Schemes aimed at defrauding VAT using gold trade are a classic example of why the State Revenue Service and Finance Ministry cannot deal with tax fraudsters. Over the course of the past five years, fraudsters have been paid at least EUR 25 million. It is the money residents paid in VAT when buying bread, milk and beer in 2 litre plastic bottles.
To combat tax fraudsters, Estonia introduced the first reverse VAT payment procedure for gold products in 2012. Fraudsters then turned their gaze towards Latvia. Unfortunately, the Latvian government did nothing these past five years. Latvia plans to introduce its reverse VAT payment procedure for gold next year. Since 2009, tax administration processes have been under supervision by Unity’s ministers and prime ministers. According to Unity’s ministers, thy have not received any signal from SRS to act. SRS, on the other hand, claims requests for tax system changes have been requested multiple times since 2013.
Latvia’s gold and jewellery turnover ranges around EUR 20 million annually. These millions are processed by jewellers, buyers and wealthy people. Gold exporters earn the most money. These people have found in Latvia a source of endless wealth, it seems.
1 April 2012 marked the coming into force of Estonia’s new VAT payment procedure for transactions with gold. This new procedure helped Estonia effectively end the reign of VAT fraudsters. Nevertheless, fraudsters liked their niche – gold is a grateful material for their criminal activities. A small gold bar costs hundreds of thousands of euros. It can be easily transported.
The scheme itself is simple: company X declares having bought low-fineness gold from sellers that are hard to identify – private person or foreign citizen. The gold is then sold to company Y, adding the VAT amount to the transaction amount. Once the transaction is done, the company declares it to the revenue service, but does not pay. The company is then quickly dissolved. Company Y then declares having carried the gold from the country and asks a return of VAT. Company X paid no tax, but the revenue service pays the amount from the budget. In reality, however, the same person is behind company X and company Y. This person declares the same gold time and time again, defrauding millions from the budget in the process. Once Estonia put an end to it, fraudsters relocated to Latvia.
Assay Office of Latvia is the only organization in the country that dictates the quality of gold. Fraudsters go to this office to receive a state recognized document on the amount and quality of gold. This document serves as cover to make it harder for SRS to uncover fictive transactions. In reality, the office processes the same gold time and time again.
Transaction activity is also demonstrated in statistical data. In 2010, Latvia exported gold worth EUR 1.8 million. In 2012, this amount reached EUR 27 million. The largest volume was reached in 2015, when the country exported 1.4 tons of gold worth EUR 38 million. Turkey dominates as export destination. Other prominent gold export destinations include Germany, Poland, Denmark and Estonia.
The annual account of Gold Bonus Company states the company is engaged in wholesale trade of precious metals and finances. The company performed no business actions in 2011. The next year, however, the company’s turnover reached EUR 4 million. Estonian citizen Marti Pajomagi became the company’s owner in 2014. The company’s turnover for that year reached EUR 17 million. The company was dissolved before SRS could halt its function. Gold trader Unico Gold Latvija had a turnover of LVL 7 million in 2012. It is registered in a respectable building on Citadeles Street; owners come from Estonia. It was a major breakthrough for the company, as its turnover was only LVL 48 thousand in 2011. This company was closed by SRS two weeks ago.
«The State Revenue Service was informed that VAT reverse was being introduced in Estonia. In 2013, we found that those companies had entered Latvia’s market very rapidly – the number of their processed deals had increased very rapidly. In 2013, during a meeting with Assay Office of Latvia, we concluded that those transactions could reach EUR 30 million and EUR 6 million of that amount could be defrauded VAT,» – said SRS Tax Office deputy director Agnese Rudzite.
SRS began monitoring precious metal traders very carefully. Twenty nine companies were closed down in 2014 and sixteen more in 2015. Unfortunately, this did not help the situation all that much. The country lost several dozen million euros over the course of four years. Finance Ministry was informed of the situation multiple times. The ministry was even asked to introduce a reverse VAT payment procedure, adopt a licensing approach for the industry or at least adopt a security fee requirement for transactions with gold, but nothing was done.
Laimdota Straujuma’s government formed the Grey Economy Combating Council in 2014. Its main objective is to monitor institutions that combat tax avoiders, corruption and unregistered businesses.
Members of the council include the head of SRS and the Finance Minister. Janis Reirs was Finance Ministry until 2016. Before then, he was the head of Saeima’s Budget-Finance Committee. Reirs is skeptical about the efficiency of the reverse VAT payment procedure, as he believes fraudsters will simply move to another industry or other country.