Poland cracks down on steel VAT fraud

The Polish government has introduced reverse-charge VAT mechanisms for the steel sector, to crack down on tax evasion in the country’s steel market.

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This means that steel consumers, rather than producers, will pay VAT to the government.

Warsaw acted using new powers granted by the EU in July, which allow national governments to impose reverse charges without asking the EU Council of Ministers for permission, as they had to do in the past.

A key target here is the imported rebar market, which has been riddled with VAT fraud, Polish steel industry officials told Steel First.
The result has been a glut of imported supplies sold without tax to the Polish construction sector, harming legitimate Polish steel manufacturers.

The changes are expected to come into force from October 1 this year, pending a signature from Poland’s president, Bronislaw Komorowski.

“The usual profit margin, when it comes to steel products such as rebar, is 3-6% in Poland,” Iwona Dybal, president of the Polish Union of Steel Distributors (PUDS), said. “With VAT on steel products here being 23%, entities involved in such scams can lower the prices below cost, as they have already saved 23% on VAT.”

Mechanics of fraud
Tax fraud involves illegal traders setting up shell companies which they use to import steel from another EU member state, selling it to a domestic customer with local VAT included on the bill, but the shell company disappears or is closed down before paying back the collected tax.

This “carousel fraud” scam usually involves a series of transactions, often including legitimate companies which are ignorant of their part in a fraud.

Rebar sales in Poland have been an easy target for fraudsters.

“It all started three or four years ago when the economic crisis hit the EU,” Stanislaw Dzienniak, president of the Polish Steel Assn, said.

“In other countries, demand for steel dropped, while in Poland we had double-digit increases each year. With Euro 2012 [football championship finals] being held here, the whole country was one giant construction site and demand for rebar was high,” he said.

Extent of illegality
These VAT scams are so common that, according to PUDS, 50% of 1.3 million tonnes of rebar used in Poland in 2012 came from fraudulent sources.

“We compared statements from all EU member countries which sold rebar to Poland with data from the tax office, and it showed that some 650,000 tonnes of product was sold here without VAT being paid,” Dybal said.

And rebar is not the only steel product affected. Poland’s reverse-charge mechanism will apply to some 40 steel products, from fencing and pipes to finished flat-steel products, as well as rebar.

According to information provided by the Polish finance ministry, last year 3,000 companies traded steel and its products in Poland as their main source of activity.

Further steps
The ministry has taken further steps to curb VAT frauds.

First, it has shortened the period for paying VAT to the tax office from three months to a month, where goods sold exceed a value of 50,000 zlotys ($15,760) per month.

Second, it has introduced joint and several tax liabilities in the trading of sensitive goods, such as steel, fuel and gold.

This means that if a customer buys a product, knowing or suspecting that the company selling it will not pay taxes, the buyer will be responsible for the unpaid taxes.

The government has also created a white-list of trusted traders. Buying from firms on this list will exempt buyers from the joint tax liability rule.

Companies on the list will be monitored closely by tax authorities, and will pay individually calculated deposits based on their monthly trade volumes. The deposit can range from 200,000 zlotys ($63,045) to 3 million zlotys ($945,700).

This means that companies will have to be careful who they trade with and what they buy.

If a price is suspiciously low, they risk a hefty fine, which would be 23% of the value of any transaction – the same as the main VAT rate in Poland.

Effect of changes
But what effect will these changes have?

“It will present some initial cash-flow problems for producers,” Dzienniak said.

“Until the reverse-charge resolution comes into force, we will still have to pay VAT. After it is implemented, this will stop, but we will have to wait for these VAT returns for as long as 80 days, according to Polish law and common practice,” he said.

“Eventually, the situation will return to normal, but in these tough times for the industry, it might pose serious challenge to some producers,” he added.

There will be no rush of producers making their own VAT-free deliveries, Dybal said.

“Here in Poland, most producers cannot afford their own storage space, so the distributors and wholesalers that can afford such expenses will still be needed,” she said.

As exports circulate the EU free of duty, “it shouldn’t change anything, especially given that Poland needs more steel than it currently produces”, Dybal added. “It could even boost exports and imports as, previously, many companies abstained from such transactions, fearing that products might come from illegal sources.”

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