Operation ‘Dragon’

• More than 370 Tax Agency officials register 61 premises as key points for the entry of Asian goods into Spain, such as Cobo Calleja (Madrid), Carrús (Alicante) or Badalona Sud (Barcelona)
• The Inspection activities, carried out by staff of the Racketeering Squads of the ONIF Anti-Fraud Office, IT Auditing and Customs Surveillance, have led to inspections on 66 companies and 6 private individuals
• After six months of investigations and the analysis of many prior inspections, one large scale tax fraud operation has been defined against companies that are declaring a profit margin of up to 20 times less than the real margin in the Asian products importing and distribution sector

 

June 8, 2017.- The Tax Agency has launched today a coordinated operation at the national level against tax fraud and the underground economy in the import sector, distribution and sale of products from China and other complementary activities. The so-called Operation Dragon involves performing inspections on 66 companies and 6 private individuals in conjunction with raids on 61 warehouses located in industrial estates in 11 different Autonomous Communities classed as hot spots for the entry into Spain of goods from Asia - these are Cobo Calleja (Fuenlabrada, Madrid), El Carrús (Elche, Alicante) and Badalona Sud (Barcelona), among others.

The entry and search operation, which will last at least throughout the entire day today, will involve over 370 Tax Agency officials, including staff from the Inspection area, Racketeering Squads from the National Anti-Fraud Office (ONIF), IT Auditing Units and Customs Surveillance officials, with the collaboration of certain teams from the National Police, the Civil Guards and the Catalan Autonomous Police.

The activities began with visits by the Tax Inspectors at the offices of the taxpayers in question in order to gain access directly to the documentation and accounting records and ledgers, including electronic data processing systems. Since these were administrative rate actions, no arrests were made.

Profits 20 times below sector average declared

Operation Dragón stemmed from in-depth knowledge by the Tax Agency, based on several inspections and investigations carried out in recent years, of the patterns of undeclared activity used by the sector of imports, distribution and sale of Asian products, which led the Agency to focus its inspections on these activities from a global perspective, based on the success of previous sector-specific nationwide operations.

In this regard, the contribution of the ONIF has been crucial to clarifying the complex mechanics of the fraud existing in the sector and, in particular, the experience gained in the November 2014 'Operation Juguetes' with relation to the mechanics of entering and importing undeclared goods, or declaring below cost, using specialised intermediaries.

Specifically, the companies affected by Operation Dragón had been declaring an operating margin (profit over turnover) of only 1.7% on average, which is 20 times lower than the estimated range for the sector overall, based on investigations carried out in advance which determine that the actual margin on importing and distributing products of this type is approximately 40%.

Many of these companies were carrying out million-euro operations and expanding their businesses whilst systematically declaring losses. In turn, in prior inspections on other companies in the sector analysed as a background to this operation, it was revealed that 70% of all sales and purchases were undeclared and this proportion practically coincides with the proportional use of cash detected.

'Patera' accounts and fake invoices

Prior investigations have revealed the existence of major sums of cash being deposited into what the investigators are referring to as 'patera' accounts, which are being used so that the different business owners in the sector, without the need to be connected to each other, are sending significant cash remittances, both to their suppliers in China and to other accounts held by the businesses themselves in their country of origin.

The investigators have also revealed that, based on the study of purchases from private parties and retailers in these industrial estates, there is a double operation being carried out by these companies in terms of their invoicing. On the one hand, when customs did not request an invoice, the sales were sold directly and remained undeclared. On the other hand, in the case of sales to shops and businesses that declare correctly, the offset the 'overrun' in taxes generated in these 'official' sales by stockpiling fake invoices to fictitiously push up their costs.

Major cash purchases

At the same time, in some of the industrial estates under investigation, it has been detected that numerous retail businesses and distributors go there in person, load up the goods into private cars and small vans, paying a significant part of their purchases in cash and thereby evading what should be an ordinary trade transaction, with orders followed by delivery to client and subsequent bank payment of orders.

The reason for this type of procedure is none other than the low prices that the clients pay for the products, an enticement that is a direct consequence of the low initial price of the imports but is also especially due to the non-payment of direct taxes and, in particular, VAT on these sales. It is not unusual for payments to be made in cash, even for amounts greater than the maximum of 2,500 euros permitted by tax regulations.

This situation has led to a second operation being carried out in parallel to the main investigation inside the premises. The secondary operation involves identifying transports of goods in and out of the industrial estate, in order to verify the possible existence of goods bought or sold without declaring them and illicit transport activities.

Towards a full reset of the sector

With all this groundwork, after six months of investigations into the chosen collective, an entry and search operation was set into action, 'Operation Dragón' affecting 61 premises in 11 Autonomous Communities: Andalucía (11), Aragón (1), Asturias (1), Baleares (2), Canarias (3), Castilla y León (4), Cataluña (13), Extremadura (1), Galicia (7), Madrid (8) and Valencia (10).

The Tax Agency's investigators estimate that the industrial estates affected by the operation distribute over 50% of all the goods entering Spain from China in different segments of the textile, footwear, toys, household goods and stationery, among others.

The objective of these operations is not just to deal with the companies inspected on a once-off basis, but rather to create a permanent awareness among the sector's business owners that this irregular way of operating cannot continue and that the Tax Agency has launched a global monitoring campaign into the tax declarations of the entire collective.

In fact, this operation forms part of the 2017 anti-fraud plan, a significant aim of which is also to avoid that this type of activity continues, guiding the businesses in the sector towards better fiscal behaviour. To ensure this, the Agency also intends to carry out spot checks at retail outlets in the same field, in order to verify the billing and collection procedures, using the experience gained in 'Operation Dragón' regarding the different aspects of the activity, such as actual rates, cost structures, cash handling, supply channels and methods of payment to professionals and staff. The evolution of the tax behaviour of the collective in recent quarters will be taken into account when defining future control plans for this area.