The absence of consistent methods of eliminating tax frauds in a coordinated way is - according to NIK - the main reason why the Tax Free system on the Polish border does not work properly. Although the National Revenue Administration bodies controlled both buyers and sellers, and also identified the abuse mechanisms, they were not fully effective. In the audited period, the system was at significant risk of the so-called carousel frauds and was susceptible to corruption.
The core of the Tax Free system in Poland is that a foreigner living outside the European Union can receive tax return for the goods purchased in Poland and transported outside the EU, what is crucial - in his or her personal luggage. A precondition for the tax return is a document confirming that export. The system also pays off for sellers who acquire the right to sell their goods with zero tax rate. The problem is that the Tax Free system, instead of being used for ”retail export” only, that is for occasional purchases for private use, was also used for organised, fragmented, bulk export of goods for commercial purposes by foreigners engaged in that operation.
NIK confirmed the above in its analysis of documents concerning 90 travellers who in the audited period used the Tax Free procedure on the largest scale. When crossing the border, even several times a day, they exported goods worth over PLN 173.5 million (nearly PLN 6 million maximum per one traveller) outside the borders Poland in their personal luggage. Moreover, the data of at least 23 persons had been mentioned before in some analyses or decisions made by the National Revenue Administration (NRA) bodies in the context of tax abuses.
According to NIK, the failure to eliminate extreme cases of such ”export” on the Eastern border in a systematic and coordinated way facilitated carousel frauds with the use of the Tax Free system, as such frauds are based on the fragmented transport of goods. Differences in the understanding of the term ”personal luggage” considerably increased the risk of unequal treatment of travellers as well as the threat of corruption.
As a rule, the big scale of purchases in the Tax Free system is favourable from the economic viewpoint. It should foster the development of trade, especially near the borders. That system is very popular, mainly among the citizens of Ukraine and the Republic of Belorussia. But the value of goods exported by them from Poland as part of the Tax Free system in relation to the total export value has been decreasing systematically. It is most visible in case of Ukrainian citizens - in 2017 that was 21.5%, and in 2019 it was only a bit more than 15%.
Since the Tax Free system is favourable for the state, the service of foreigners using that system should be efficient by limiting the burden of border control both with regard to travellers and goods exported by them. At the same time, the system needs to be tightened so that it is no longer used for tax abuses and frauds.
NIK verified if that was the case. The audited period was from March 2017 to June 2019. NIK audited the Eastern border in terms of three areas, key ones from the viewpoint of the Tax Free system: technical and organisational conditions of traveller service, control of the export of goods and control of sellers operating in the system.
Technical and organisational conditions
In the audited period, the most intense movement of travellers, measured by the number and value of confirmed Tax Free documents (more than 200 thousand documents and the value of above PLN 200 million in 2019) was reported in:
- Podlaskie Province: on border crossings with the Republic of Belorussia in Kuźnica and Bobrowniki,
- Lubelskie Province: on border crossings with the Republic of Belorussia in Terespol, and with Ukraine in Hrebenne, Zosin and Dołhobyczów,
- Podkarpackie Province: on border crossings with Ukraine in Medyka, Korczowa and in Krościenko.
The travellers hoping for the VAT return, complained mainly about too long waiting time for customs clearance, improper behaviour of customs officers, too frequent controls and prolonging search of goods. There were only 23 official complaints of travellers with regard to customs clearance conditions in three audited provinces. It was quite few considering the scale of traffic in the Tax Free system. Travellers of all categories (not only from the Tax Free category) had to wait long in customs clearance queues. An issue was e.g. the size of the border crossing that was not adjusted to the traffic intensity or insufficient capacity of access roads to the border crossing.
Smooth border traffic was significantly disturbed also by the Tax Free procedures, especially when the same people repeatedly transported big amounts of goods in a fragmentary manner. The traffic changed depending on the time of the day and the day of the week. It usually increased in the afternoons and evenings and also before bank holidays and long weekends. The factor which prolonged the waiting time on the border crossings with Ukraine was also the way of conducting customs clearance by customs officers. Travellers queued even more when they knew that a given shift of customs officers on the Ukrainian side would be less strict when carrying out a control.
