has continuously looked for possibilities to improve the exchange of information, the administration of taxes and to find appropriate measures to prevent tax fraud. Recently, a more significant discussion began at the beginning of 2010, when the so-called Green Paper was published by the European Commission. It dealt with different possibilities and opened a discussion, during which all persons could express their opinion on the proposals made in the Green Paper.