Andrejs Ždans and his “Forevers”: how millions were siphoned from the budget under the guise of VAT refunds through front companies

Audit reports indicate that “Forevers” engaged in extensive tax fraud. Curious why law enforcement “missed” it?

A few weeks ago, Pietiek published several articles concerning individuals such as Vitauts Teličens and the owner of the meat processing company Forevers, Andrejs Ždans (pictured), as well as about law enforcement authorities’ unwillingness to respond to information about these individuals’ alleged violations. It was interesting to read how a large part of the audience commented on these blatant facts with surprising tolerance — nothing has been proven, so perhaps none of it is even true.

It so happens that a few years ago a document came into my possession — prepared by the Third Division of the Third VAT Audit Department of the Tax Control Administration of the State Revenue Service — titled “On the tax audit findings regarding SIA Rocher.” The company Forevers is mentioned on almost every third page of the document. Here I present the most interesting excerpts for the public eye — and I look forward to seeing how the tolerant readers will comment on them this time, and how they will explain the law enforcement system’s astonishing leniency toward certain well-financed “entrepreneurs.”

1. Description of tax audit findings

In January 2017, SIA Rocher declared meat purchases from the Polish company Super Smak Sp. z o.o. and the subsequent sale of the meat to the household appliances wholesaler SIA Mega DVD (see Section 1 of the scheme). SIA Mega DVD declared deductible VAT (input tax) of EUR 127,720.66 for the meat purchased from SIA Rocher.

SIA Mega DVD then declared the further sale of the meat to its final recipient, SIA Forevers (a meat products manufacturer). SIA Forevers declared deductible VAT (input tax) of EUR 128,356.77 for the meat purchased from SIA Mega DVD.

The existence of the goods (meat) is not disputed — SIA Forevers did receive the foreign-origin product (meat) — however, the receipt of the meat through the Latvian companies SIA Mega DVD and SIA Rocher (as formally documented) is contested, based on the facts established during the audit and the circumstances described below.

***

When evaluating the nature of SIA Rocher’s declared meat purchase and resale transactions in January 2017 — as well as transactions involving the purchase and supply of spices (vanillin and cinnamon sticks, Chinese tea) — and assessing both direct and indirect business partners (participants in the transaction chain), the structure and specifics of the transaction chain (see Scheme 1 above), it was found that SIA Rocher had knowingly participated as an intermediary in an artificially organized intra-EU supply chain scheme aimed at VAT fraud, acting in the interests of the ultimate beneficiary, SIA Forevers, to obtain deductible VAT (input tax) on foreign-origin goods (meat) by declaring fictitious transactions for the purchase and delivery of spices and tea.

***

During the tax audit, information was obtained about the declared transactions, participants, and conditions within the meat purchase–supply chain, which collectively indicate that SIA Rocher was aware it was part of an artificially organized chain of transactions intended for VAT fraud in the interests of the ultimate beneficiary, SIA Forevers.

The summary of facts gathered during the audit leads to the conclusion that the company knew (or should have known) that by formalizing transactions with the aforementioned partners — namely, purchasing meat from the Polish company Super Smak Sp. z o.o. and reselling it to SIA Mega DVD, which in turn declared the meat sale to SIA Forevers (the actual recipient and end consumer of the meat) — it was involved in the documentation of fraudulent transactions and deliberately collaborated with partners to gain fiscal advantages through manipulation of the tax system.

The intent to defraud the state of value-added tax arises from the relationships among the persons involved in the tax fraud, their diverse activities imitating genuine taxable transactions, and their overall objectives and intent. The intent to defraud VAT is defined by circumstances characterizing a taxpayer’s conduct directed toward tax evasion (see Supreme Court judgment of June 1, 2015, in case No. SKA-3 55/2015).

***

When evaluating the transaction scheme involving SIA Rocher, signs were identified indicating that the scheme was artificially organized and did not arise under free market conditions as the result of spontaneous and unpredictable business dealings.