In 2017-2019 (first half), the average waiting time for customs clearance with Tax Free documents was much longer on the border with Ukraine than with the Republic of Belorussia. Depending on the border crossing it ranged from 4 minutes in Sławatycze (the border with the Republic of Belorussia) to over three hours in Medyka (the border with Ukraine). It happened, though, that on the Polish-Ukrainian border travellers had to wait as long as 9 hours.
It was also related to the time-consuming nature of controls which was because of the big number travellers and their cars, especially with large quantities of goods transported in one vehicle by several persons (in Medyka the high traffic was mainly caused by minibuses). Moreover, staff shortages among customs officers were noticeable, to a variable degree, on all border crossings.
A tool supporting the National Revenue Administration related to the Tax Free procedure was the IT system ”VAT return for travellers”. It facilitates electronic registration of documents both to buyers and sellers. In 2019, such documents represented as much as 78% of all documents presented as part of the system. On the border crossings audited by NIK, special lanes were separated for customs clearance of travellers with electronic documents. In Terespol and Hrebenne, however, there were repeated cases where cars without any goods reported in the Tax Free system were redirected to those lanes by the Border Guard.
The facilities for travellers and customs officers related to the electronic registration of documents did not work for customs clearance in long-distance trains. The reason was that customs officers were not equipped (although they reported the demand) with mobile devices to service the system. That would allow a single registration of documents (instead of a double one) and the control of goods and travellers based on a system analysis of risk. According to the NIK findings, the shortages of equipment were most noticeable on the border crossing in Terespol where travellers presented a relatively big number of documents. The tests made in the middle of 2019 showed that the equipment used by customs officers was not fit for use. A decision was taken to buy new equipment.
Control of the export of goods
In the audited period, the export of goods as part of the Tax Free procedure was fragmented a lot. This is proven by the big number of documents confirmed on border crossings in the East of Poland every year. The most documents were reported on the Polish-Ukrainian border: in 2017 - nearly 2.8 million, in 2018 - about 1.8 million and in 2019 - nearly 2 million. The value of exported goods totalled correspondingly - about PLN 4 billion, over PLN 2.5 billion and nearly PLN 2.8 billion.
Also the average value per one registered traveller (no matter how many times he or she crossed the border) was 4-5 times higher on the Polish-Ukrainian border (depending on the year) than the value of goods on the Polish-Belorussian border. According to NIK, it could be so because Belorussian norms concerning the export of goods are stricter.
NIK isolated a group of 90 travellers (30 persons crossing the border in each of the audited provinces) who from January 2017 to the middle of 2019 exported the highest-value goods using the Tax Free procedure. Their total estimated value exceeded PLN 173.5 million. The value of goods per one traveller was nearly PLN 2 million on average but the maximum totalled nearly PLN 6 million.
The data of at least 23 persons from that group occurred in documents (analyses, signals, tax decisions) which the National Revenue Administration bodies audited by NIK gathered in connection with tax abuses using the Tax Free procedure. Additionally, those travellers often crossed the border, exporting goods purchased from a limited group of sellers. More than half of them (17 of 30 analysed sellers) belonged to a group of entities with a high risk of VAT irregularities, in line with the classification applied in the National Revenue Administration. Five of them used to take part in the ”carousel” frauds. One did not react to the calls of a tax authority and another one was not yet controlled by the tax office although it was clear that the person kept pursuing high VAT returns.
Two travellers from that group presented tens of Tax Free bills for the purchase of telescopes totalling about PLN 225 thousand and PLN 136 thousand (nearly all of them were issued by the same seller). Four persons declared from 8 to 47 bills for smartphones worth from about PLN 23 thousand to PLN 230 thousand in total (at least half of those amounts came from the same contracting party’s bills). One person exported goods worth nearly PLN 86 thousand. Interestingly enough, the goods were reported on 23 different Tax Free bills and they were exported from Poland in four cars, whereas the person in question travelled in a fifth car. Subsequent batches of goods were controlled every 2.5 hours maximum.
