by ALFREDO COLLOSA and KSENIJA CIPEK
- INTRODUCTION
Today more than ever, countries need resources to finance the crisis caused by Covid 19.
That is why I consider it vital to reduce tax evasion.The tax evasion that occurs by the use of false invoices is an issue that due to its relevance and social consequences must be considered in any control strategy of the Tax Administrations (TAs).
I am referring referring to businesses that are established for the sole purpose of simulating operations with the objective of generating tax credits, obtaining undue refunds from fictitious favorable balances, and likewise reducing the tax bases not only of the VAT but also of the income tax.
These false invoices are not only used for tax purposes, but for other reasons such as justifying irregular purchases, laundering of assets operations and other cases of corruption in public bids, payment of bribes, and in extreme cases economic support to organized crime and terrorism.
Hereby I will try to review some of the best practices that were used or are being used in different countries to combat it and highlight some final ideas.
- BEST PRACTICES TO COMBAT FALSE INVOICES.
First, it is essential to investigate in every country the causes that originate this phenomenon and its magnitude, in order to combat it more efficiently.
The causes range from high informality, nonbanking operations, simplified systems, the globalization of businesses, digital currencies, lack of a control strategy by the TAs, non-application of effective sanctions by the judicial authorities, etc.
With respect to the magnitude of fraud, of great use are the sectorial evasion studies that allow for determining not only the sector or group of taxpayers that are incurring in the maneuvers, but also which type of maneuvers are the most common ones.
The most common maneuvers for generating and using this type of vouchers have become ever more complex through time and the ICTs.
Today, you may request online the registration number, the registration in the different taxes, register activities carried out, change the tax domicile, and inform the members of corporations. You may also establish an enterprise, issue electronic invoices, file the returns, pay taxes, quickly obtain the refund of balances in your favor, customs reimbursements, certificates to enter into contracts with the Government, to mention only a few of the improvements.
These advancements generated by the Tax Administrations through ICTs have also resulted in new and much more complex forms of fraud, with false other than the traditional invoices.
For example, only by having available an IP, one may generate a company exclusively for purposes of issuing false invoices. There are cases that are extremely complex, since they involve real businesses, which nevertheless, simulate operations well above their productive capacity to obtain tax benefits.
One of the first measures adopted, worldwide, to control false or imitated invoices was the possibility of validating the vouchers on the TAs’ portals.
Another way to encourage the issuance of invoices is by forcing taxpayers to have to enter in the application program, which generates the income tax declaration, all the data of the invoice received in order to carry out the deduction of an expense or service in income tax.
For example, to deduct from income tax the expense of a paid rent, it is requested that the number of the invoice, data of the issuer and the amount be identified.
The laws of many of the countries receive the sanctions of fine and closure of the establishment, whichis applied to those who do not issue invoices for their sales operations or service provision.
It also established the obligation of end consumers to demand proof of their operations and the application of sanctions in case of breach of said obligation.
Obviously, the banking of operations contributes to the issuance of invoices since in many countries there are information regimes for financial institutions and credit card issuers to report the operations carried out to the TAs.
Other measures were the creation of unreliable taxpayer databases and their publication.
In countries like Mexico, the detection of abusive Schemes by Billing Companies for Simulated Operations (EFOS) and Companies that Deduct Simulated Operations (EDOS) was implemented.
The generalization of the electronic invoice (FE) is a great advance that has multiple benefits for the TAs and that added other preventive control measures can decisively help to combat the fraud of false invoices.
Countries have already shown that using FE solutions can prevent and reduce tax evasion : invoices can be verified as authentic using digital signatures and online verification tools. It can also make tax compliance easier for businesses where electronic documentation replaces paper-based audits or reporting obligations.
FE has been implemented in a number of countries, with evidence beginning to be collected on its impact. For example, Argentina, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Italy, the People’s Republic of China, Peru, Rwanda and Uruguay have implemented electronic invoicing.
European governments are now implementing their own versions of real-time invoice controls as they look to combat their own VAT gaps effectively.
Hungary introduced real-time transactional reporting in 2018, while Spain adopted real-time reporting the year before. Italy then made electronic invoicing with tax administration clearance for domestic business-to-business transactions mandatory in January 2019. Others are following suit; the UK is in the middle of its Making Tax Digital (MTD) initiative, while Greece and France have similar plans.
