Border tax adjustment without borders: The EU carousel of VAT fraud

This article focuses on the carousel of VAT fraud consisting in multiple undue VAT rebates for goods exported and re-exported between EU countries. This fraud has been developed as a form of border VAT adjustment since the abolition of the borders within the EU countries. The carousel is modelled as a Nash equilibrium chain-game beginning at the retail stage where fraudsters try to capture an unsatisfied demand for the traded goods by means of a reduction of its final price. This can occur because at the final stage the good can benefit from multiple subsidies deriving from undue VAT rebates and because of the power of the fraudster in affecting the prices of production factors. We explore the effects of the carousel fraud game on intra-community trade and analyse the implications for tax authorities.