The analysis conducted by NIK confirmed that the export of goods (due to a suspicion of tax abuse) was refused only in case of eight out of 60.4 thousand Tax Free documents. The refusals were related to single exports of goods.
Foreigners used the Tax Free procedure for fragmented export of large quantities of goods for commercial purposes in each of three provinces audited by NIK. According to estimates made by customs officers, in Korczowa it was half of the export, whereas in Medyka as much as 70%. It was in Medyka that the goods in one car were distributed among many travellers. Additionally, passers-by were used who after the EU border was crossed and the goods were cleared, got into a getaway car. Other abuse mechanisms were also identified. Some Tax Free documents were issued without the buyer’s data or the value of goods declared in the documents was overestimated. It also happened that the buyer was not in Poland on the day when he or she bought the goods or on the day he or she allegedly collected the tax return.
The controls, although conducted properly, focused mainly on verifying if the contracting parties were physically present, if the goods were intact and if the documents presented by travellers were correct.
It does not mean, though, that the the NRA bodies audited by NIK did not identify any Tax Free abuse mechanisms. They did. But the highest percentage of such cases was reported in Podkarpackie Province. Local customs departments exchanged with tax offices information about abuse suspicions. That helped identify negative phenomena and transfer significant findings to the Ministry of Finance. There was no standardised approach to eliminating extreme Tax Free abuse cases for the purposes of organised and fragmented export of goods. In Lubelskie and Podkarpackie Province it happened that a customs officer refused to confirm the export of some goods in case he or she decided that the goods to be exported did not fit into the category of personal luggage. On the other hand, in Podlaskie Province customs officers did not make evaluation of this type saying there were no clear provisions of law in this matter.
Besides, in none of three audited provinces the frequency of the export of goods as part of the Tax Free system or its organised nature were taken into consideration. The analyses and measures of this type were only incidental on some border crossings in Lubelskie Province. NIK has stressed that they were effective. Also administrative courts confirmed that the measures taken by the officers were justified.
Tax offices as well as customs and revenue offices mentioned the following factors as the biggest barriers in eliminating tax abuses: the absence of standardised guidelines or special IT tools, the lack of a clear legal definition of commercial export and personal luggage. In Podkarpackie and Lubelskie Provinces the decision as to whether or not some goods were exported for commercial purposes belonged to individual officers. That approach considerably increased the risk of unequal treatment of travellers and sellers, as well as the risk of corruption. According to NIK those decisions were influenced among others by the scope of the officers’ training. For instance, in Podkarpackie Province there were content-related training programmes on the Tax Free system, whereas in Podlaskie Province they were related to the registration of documents only. At the same time, in Lubelskie Province no training was organised despite the reported demand. According to explanations, the reason was the lack of an adequate lecturer.
Thus, although the threat was identified, neither the revenue administration chambers nor the customs and revenue offices were aware of the scale of the Tax Free abuse. By the end of the audit, they did not develop any consistent method of using the data to identify and eliminate extreme abuse cases.
NIK stands in a position that the analytical capacity of the National Revenue Administration may be increased considerably - and thus the risk of abuse may be reduced - by implementing a fully electronic Tax Free document flow. The Ministry of Finance has already announced a change in the law, but the date of its implementation has been postponed to 1 January 2022.
Control of sellers
The number of sellers participating in the Tax Free system dropped in the audited period from 5.7 thousand in 2017 to 4.5 thousand at the end of September 2019. At the same time, the value of goods sold by them went down as well, nearly by 50% - from about PLN 4.3 billion to about PLN 2.2. billion.
