Banks and credit card associations

Frequently asked questions for buisness and business associations

Q1: How much money is lost to VAT and Carousel fraud?

Q2: What makes carousel and VAT fraud possible?

Q3: What technologies are available to solve carousel fraud?

Q4: What about other forms of VAT fraud?

Q5: How could real time VAT payment work?

Q6: What would be the opportunity for credit card associations and payment processing companies?

Q7: What would the bank's role be?

Q8: The opportunity for banks

Q9: What about intra EU transactions?

Q10: Are there privacy/confidentiality issues linked to this technology solution?

Q11: How much will it cost to implement?

Q12: How could the solution be financed?

Q13: Who are RTvat and what could their role be?

Q14: How can I find out more?

A1: How much money is lost to VAT and carousel fraud?

Although there’s no definitive figure, based on statistics from the UK and Germany it’s generally agreed that the ‘VAT gap’ due to uncollected tax and fraud costs around €120 billion per annum; that’s €325 million per day, €10 million per hour, or €200,000 for each minute that passes without a solution. Carousel fraud is estimated to account for 25% of this.

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A2: What makes carousel and VAT fraud possible?

“Lack of speed makes carousel fraud an issue”

There are a number of contributing factors which combine to produce a system where fraud is possible:

• The delay between a merchant collecting tax from a sale and remitting it to the Tax Authority
• Lack of communication between tax authorities in different countries
• Slow and inefficient legacy data systems in most member states
• Lack of accurate data on fraud
• By using a system of taxing on invoice rather than on settlement, the fraudsters are able to receive claims for credits before the seller has deposited the VAT.

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A3: What technologies are available to solve carousel fraud?

In the modern technology-led financial world, there are well-established technologies available to drastically reduce the opportunity for VAT fraud; indeed these technologies are already widespread in the banking and settlement industries, where they operate at capacities and speeds significantly in excess of what would be required for the RTvat proposal.

Real time VAT collection will eliminate carousel fraud completely because the tax is removed automatically at settlement through the seller’s bank account, so the merchant never has access to the VAT component of the sale price.

Fraud scoring is now an established feature of the credit card business, with specialist software available to create neural networks to monitor patterns of potentially fraudulent activity. The software automatically tracks whether the business activity is consistent with the VAT collected, merchant’s turnover, usual spending pattern, credits claimed, and whether suppliers are of the kind normally expected for the different types of business.

Automatic checking is implemented so that confidentiality is preserved, and all of this data would be solely based on the national server and thus under the control of the domestic tax authority.

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A4: What about other forms of VAT fraud?

The implementation of VAT collection on settlement rather than on invoice will make a major reduction in other areas of VAT fraud and non-collection; these include reduction on losses due to bankruptcy, general non compliance, and general evasion. The simplification of administrative reporting is a benefit to both the merchant and the tax authority.

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A5: How could real time VAT payment work?

• Funds would be automatically transferred from the merchant’s bank account to the tax authority on a net basis once per day, based on all transactions completed that day, with corresponding tax reclaims and refunds automatically credited back within a 24 hour period.
• A VAT purchasing card could be used by each business, linked to their unique VAT ID, to simplify the electronic transaction process.
• New national servers in each of the 27 EU countries controlled by the national Tax Authorities would be linked to existing legacy systems to produce detailed transaction reports and watch for fraudulent activity. Each national server would be linked to an independent central European ‘clearing house’ server to deal with intra-EU transactions.

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A6: What would be the opportunity for credit card associations and payment processing companies?

The technology element of the RTvat solution is based on methodology and infrastructure already well established in the credit card industry. There is an opportunity for existing providers of theses facilities to extend their business by developing systems to handle the real-time transfers of funds between the banks and the tax authorities, as well as the cross-border system transferring transaction data between the state-based servers and the central intra-EU funds netting mechanism.

As the existing systems are operating on typical response times of 2-3 seconds and the RTvat solution requires only daily netting, it is anticipated that there should be little difficulty in adapting and applying the existing systems to the new application.

