VAT Fraud and the Fight against It in Estonia: Laws and the Practice of the Administrative Law Chamber of the Supreme Court

Author:Kaspar Lind
Position:Magister iuris. Attorney-at-law, Casus Law Firm

1. Introduction - 2. The scope of VAT fraud - 3. The main types of VAT fraud in Estonia - 4. Legal regulation - 4.1. Reverse charge - 4.2. Legal regulation of due diligence - 4.3. Alternative measures in fighting fiscal fraud - 5. Judicial practice - 5.1. Participation in fiscal fraud - 5.2. Awareness and due diligence - 5.2.1. Cases wherein the buyer knew that the seller was not the real seller In the above-mentioned Kittel judgment, the European Court of Justice has... (see full summary)

Kaspar Lind
Magister iuris
Attorney-at-law, Casus Law Firm
VAT Fraud and the Fight
against It in Estonia:
Laws and the Practice of the Administrative
Law Chamber of the Supreme Court
1. Introduction
In the past 50–60 years, VAT has become one of the main sources of revenue for many countries, including
Estonia. According to the 2011 state budget of the Republic of Estonia, the planned income from VAT is 1.3
billion euros for the year.*1 There is currently no real alternative to VAT that would replace the revenues
received from VAT and could be collected as easily.*2 The administration of this tax is relatively easy, since
a large burden in tax collection has been placed on persons involved in business who sell goods and serv-
ices to consumers. For instance, there is no need to conduct complicated and controversial evaluations as
in the case of taxation of assets. Some advantages can be highlighted also in comparison to the taxation of
However, when turnover tax is applied as a value added tax, several risks emerge, and the literature has
pointed out that such a system is susceptible to scal fraud.*3 The reason for this lies in the fact that applying
the value added system increases the incidence of tax loss for the state and, at the same time, scal fraud
is hard to detect. With this increase, as a result of unlawful activity, a situation may arise wherein a person
reduces his tax liability or creates excess payment by means of unjusti ed deduction of input VAT. This is a
peculiarity of the technical application of VAT.*4 The detection of VAT fraud, however, is complicated by the
1 2011. aasta riigieelarve seadus (State Budget Act of 2011). – RT I, 28.12.2010, 6 (in Estonian). According to the state budget,
VAT makes up 1,299,962,931 euros of the total revenue in the state budget, which is 5,609,205,346 euros.
2 The explanatory memorandum on the draft of the State Budget Act of 2011 says, among other things: ‘The relative importance
of consumption taxes increases from the 2010 level of 39.9% to 41% in 2011. In the medium term, the increase in the rela-
tive importance of consumption taxes occurs more quickly than the rise in the relative importance of labour taxes, reaching
42.4% by 2014. The main source of increase is the receipt of VAT.’ See Seaduseelnõu nr 822 seletuskiri. Riigikogu 11. koosseis
(Explanatory memorandum on the draft Act No. 822. The 11th composition of the Riigikogu.) Available at www.riigikogu.
ee (4.2.2011) (in Estonian).
3 See D. Birk. Steuerrecht. 11. Au . Heidelberg 2008, p. 453. Also H. Stadie. Umsatzsteuergesetz. Kommentar. Köln 2009, p.
123. The same view is expressed by C. Hasler, G. Sautebin. Strafrecht im Geltungsbereich der Mehrwertsteuer. Eine Prax-
isorientierte Darstellung. Bern 2007, p. 75.
4 Wrong conclusions have been drawn from this in the Estonian penal law, where the creation of excess payment is a separate
composition that entails a stricter punishment pursuant to the Penal Code (Karistusseadustik. – RT I 2001, 61, 364; RT I
30.06.2011, 6 (in Estonian); hereinafter referred to as the PC). The general composition is PC §3891, whereas PC §3892
is special composition in cases where the person creates a claim for refund or unlawfully increases the claim for refund.
As mentioned, the punishment prescribed for the special composition is stricter. The logic behind the provision cannot be

To continue reading