In the audited period, tax offices from all three provinces questioned documents related to the goods worth over PLN 60.4 million, whereas customs and revenue offices raised doubts about documents concerning goods for nearly PLN 51 million, of which about PLN 6 million (over 11%) referred to the cases where the findings were confirmed in final decisions or corrections (taking account of control results). In the same period, the heads of customs and revenue offices issued decisions in the Tax Free system, in line with which the value of VAT depletions exceeded PLN 19 million.
All tax authorities audited by NIK identified tax abuses where the Tax Free system was used for fragmented and frequent export of large quantities of goods and strictly related ”carousel” frauds. On the one hand, the bodies audited by NIK properly controlled whether or not sellers complied with basic conditions of using the zero tax rate. On the other hand, though, they did not conduct systemised analyses that would help them identify persons with a high risk of participation in ”carousel” frauds, in connection with travellers exporting goods on the largest scale.
NIK says irregularities could be identified already at the stage when tax payers report the start of the Tax Free sale. This is thanks to the verification of the declared places of running business (after having made first high sales proceeds). The ”carousel” frauds can often be detected when bulk quantities of goods are entered on Tax Free documents by sellers that do not have registered offices or places where they run their business, which is typical for the retail sale.
Tax offices complained that Tax Free documents could not be verified individually (there are plenty of them - even a few thousand per month). Besides, the law does not provide a clear definition of export for personal purposes. Also, due to the jurisdiction of administrative courts, there is no legal basis to question cases where the procedure could be used for commercial purposes. In line with that jurisdiction, the Tax Free document with a formal confirmation of export outside the EU is a guarantee of legality of the VAT return and the 0% tax rate for the delivery of goods on which the tax was returned to the traveller.
At the same time, the heads of customs and revenue offices pointed among others to personnel issues. They said that the cases related to ”carousel frauds” were time-consuming and very complex. They also complained about limited access to the system ”VAT return for travellers”. Also, there were no precise legal provisions related to the quantity of exported goods and it was not possible to track them (as opposed to the delivery of goods within the EU).
According to NIK, it is not effective to focus on identifying Tax Free frauds only at the stage of verifying settlements made by the seller. The controls and tax proceedings usually deal with remote settling periods. By their nature, such procedures are long-lasting and complicated and do not leave hope for the recovery of one’s swindled money. NIK says some of these frauds could be prevented by identifying travellers in connection with sellers and by taking action already at the stage when foreigners cross the border.
Recommendations to the Ministry of Finance
Considering the need to fight the ”carousel” frauds using the Tax Free procedure aimed at swindling the undue VAT return and to prevent such frauds, as well as to make sure the Tax Free procedure is used in line with its purpose, NIK has addressed the following recommendations to the Minister of Finance:
- to develop standardised and effective methods of eliminating the Tax Free abuse cases aiming at organised and fragmented export of bulk quantities of goods outside the EU customs area, to ensure the following in particular:
- standardised control procedure on all border crossings (based on the results of analyses carried out at the regional or central levels),
- solutions supporting the said analyses in the IT tool designed as part of the Platform for Tax and Customs Electronic Services,
- train customs and revenue officers dealing with the Tax Free customs clearance.
- to develop general guidelines to support customs officers on the borders in controlling one-off export of goods in terms of evaluating if they can be qualified as personal luggage. This is to reduce the risk of:
- unequal treatment of travellers using the Tax Free procedure,
- situations where foreigners choose the place and time to cross the border of Poland depending on the way customs officers approach the quantity of goods to be exported,
- corruption.
- to initiate and coordinate analytical and control measures on part of the NRA bodies. The measures should focus on systematic identification of VAT payers and travellers connected with them, using the Tax Free procedure for the ”carousel” frauds, considering the documented knowledge of the NRA bodies about travellers and sellers who had already been involved in similar frauds.
- to implement consistent guidelines for the NRA bodies in terms of verifying actual conditions for retail sale at the stage of notifying tax office heads that the Tax Free sale has just started. The guidelines should also clarify what to do in case a high-value delivery has been declared for the first time. The point is to eliminate at the earliest possible stage the entities focused on tax frauds only.
