Searches carried out in Czechia and Latvia over EUR 14 million VAT fraud

RIGA - European law enforcement authorities have carried out searches in multiple locations in Latvia and the Czech Republic as part of a probe into a suspected EUR 14 million VAT fraud scheme involving the trade of second-hand mobile phones.

The European Public Prosecutor's Office (EPPO) informed that five arrests were made following the searches in the Czech Republic and Latvia. Three of the suspects were detained in Latvia and extradition proceedings of the three Latvian citizens to Czechia are ongoing. One individual was taken into custody in Czechia.

According to the authorities, the suspects are believed to have fraudulently applied a reduced value added tax (VAT) rate to mobile phones imported from the United States and other non-EU countries, by falsely declaring them as originating in the EU. It is understood that this allowed them to unlawfully benefit from the VAT margin scheme, which is only applicable to goods previously sold within the EU.

Under the EU law, when selling second-hand goods bought from private persons in the EU, or from sellers who have already paid VAT in full for such items, the reseller may apply the so-called ‘margin taxation’ scheme, under the conditions set out in the applicable law. In such cases, the reseller only has to pay VAT on the profit margin they make (the difference between the price paid for the item and the price for which it is sold), and not on the full sale price of the item.

However, it is suspected that the suspects applied this provision unlawfully. The suspected fraud also allowed mobile phones to be sold at a lower market price, thus causing unfair competition.

Assets worth EUR 2.5 million were seized, including houses, cars and motorcycles, precious stones, luxury handbags and watches. Bank accounts were also frozen, and IT data and key documents were secured, the EPPO said.

The five arrested individuals have been charged with tax fraud. If found guilty, they risk five to ten years of imprisonment under the Czech law.

Evidence-gathering activities were carried out in several countries, including Austria, Czechia, France, Germany, Italy, Latvia and Slovakia.