Croatia introduced fiscalisation in 2013. through Cash Transaction Fiscalization Act[1]. According to the Cash Transaction Fiscalization Act, fiscalization of cash transactions means a set of measures implemented by fiscalization subjects in order to allow for efficient oversight of generated cash turnover.
For the purpose of fiscalization, the receipt, shall contain the following information:
- time when the receipt was issued (hour and minute)
- operator (person) ID on the cash register
- ID of the means of payment– bills, card, cheque, transaction account, other
- Unique identification code of the cash receipt
- security code of the issuer (fiscalization subject) and QR code.
In order to implement cash transaction fiscalization, the fiscalization subject is required to acquire a digital certificate from the Financial Agency, which shall be used in the fiscalization procedure for electronic signature of the elements of the receipt, as well as for identifying the fiscalization subject during electronic data interchange.
For the purpose of implementing the procedures of fiscalization of issued receipts, the fiscalization subject shall use software which enables procedures stipulated by the provisions of the Act, i.e. software which prevents procedures of avoiding fiscalization of the issued receipts.
At the time of the introduction of the fiscalization system, a way was developed that allows the use of software solutions at existing cash registers, and not exclusively the replacement of cash registers for a specific, exclusive type of cash register. The goal of the fiscalization is to establish control over the realistic presentation of daily turnover realized in cash in the business of taxpayers, prevention of tax evasion and fast and quality supervision of legal calculation and payment of taxes.
FE can have the additional benefit of replacing paper invoices, eliminating the need to print, send and store invoices.
FE is a re-engineering and digitization of the entire procure to pay process that companies will have to undertake at some point in time if they want to remain competitive in a digital world.
A next step is the digital VAT books and a subsequent step is the digital accounting carried out online at the headquarters of the TAs’ websites.
However, I note that in many countries there is overconfidence that FE solves the problem of false invoices, but in practice it is proving not to be the case as there are cases of false FE.
Many times when the TAs come to control the cases, all the VAT on these vouchers has already been returned to the exporters, for which I understand that the FE must be complemented with other measures.
Other measures adopted include limiting the authorization of the issuance of vouchers to subjects with irregularities or withholding 100% of VAT on invoices issued by subjects with inconsistencies in their tax behavior.
Others are moving rapidly towards Compliance Risk Management models, for example to process returns and generate audits.
Some of the benefits of the Compliance Risk Management System are: classification of taxpayers in predefined risk categories based on their behaviour, enables mass-based detection of types of risky behavior, increases taxpayers’ trust in tax administration, increases compliance with tax laws, establishes uniform procedures, focuses on risky taxpayers, optimization of audit capacity to the most risky taxpayers, prevention and detection of internal risks, etc.
For its part, there are already TAs that are trying to measure the economic capacity of taxpayers in order to authorize or not the issuance of vouchers.
Many countries also have in their criminal laws expressly defined as a criminal offense on the subject.
Some TAs are carrying out the traceability of certain products important to their economies in order to associate the physical movement of goods with the electronic documentation issued and financial flows, in order to detect the issuance of false receipts.
New approaches to cooperative or collaborative compliance are also highlighted in which a new relationship is established between the TAs and taxpayers, such as the forums of large companies already created in many countries, the Codes of Good Practices, the figure of reliable operators, both in the customs field as tax.
Likewise, the taxpayer certified in VAT of the Directive of the European Union, tax compliance and Directive 2018/822 of the European Union on DAC tax intermediaries according to which tax intermediaries must notify the TAs of cases of fraud.
Other measures adopted is the establishment of the subjects who are the beneficial owners of the companies and goods.For every registered property in a country, whether an enterprise or real or personal property, one must determine who is the owner or the final beneficiary.
For the Vat Fraud the EU Commission is proposing a series of fundamental principles and key reforms for the EU’s VAT:
- Tackling fraud: VAT should be charged on cross-border trade between businesses inside the EU. Currently, this type of trade is exempt from VAT, providing an easy loophole for unscrupulous companies to collect VAT and then vanish without remitting the money to the government.
