March 30, 2010 / 5:26 PM / 7 years ago

Factbox: How carbon trading tax fraud works

LONDON (Reuters) - Spanish police said on Tuesday they arrested nine people on charges of carbon tax evasion, while Norwegian tax authorities said they would investigate all companies' transactions in EU emissions permits.

Both investigations are part of a wider EU probe into an estimated 5 billion euro ($6.75 billion) fraud where companies bought carbon emissions permits in one country without paying value-added tax (VAT), and then sold in another adding tax to the price but pocketing that difference for themselves.

Such fraud surfaced in Britain in August last year, prompting the arrest of seven people, while French prosecutors in June launched an investigation into carbon VAT fraud and the Netherlands took measures to stamp put the practice.

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See below for details on how the fraud works and for stories related to carbon tax fraud in the last year:

HOW DO FRAUDSTERS DO IT?

The fraud has high returns over a short period of time. It is difficult to prove, meaning convictions are sparse.

A simple version is 'acquisition' fraud where the goods are imported VAT-free into one European Union member state from another. Once the goods have been sold on the importer goes missing, taking the VAT, which is collected as part of the sale.

A more complicated form is called "carousel fraud." Goods are imported VAT-free but are not sold for consumption in the home market. The goods are sold through a series of companies, each liable to VAT, before being exported, possibly even back to the original seller.

The first link in the chain often goes missing without accounting for the VAT. The final link reclaims the VAT it has paid from the government before disappearing.

TIMELINE:

MARCH 30, 2010

Spanish police say they have arrested nine people on charges of avoiding 50 million euros ($67.54 million) in tax linked to trading in carbon credits.

Norwegian tax authorities said they will investigate all firms' EU carbon permit transactions in the Nordic country as part of an ongoing probe into VAT fraud.

MARCH 29, 2010

Oslo police say a police investigation into carbon tax fraud is widening its scope into money laundering, with five men charged.

MARCH 1, 2010

Norwegian police say at least three more firms are under investigation over alleged carbon tax fraud.

FEB. 26, 2010

Norway's tax authority says three people are charged and at least two companies are under investigation in Oslo over alleged carbon tax fraud.

JAN. 11, 2010

Belgian prosecutors say three Britons and a Dutch man are charged by Belgian authorities with money laundering in an investigation into fraudulent trading in carbon emissions permits.

DEC. 10, 2009

Fraudulent trading in European Union carbon emissions credits in the past 18 months has led to more than 5 billion euros in tax revenue losses for several EU nations, European police agency Europol says in a statement.

SEPT. 1, 2009

A patchwork of unilateral actions by few European Union nations to prevent suspected tax fraud in carbon permit trading could serve only to push the activity into neighboring states.

AUGUST 19, 2009

The British tax office arrests seven people in London in a suspected 38 million pound ($57.13 million) VAT fraud in the EU carbon allowances market.

JULY 15, 2009

The Dutch ministry of finance says there are "clear indications" of fraudulent activity in the Dutch carbon emissions market and put the onus of paying VAT on the carbon permit buyer, instead of the seller.

JULY 11, 2009

The Paris prosector's office says a probe is under way into a suspected multi-million euro VAT fraud in the French carbon emissions market, although no one is placed under investigation at this point.

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