Is a new wave of criminal proceedings imminent against Internet traders from China on suspicion of tax evasion?

At the beginning of December 2018 there were press reports in Germany about a rush of Chinese companies to the tax office in Berlin Neukölln. Several thousand Internet traders from China applied for a German tax number there at short notice. It is very likely that there will soon be a series of criminal proceedings against Chinese Internet traders on suspicion of tax evasion.

new wave of criminal proceedings imminent against Internet traders from China on suspicion of tax evasion

1. Change in law: Amazon and Ebay must be liable for taxes

The background for this development is a change in the law according to which platform operators such as Amazon will be liable for tax themselves in future if traders evade turnover tax. The risk of having to pay millions in taxes themselves may have prompted Amazon to exert pressure on the users of the online platform.

Tax investigators suspect that of the many traders who suddenly register for tax in Germany, some have already sold goods on Amazon or other Internet platforms in Germany. It is assumed that this has been done without fully declaring the VAT and customs duties.

2. Criminal accusations against Chinese Internet traders

Already in the past there have been accusations against Chinese Internet traders on suspicion of VAT evasion.

The underlying facts are mostly knitted according to similar patterns:

A Chinese entrepreneur founds a company, usually a GmbH, based in Germany. This is where online trading is conducted, often with products from the electronics and entertainment industries. These are imported from the People’s Republic of China and offered for sale on Internet platforms such as Ebay or Amazon.

The import of goods from the People’s Republic of China is subject to customs duties and import turnover tax. In addition, a delivery from China would result in long waiting times for German Internet customers.

In order to enable customers to deliver the goods they have purchased quickly, the entrepreneurs maintain their own logistics companies and warehouses. The goods are stored in the warehouse and sent from there at short notice to the German Internet buyers. The warehouses are operated by logistics companies. These are often founded especially for this purpose, usually in the legal form of a UG (limited liability company).

These logistics companies, which maintain the warehouses, act exclusively as service providers in their dealings with the tax authorities, merely packaging and shipping the goods purchased in the People’s Republic of China. Not infrequently, so-called straw men are used as managing directors of the UGs.

Customs declarations are sometimes made by the “official” sellers. However, customs duties and import sales tax are reduced if the value of the goods is much lower than the actual sales value.

Some goods are also imported via European third countries, such as the Netherlands. The import of the goods is declared as an intra-Community delivery to Germany without the import sales tax being paid.

3. Tax investigators search for typical circumstances

It is difficult for German tax investigators to understand the true values and economic processes in the network of companies and transport routes. Therefore, investigators are tempted to place every trader whose transport routes are internationally networked under general suspicion.

In the past, similar investigations into tax evasion against foreigners were carried out against IT engineers who worked in German companies.

4. Defence against allegations of evasion of customs duties and import sales tax

The defence of such cases requires a great deal of experience in commercial and criminal tax law as well as special knowledge of customs law and VAT law. In order to defend oneself against a general suspicion, it is necessary to clarify the complex facts and relationships with economic expertise.

Frequently, individual participants acting as intermediaries or suppliers are not even aware that they are part of a system designed for tax evasion. In these cases, it must be carefully worked out what the person concerned actually knows – and what not!

A successful strategy of criminal defence starts as early as possible. Any foreigner who expects to be suspected of having evaded taxes or customs duties in Germany should immediately contact a German specialist in tax criminal law. If possible, this should be done before a search, arrest or criminal charge is made.