False Invoices and Tax Frauds

Alfredo CollosaAlfredo Collosa    27 January 2020
False Invoices and Tax Frauds

An ever present complex issue to bee considered in the control strategy of the Tax administrations

While the greater part of the world is involved in examining the international taxation phenomena, headed by the OECD’s BEPS Action Plan and taxation in the digital economy, the purpose of this comment is to highlight an issue which I understand is ever present and of great importance to the countries, namely: the tax evasion or tax fraud resulting from the use of false, irregular or imitated invoices.

This topic, because of its magnitude, relevance and social consequences should be considered in every control strategy of the Tax Administrations (TAs).

I am 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, as well as economic support to organized crime and terrorism.

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.

As I said before in another blog in this same section, I am convinced that technology should simplify taxes[1]. Because of this simplification, the TAs are becoming digital Administrations, with the concept of virtual office being highlighted.

Today, you may request online the registration number, the registration in the different taxes, register activities carried out, change the tax domicile, 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, through the use of 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.

ICTs are available to everyone, namely those who wish to use them to evade, as well as to the TAs for a more efficient management. There is a significant gap in its use by the private sector as compared to the public sector, especially in many developing countries, which undoubtedly constitutes a challenge for the TAs.

The generalized use of the electronic invoice is a great achievement with multiple benefits for the TAs, which together with other preventive control measures may resolutely contribute to combat fraud.

Undoubtedly, this is one of Latin America´s contributions to international taxation in support of transparency and digitalization of the TAs and the struggle against evasion.

The following step thereto are the digital VAT records and a subsequent step would be digital accounting on line at the headquarters of the TA webs.

Nevertheless, I would warn that electronic invoicing per se does not fully solve the problem of false invoices. Thus, it should be complemented with other measures.

At the world level, the TAs have adopted multiple actions for controlling false invoices. These range from the creation of unreliable taxpayer bases and their publication, limiting the authorization for the issuance of vouchers to individuals with irregularities, 100% withholding of VAT in the invoices issued by individuals with inconsistencies in their tax behavior, structuring taxpayer risk profiles to then process refunds. Other measures are the possibility of validating vouchers in the TA portals, endeavoring to measure the economic capacity of the taxpayers, the detection of abusive schemes by Companies Invoicing Simulated Operations (EFOS) and Companies Deducting Simulated Operations (EDOS) in Mexico, proposing modifications in the penal legislations of each country for expressly considering the issue as a criminal offense, etc.

The new cooperative or collaborative compliance approaches are highlighted. They establish a new relationship between the TAs and the taxpayers endeavoring to provide greater security and certainty to the administration, thereby promoting voluntary compliance.

Some of these cases are the forums of large enterprises already created in many countries, the Good Practices Codes, the reliable operators in the customs as well as tax sphere, the VAT certified taxpayer of the European Union Guideline and likewise, tax compliance, mentioning as example the recent UNE 19602 regulation approved in Spain, in order that companies may identify, manage and control tax risks to facilitate tax compliance.

Another important one is Directive 2018/822 of the European Union on DAC (Directive on Administrative Cooperation) tax intermediaries, according to which the tax intermediaries should inform the TAs about the fraud cases.

We also deem it important to continue to move forward in determining the individuals who are the actual beneficiaries of businesses and properties. 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.

These best practices, which we have mentioned as example, should be analyzed by the TAs, by always considering their context and scope of action, since the automatic application of solutions from other countries have not always been successful.

The TAs have ever more external and internal information, for which reason they should contribute to generate more preventive controls for reducing the use of false or imitated invoices, along with the importance of subsequent controls. What generally occurs is that many times they arrive late; for example, when the tax credit has already been unduly refunded to the exporter.

There should be a single control strategy combining both types of control: massive and intensive, as I previously commented[2].

A system of previous controls and online alerts, similar to that applied by financial entities for granting and controlling the use of credit cards, may bring about results in specific cases of false invoices.

The TAs should anticipate themselves to these forms of tax fraud. Important in this case are the new investigation and examination methods based on predictive behavior models associated to risk profiles, data mining and big data.

I hereby highlight the importance of motivated, trained, integral and well-remunerated human resources as an essential element for the success of any control process.

The implementation of banking procedures in the operations is essential, since the reduction of informality may in turn reduce evasion, without disregarding the control of operations that are carried out with digital currencies.

Cooperation with other TAs and Organizations within the same country as well as abroad, is also vital not only for sharing information but also for jointly facing such complex phenomenon.

One should continue to create awareness among citizens of the consequences of this type of fraud, but above all the judicial authorities so that they may apply effective sanctions to these violations in accordance with each country’s penal code.

Finally, these are only some ideas to open the discussion, which I consider to be of great importance and validity and which should be taken into account in the control strategies of the TAs.

 (*) CIAT BLOG 21/03/2019

[1]          Will technology simplify taxes? CIAT Blog. 2/6/2017.

[2]          Massive or intensive controls? Which should be the strategy of the Tax Administrations? CIAT blog 13/8/2018.

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