How Tax Administrations Worldwide Can Combat False Invoices

Tax evasion that occurs through the use of false invoices is an issue that, due to its significance and social consequences, must be considered in any control strategy of a tax administration. It is important to note that the use of false invoices is not only for tax evasion purposes but also for irregular purchases, money laundering operations, corruption in public tenders, payment of bribes, and financial support for organized crime and terrorism.

This article will review some of the best practices that have been used, or are being used, in different countries to combat this problem.

Validating Invoices

One of the first measures adopted worldwide to control false or imitation invoices was the possibility of validating the invoices through the tax administration portal. Other measures were the creation and publication of unreliable taxpayer databases.

Electronic Invoicing

The general adoption of electronic invoicing (EI) is a great advance that has multiple benefits for tax administrations and, added to other preventive control measures, can decisively help to combat the fraud of false invoices.

EI is a Latin American innovation in advancing the process of tax transparency, and has used the technological developments available to improve control of taxes and make the services of tax administrations more efficient.

In Europe, the European Parliament resolution of Feb. 16, 2022 considers it necessary to explore a more harmonized introduction of EI in all member states, beyond its current mandatory use in public procurement across the EU, given that it has proved to be an effective tool for combating fraud and evasion in the countries where it also has been introduced for other types of transactions, and has led to greater simplification and reduced compliance costs.

Requiring companies to issue invoices electronically has been effective in helping countries tackle value-added tax (VAT) leakage, which stood at 134 billion euros ($146 billion) in the EU in 2019.

Over time, and in conjunction with the enhancement of the technology, this tool has been strengthened, as regards both its swift and easy availability to the public and as a safeguard of information. It has not only improved tax administration but has also made taxpayers’ accounting easier, more efficient and more accessible, particularly for small and medium-scale taxpayers.

At the same time, it has been shown that this tool has generated positive externalities, since many governments now have the potential to meet specific needs in their individual country. Some new uses that have been made of electronic invoicing include control of goods, a single accounting system, electronic payroll, and factoring as a financing mechanism.

Preconditions for the effective implementation of EI are a mature tax authority whose functions and processes are operating efficiently, as well as a well-functioning economic environment, and communications and information technology infrastructure.

However, it can be noted that in many countries there is overconfidence that EI will solve the problem of false invoices, when in practice this is proving not to be the case, as there are also instances of false electronic invoices. On many occasions when tax administrations come to control cases, all VAT on invoices has already been returned to the exporters—from which it can be seen that EI must be complemented with other measures.

VAT Books and Other Measures

A next step in EI is digital VAT books, and a further subsequent step is the digital accounting carried out online by tax authorities. Other measures adopted include limiting authorization of the issuance of vouchers for individuals or entities indicating tax irregularities, or withholding 100% of VAT on invoices issued by individuals or entities with inconsistent tax behavior.

Some administrations are moving rapidly towards compliance risk management models, for example, to process returns and generate audits.

Many countries have also in their criminal laws expressly defined this behavior as a criminal offense on the part of the relevant individual or entity.

Some tax administrations are carrying out the tracing 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.

Cooperative or Collaborative Compliance

New approaches to cooperative or collaborative compliance are also being followed, in which a new relationship is established between the tax administration and taxpayers—such as the forums of large companies already created in many countries, codes of good practice, and figures for reliable operators, both in the customs field as well as tax.

Similarly, EU Directive 2018/822 (DAC6) imposes an obligation on an “intermediary” (and in some cases a taxpayer) to report certain arrangements which are cross-border and satisfy relevant listed “hallmarks” often present in tax avoidance arrangements. The intermediaries must report details of the arrangements to the local tax authority, which is then required to exchange the information with all other EU tax authorities.

Another measure adopted is to establish which individuals or entities are the beneficial owners of companies and goods.

Measures to Encourage the Issuance of Invoices

Among the measures adopted to encourage the issuance of invoices, it is worth highlighting programs that encourage taxpayers to request invoices, which, by the use of their data, then allows them to participate in prize draws and lotteries, as in Mexico for example.