- One Stop Shop: It will be simpler for companies that sell cross-border to deal with their VAT obligations thanks to a ‘One Stop Shop’. Traders will be able to make declarations and payments using a single online portal in their own language and according to the same rules and administrative templates as in their home country. Member States will then pay the VAT to each other directly, as is already the case for all sales of e-services.
- Greater consistency: A move to the principle of ‘destination’ whereby the final amount of VAT is always paid to the Member State of the final consumer and charged at the rate of that Member State. This has been a long-standing commitment of the European Commission, supported by Member States and the European Parliament. It is already in place for sales of e-services.
- Less red tape: Simplification of invoicing rules, allowing sellers to prepare invoices according to the rules of their own country even when trading across borders. Companies will no longer have to prepare a list of cross-border transactions for their tax authority (the so-called “recapitulative statement”).
In short, these are some of the measures that were adopted to combat false invoices;surely, there will be others that I have omitted.
- CONCLUSIONS
Finally and as a conclusion, I want to highlight some final ideas.
It is essential to inquire in each country regarding the causes that originate these maneuvers and their magnitude in order to combat them more efficiently, for which the sectoral evasion studies are very useful, which allow knowing not only which sector or which group of taxpayers are committing the maneuvers but also what type of maneuvers are the most common.
The control strategy must be unique, coordinating both types of controls, massive and intensive.
With the great information available to the TAs through their exploitation, controls that are more preventiveshould be generated, while emphasizing the importance of subsequent controls.
I understand that TAs should enhance or exploit the data mining offered by e-commerce, digital economy and crypto assets, also including a strategy of identifying transactions through virtual wallets and other digital payment and investment tools, to achieve control of operations and movements of funds through these tools.
This is because we must keep in mind that many of these operations can have consequences, not only tax implications but could be linked to crimes of money laundering, drug trafficking, and corruption.
Obviously, in many cases the control strategies of these operations require regulatory changes, very good information management, intelligent control plans and training of human resources with new digital skills.
A system of prior controls and online alerts similar to that applied by financial institutions to grant and control the use of credit cards can come to bear in certain cases of false invoices.
New investigation and control methods based on predictive models of behaviors associated with risk profiles, data mining and big data may be important to be able to anticipate these forms of tax fraud.
Tools that use predictive modelling can enable TAs to study fraud cases from history and figure which cases are correlated most with their current cases.
Technology tools are not a single fix to the problem of tax fraud with false invoices, but if implemented effectively, substantial progress can be made in high-risk areas.
The other necessary tools available should always accompany these solutions to TAs, including legislative measures, effective enforcement, taxpayer consultation and international co-operation.
Banking operations is key since reducing informality will decrease evasion, without neglecting the control of operations carried out by digital currencies.
In this sense, if there is something positive about the current Covid 19 pandemic, it is that it has caused many companies to digitize and sell more products or provide services by accepting means of bank payments.
Cooperation with other TAs and Organizations within the country as well as abroad is also vital not only to share information but also to jointly address the different types of fraud.
This unprecedented economic, health and social crisis that we are going through is producing a huge loss of revenue, which is why many countries are planning tax reforms and processes to modernize their TAs.
In the processes of tax reform, all aspects related to digitalization must be considered, which as I understand should always have the citizen as the guiding principle, seeking simplification, reduction of bureaucracy and greater transparency in the face of corruption.
Reducing compliance costs for taxpayers and the costs of tax administration by TAs is vital throughout the process.
The generalization of the FE is a great advance that has multiple benefits for the TAs and that added other preventive control measures can decisively help to combat the fraud of false invoices.
However, in many countries there is overconfidence that FE solves the problem of falseinvoices, but in reality, there are cases of false and imitated electronic invoices, which is why additional measures are required.
Citizens must continue to be made aware of the consequences of these frauds and apply effective sanctions to these crimes in accordance with the criminal codes of each country.
It is important to analyze these best practices that I have always mentioned, considering the context and scope of action, since the experiences of automatically applying solutions from other countries have not always been successful.
[1] https://www.porezna-uprava.hr/hr_propisi/_layouts/15/in2.vuk2019.sp.propisi.intranet/propisi.aspx#id=pro1334