SIA Rocher was identified as a participant in an artificially created transaction chain intended for VAT fraud, based on specific characteristics and functions. SIA Rocher and the other participants in this chain acted in the interests of the ultimate beneficiary, SIA Forevers.

***

SIA Mega DVD declared input VAT for the meat purchased from SIA Rocher, while for the meat supplied to SIA Forevers, it declared output VAT payable to the state budget. The VAT payable by SIA Mega DVD to the budget was the difference between the VAT charged on the meat supply and the deductible VAT on the meat purchase — meaning that, in practice, VAT had to be paid to the state budget only from the profit margin between revenue and expenses.

***

Evaluating the above-mentioned facts about meat purchases from the Polish company Super Smak Sp. z o.o. during the period from 2013 to January 2017, it was concluded that SIA Forevers had been receiving meat from Super Smak Sp. z o.o. for several years through various Latvian intermediary companies, in large quantities and of significant value. However, Forevers had not concluded any direct contracts with the Polish company Super Smak Sp. z o.o. for meat purchases without intermediaries, nor had it signed direct purchase agreements with EU meat producers in Belgium or Germany, which would have reduced raw material (meat) procurement costs.

Since the company’s actions do not align with accepted commercial practice — namely, failing to eliminate intermediaries to reduce costs — and cannot be considered economically or reasonably justified, such behavior is linked to other motives: obtaining input VAT through an artificially organized transaction chain for foreign-origin goods (meat).

At the time of delivery, SIA Forevers received accompanying documentation for the goods, including certificates of origin for the meat, meaning that Forevers was aware of which foreign companies it could contract with directly for meat supplies, thereby excluding Latvian intermediary firms from the transaction chain.

The above conclusions — that an artificial transaction chain was organized in the interests of SIA Forevers to obtain input VAT on foreign-origin goods — were also drawn based on other circumstances identified during the audit, including an assessment of the economic substance (not just the legal form) of the transactions, as well as an evaluation of the companies involved (both direct and indirect partners) and the conditions under which the transactions were carried out.

***

Findings on SIA “Rocher”’s business activity

SIA Rocher exhibits signs (listed below) of simulating real commercial activity while in fact not carrying it out.

After evaluating all information obtained about SIA Rocher, its business partners, and declared transactions, the following was established:

SIA Rocher simulates intermediary transactions for meat supplies to its final recipient, SIA Forevers — only documents are drawn up to formalize the intermediary role in meat deliveries, but the transactions do not actually take place as recorded in the documentation.

Additionally, it was noted that SIA Rocher resells meat purchased from the Polish company Super Smak Sp. z o.o. at a lower price than the purchase price, which indirectly indicates that SIA Rocher only pretends to conduct genuine commercial operations. If SIA Rocher’s goal is not to make a profit, then the company must have other purposes — and these have been identified by analyzing the transaction chain and its participants. The conclusion is that SIA Forevers, by declaring intermediaries such as SIA Rocher and SIA Mega DVD, obtains input VAT that Forevers could not claim if it had declared direct meat purchases from foreign companies. (The existence of the meat is not disputed, as its origin has been verified and confirmed by information from foreign tax authorities.)

SIA Rocher participates in an artificially organized transaction chain in the interests of SIA Forevers — the chain secures input VAT through fictitious transactions declared by SIA Rocher for the purchase of spices and tea from SIA Grustor and their subsequent “sale” at a 0% VAT rate to the Czech company Flynoche s.r.o..

***

The chain of fictitious transactions (for the purchase and supply of spices and tea) serves the purpose of obtaining input VAT, which, together with the meat supplies, is passed on to the next intermediary, SIA Mega DVD, and ultimately to the true beneficiary of the transaction chain — SIA Forevers.

SIA Forevers processes the meat into meat products and sells them domestically through retail networks. As a result, the input VAT obtained through SIA Rocher and SIA Mega DVD reduces the amount of value-added tax (21% VAT) that SIA Forevers is required to pay to the state budget from its meat product sales within Latvia.