Another way to encourage the issuance of invoices is by requiring taxpayers to enter all data on invoices received when completing the online form which generates their income tax declaration, in order to to carry out the deduction of an expense or service for income tax. For example, to deduct the expense of a rent payment from income tax, the invoice number, issuer details and the amount must be identified.

The laws of many countries also include sanctions of fines, and closure of the business for those who do not issue invoices for their sales operations or provision of services. These laws have also established an obligation for end consumers to demand proof of the business’s operations, and the application of sanctions in case of breach of this obligation.

In other countries, “benefits programs” have been created, similar to those offered by financial entities or airlines where points or miles are added: The objective is that by loading the data of invoices received, benefits can be obtained.

All these measures seek, above all, to incentivize final consumers to demand proof of their transactions.

Obviously, the “bankarization” 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 operations carried out to the tax administration.

Final Thoughts

It is essential for every country to investigate the causes of tax evasion by false invoicing and its extent, in order to combat it more efficiently. The causes include a high degree of informality, non-banking operations, simplified systems, the globalization of businesses, digital currencies, lack of a control strategy by the tax administration, and non-application of effective sanctions by the judicial authorities.

With respect to the extent of fraud, sectoral evasion studies are of great use, allowing for the determination of not only the sector or group of taxpayers that are involved in these maneuvers, but also which type of maneuvers are the most common and complex.

I am convinced that technology should simplify taxes: In pursuit of this simplification, tax administrations are becoming digital administrations. Today, it is possible to go online to request a registration number, register for different taxes, register activities carried out, change tax domicile, and provide information on the members of corporations. Taxpayers may also establish an enterprise, issue electronic invoices, file returns, pay taxes, quickly obtain a refund of balances in their favor and customs reimbursements, and obtain certificates to enable them to enter into contracts with the government, to mention only a few of the possibilities available.

However, these advances generated by tax administrations through information and communications technology have also resulted in new and much more complex forms of fraud through the use of false non-traditional invoices. For example, by having only an IP address, it is possible to generate a company exclusively for the purpose of issuing false invoices. There are also cases that are extremely complex, since they involve real businesses which nevertheless simulate operations well above their productive capacity in order to obtain tax benefits.

The tax administration control strategy must be unique, coordinating both wide and intensive controls. With the extensive information available to the tax administration, more preventive controls should be generated, while emphasizing the importance of subsequent controls.

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 be brought to bear in certain cases of false invoices.

The switch to continuous transaction controls (CTCs), which sees transaction data automatically submitted to governments for approval, places authenticated source data of business transactions into the hands of governments, removing much of the dependency that tax administrations have had on resource-intensive on-site business system and document audits. Using CTCs means that the tax administration builds up a picture of a business’s tax liability using small, incremental reports supplied to them at the time of the business transaction.

New investigation and control methods based on predictive models of behaviors associated with risk profiles, data mining, and big data may also help to anticipate these forms of tax fraud.

Banking operations are also key, since reducing informality will decrease evasion, including control of operations carried out using digital currencies.

Cooperation with other tax administrations 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. As discussed above, in many countries there is overconfidence that EI alone can solve the problem of false invoices. In reality, even with EI, there are still cases of false electronic invoices, which is why additional measures are required.

Citizens must continue to be made aware of the consequences of these frauds, and effective sanctions for these crimes in accordance with the criminal codes of each country should be applied.

It is important for each government to analyze the best practices outlined above, and consider the context and scope of action, since the experience of automatically applying solutions used by other countries has not always proved successful.

This column does not necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Alfredo Collosa is a consultant and tutor in tax administration at the Inter-American Center of Tax Administrations (CIAT), professor, investigator, author of books and publications, and lecturer. He holds an Official Masters in Public Finance and Tax Administration (UNED-IEF).

The author may be contacted at: aecollosa@gmail.com