An additional element in widespread use across the credit card associations is the use of ‘fraud scrubbing’, or potential fraud pattern detection and alert systems. The RTvat solution would incorporate bespoke fraud scrubbing applications adapted from state-of-the-art systems now in use and in development to track the pattern of transactions for each VAT ID and alert the national tax authority to unusual, suspicious or potentially fraudulent activity, with the option to block funds transfer of refunds at pre-specified levels of risk. 

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A7: What would the bank's role be?

• The bank would act as a ‘splitter of funds’, to the benefit of both the merchant and the individual tax authorities.

• The bank could also act as an issuing agent for a purchasing card linked to individual VAT numbers to be used by the merchant for recoverable VAT purchases.
• Transaction reports automatically generated by the bank as part of the account maintenance process would reduce the administrative burden on their business customers and avoid the risk of non-delivery penalties.

• The bank would remit the tax due from the merchant directly to the Tax Authority, less a small transaction fee.

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A8: The opportunity for banks

• Banks have the opportunity to act as the payment separating engine for funds deposited by their business clients.
• Banks will have the opportunity to issue the purchasing cards.
• Within the new system, the bank has a much clearer view of its customer’s cashflow position, minimising the impact of unexpected large VAT demands on the company’s credit worthiness.
• There will also be additional value in a reduction of accounting and monitoring of the bank’s SME customers, as only the net amount is credited to the SME’s bank account.

• The bank is in a position to provide its customers with an additional valuable reporting service to help reduce administrative costs.
• There is a potential new revenue stream on transaction charges to the Tax Authority for providing the information and fund transfer

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A9: What about intra EU transactions?

Transactions between EU member states are currently regarded as being taxed as ‘zero rated’ at the point of export. This both provides a useful loophole for fraudsters and creates an imbalance in VAT collections between member states.

RTvat’s solution would involve:

• The creation of a network of national servers controlled by each individual tax authority
• The establishment of a central independent data and funds transfer system
• Real-time transfer of balancing settlements between member states, with tax applied at the prevailing rate in the buyer’s country
• Privacy and confidentiality would be retained by national Tax Authorities

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A10: Are there privacy/confidentiality issues linked to this technology solution?

The network of national servers remain completely under the control of the national Tax Authorities and only the necessary transaction information is passed through the central matrix, identified by the merchant’s unique EU VAT code.

The information from the neural network controlling fraud scoring will be available to the national Tax Authorities to follow up according to their own procedures and priorities. Information gained will be relevant to internal fraud as well as cross-border and carousel fraud.

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A11: How much will it cost to implement?

Inevitably there will be start-up costs to build the technology infrastructure and to re-position existing administrative infrastructure to handle the new systems. However it is anticipated that the savings to be recouped will rapidly compensate for these initial costs.

Implementation costs can be expected in the following areas:

Technology infrastructure: see separate estimates, but the total is anticipated to be at most the equivalent to the amounts lost from ten days of continuing fraud. The plan is to bring in a for-profit group of companies that will build out the whole program and receive a small percentage of what is recovered due to the implementation of the RTvat system.

Businesses: there will be some overhead in re-training staff and accountancy costs in switching to the new system, but such costs are inevitable with any envisaged change to the way in which VAT is operated. Using the RTvat system, the reduction in administrative overheads and reporting requirements should more than compensate for short-term losses.

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A12: How could the solution be financed?

There are a number of possible financial models; the important point is that the entire systems could be financed from recovery of just a few days' losses.

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A13: Who are RTvat and what could their role be?

RTvat was formed by the International E-commerce Association (Intecard); it is now being established as a separate not-for-profit organisation which has the sole intended purpose of bringing about a fast implementation of the RTvat solution.

RTvat has considerable experience in transaction processing in partnership with banks, card associations, processors, fraud monitoring systems and insurers. RTvat has no plans to become a for-profit group but does intend to work with stakeholders in government and business.

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A14: How can I find out more?

> Contact us if there area any aspects you would like to discuss.

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To find out more about our Real-Time EU VAT solution, contact us.