Friday, August 25, 2006

Dubai 10th largest trading partner with UK.... hmm

Via grapeshisha comes this story:

The 30 billion pound money-go-round: Telegraph:
It seemed, on paper, that trade between Britain and Dubai was booming. After years of sluggish growth, exports were finally taking off - up by an astonishing £325 million in a single month last year - and the little desert kingdom was sending plenty back in return. Businessmen at both ends were getting rich, and the Government looked happily at the figures.

Until it realised that there were no ends. Just a loop around which billions of pounds worth of goods were continuously and lucratively revolving as part of a VAT fraud that has now grown so extensive and complex that it has begun to distort the entire British economy.
. . .
The most sophisticated version occurs when a trader imports the goods, sells them on, with VAT added, to a criminal associate, who re-exports them (claiming the VAT back from Revenue and Customs), and later re-imports them, so that the whole procedure begins again. Some carousels have been known to spin as many as 30 times. It is estimated that up to 10 per cent of Britain's recorded exports may be fraudulent to some degree.
. . .
The growth of the racket has produced some startling statistics. This year, Dubai, which has a population of barely 900,000, officially became Britain's 10th-biggest trading partner. Suspicions were raised, however, when, in June last year, our exports to the kingdom soared to £529 million from just £204 million in the previous month.
. . .
many critics argue that flaws in the VAT system - compounded by ill-conceived EU regulations - are substantially to blame. "The rules and the administration of the tax are fundamentally flawed," says David Raynes, a former senior customs officer and fraud expert. "Actually, VAT as a tax is fundamentally flawed."
. . .
VAT, which was invented in France, was effectively imposed on Britain as a condition of joining the Common Market. Until then, we had a simple purchase tax of the type still levied in America.
Emphasis added.

Gulf News picked up on the Telegraph story here, and followed that with an article connecting the proposal for a GCC VAT with the potential for carousel fraud, as did 7Days.

My standard observations:

1. People will find economic opportunities like water finds leaks in a boat. This is true whether those opportunities create wealth, or they rearrange wealth.

2. The law of unintended consequences applies. The effects of innovation in institutional arrangements are quite difficult to predict precisely because of the degree to which those arrangements will be tested by the individuals responding to the incentives created.

3. The health of a society's institutions can be judged by the degree to which individuals are expending effort rearranging wealth rather than creating wealth.

More at
Raw trade data suggested the the UK's exports rose by 39% year-on-year in the second quarter, but when the ONS factored out possible MTIC fraud, this falls to a 12% increase.
. . .
MTIC is a European concern, and some estimates have put the total loss of VAT within the EU at EUR50 billion annually. This has prompted some European governments, including the UK, Germany and Austria, to seek permission from Brussels to change VAT regulations to apply 'reverse charging' under which the purchaser of the goods, rather than the seller, will be liable to account for the VAT on the sale. So far only the UK has been given permission to change its rules to combat the fraud.

Momentum for action to combat the problem is also growing within the European Commission. In a paper published earlier this year, Taxation Commissioner Laszlo Kovacs presented some radical proposals to counter carousel fraud, but it is thought the EC will take a more conservative approach to the problem by enhancing administrative cooperation and improving safeguards in the current system.



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