Bulgarian consultants facilitate Romanian tax fraud on an industrial scale

Several financial advisors in the Bulgarian city of Ruse, on the border with Romania, help Romanian businessmen commit VAT fraud and, in some cases, siphon off funds from the European Union, of which both countries are members.

OCCRP’s partner, Context, revealed the fraud after an investigation conducted in partnership with journalists from the Bulgarian platform BIRD.
Reporters found that contractors used the so-called “missing community trader” (MTIC) method, which uses zero-tax rules for trade between EU members by creating fictitious exports.

Typically, a chain of one or more shell companies is created and they start trading goods between EU countries, which is exempt from VAT because VAT in the EU only applies to local transactions in the country.
In simple cases, fraudsters import goods without VAT, sell the goods on the domestic market, charging the local buyer VAT, but without returning it to the tax authorities.
The local buyer deducts the VAT paid by his tax office and continues to sell the goods, charging VAT.

The company that imports goods and resells them on the domestic market without returning VAT to the treasury commits fraud.
But it disappears before legal action can be taken by national law enforcement authorities responsible for detecting potential crimes.

MTIC is one of the most common types of tax evasion in the bloc of 27 nations and costs the union almost 50 billion euros a year, according to Europol.
The scheme has also hit Romania’s budget painfully and is likely delaying badly needed development projects.

Laura Codruta Kovesi, a Romanian prosecutor appointed chief European prosecutor in 2019, told Context that tax evasion in cross-border fraud “has been very tolerated” and “ignored for years” by many EU countries.

“When a company evades taxes and pays no taxes to the state, you personally don’t feel anything,” she said.
But without these funds in Romania, “we can’t raise wages, we can’t have better hospitals, we can’t have schools, we can’t have roads… There is no money in the budget.”

A 2023 report by the European Commission to collect VAT in the bloc showed that Romania has the largest VAT gap among member states and fails to collect 36.7% of expected revenue.
In 2021, Romania failed to collect almost 9 billion euros of VAT, while Germany, a country with an economy that is 15 times larger, left uncollected only 7.5 billion euros.

“If I wanted to commit VAT fraud, where would I go? Would I go to a country like Italy or Germany, where I know the tax administration comes and checks me regularly?”
“No, I would move to Romania, I would move to Bulgaria … where the detection level is very low [and] I can live peacefully because no one disturbs me.”

The MTIC fraud scheme is a simple but effective method.

Reporters found that consultants from Ruse helped Romanian businessmen set up companies in Bulgaria and offered office space there.
They also identified socially vulnerable people who, for a modest amount of 50 euros, legally sign the documents and on paper represent the companies.

The most productive three consultants revealed in the investigation helped create hundreds of shell companies.
One of them, whose website boasts of being a “Tax Haven in the EU”, has created a total of 230.

At least eight companies he set up in Bulgaria that are controlled by entrepreneurs in Romania were involved in large tax frauds that Context.ro detected.
Many of the persons employed to represent the firms have financial difficulties and appear to have been exploited.

The companies acted as facades for fictitious exports between Romania and Bulgaria, but the goods never left Romanian territory and then sold locally below market prices because VAT was “saved”.

Some of the companies are involved in fraud with the European Structural and Investment Funds.
They have been used to artificially inflate the value of imported goods in order to fraudulently gain access to more substantial EU funds.

In one such scheme, a network of Bulgarian companies positioned between a Chinese exporter of a production machine and a Romanian manufacturer of plastic containers inflated the price of the machines more than three times the original price, resulting in a fraud of almost 1 million euros.
No one was charged.

According to the Romanian National Tax Administration, ANAF, over the past 10 years, 140 cases of fraud involving Bulgarian companies have been identified, causing more than 250 million euros in damage.

The Romanian government this year is struggling to draw up a fiscal plan that could fill the deficit in its finances, and is looking at measures such as tax increases and spending freezes.

“Romania is the external border of the European Union… VAT fraud and, in general, the fight against organised crime, must be a priority,” Kovesi said.
“You can’t eliminate drug trafficking and other crimes… without interrupting their funding.”

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This post is also available in: Български (Bulgarian)