Mexico Effort to Curtail VAT Fraud Needs Real-Time Verification

Mexico’s new data collection measure aims to crack down on invoice fraud for value-added tax. But instead of building a real-time fiscal invoicing system and getting out ahead of fraudsters, it offloads enforcement onto digital platforms such as eBay and Amazon. This is a half-measure that criminalizes intermediaries without equipping them with any method to detect fraud.

The government is framing the new measure as a modernization effort to eliminate the thriving gray market in false invoices used fraudulently to offset tax liabilities. Instead of reconsidering the architecture that enables the fraud, the proposal focuses on digitization of enforcement and outsourcing it to non-state actors.

But the best path forward starts with building the infrastructure Mexico needs—real-time fiscal invoicing with validation for every transaction before it enters the tax record.

To better understand why the new reform is misguided, it’s helpful to grasp the mechanics of the fraud it is meant to address. False VAT invoice fraud hinges on the ability to generate or acquire a tax receipt for a transaction that never really happened or that the fraudster wasn’t a party to. This is typically done through a network of front companies, known in Mexico as factureras, that exist solely to issue such invoices.

The invoices, which essentially are receipts, can then be used to inflate deductible expenses or even claim unwarranted VAT refunds. In some countries, entire online marketplaces have emerged to offer fake receipts as a kind of fraud-as-a-service.

If a receipt can go out without being immediate verified against tax authority records, it can be passed off as legitimate just long enough for a fraudster to offset tax liability and disappear. The problem is ultimately an information delay, and it’s what makes the fraud scalable.

In practice, this means that the fraud doesn’t occur in the advertisement of these receipts; it doesn’t even really occur in the generation of fake invoices. The fraud occurs in the government tax infrastructure that allows unverifiable transactions to flow through the system without being flagged.

That failure is puzzling because, on paper, Mexico has many of the tools needed for this modern enforcement. Under its current system, taxpayers must obtain a digital identity and a separate signing certificate, then route each invoice through a certified validator that is supposed to forward the invoice to the tax authority in real time. Clearly, something is broken.

More than 8,000 shell companies have acquired these certificates and used them to issue legally valid but entirely fictitious invoices. Invoices are being digitally stamped, reported, and logged—fraudulent, yet compliant. The system has the appearance of real-time validation but not the actual function.

Mexico’s reform has expediency on its side, but there are dangers that come with hasty policy choices and quick fixes. Criminalizing the platforms that unwittingly might host fraud moves beyond aggressive enforcement and sounds more like delegation without authority or ability.

Platforms aren’t equipped with trained auditors, and they don’t have access to the back-end financials of their users. They can’t distinguish a legitimate invoice from a fabricated one—and certainly not in real time or at scale.

Real enforcement happens where the buyer, seller, and the government can all meet: at checkout.

Photographer: Ulises Ruiz/AFP via Getty Images

From the perspective of a digital platform, these fraud schemes may not look like a sophisticated tax evasion offering. A seller may post an ad offering “accounting services,” “legal tax structuring,” or even “compliance solutions.”

Maybe there’s even a WhatsApp number associated with the ad—but there may be no invoice, no transaction, and no buyer or seller identified. The ad creates a trail vague enough to avoid filters but clear enough to attract the right clientele.

If this sounds familiar, that’s because it is. Mexico’s proposal follows a well-trod path used by governments confronting this type of VAT fraud without the political will or capacity to build the infrastructure to stop it. Instead of reengineering how receipts are issued, tracked, and verified, they just criminalize whoever they can catch standing closest to the fraud.

Mexico is preserving the form of oversight (policing and liability) without adopting the function of reform (real-time validation). It’s not so different from when China implemented its Golden Tax Project, which also prioritized platform-based monitoring and digitized paper trails over real-time validation at the point of sale.

The choice offered oversight without enforcement, and a reformed system where the tax authority got more—but not better—data. Importantly, the project failed in part because private parties shouldered liability without being able to verify the transactions they were tasked with policing.

Real enforcement happens where the buyer, seller, and the government can all meet: At checkout. That’s the only place where the transaction is alive, all parties are present, and enforcement can be embedded rather than imposed.

Mexico should encourage real enforcement as countries such as Brazil, Italy, and Fiji have done: by embedding compliance at the point of sale. Every receipt is digitally issued, time-stamped, and cleared by the tax authority. Fraudulent invoices can’t be introduced later because there is no “later.”

Such a system absolves platforms of their newly foisted policing requirements because it removes the incentive to advertise or even trade in fake receipts. If the receipt can’t be cleared against a tax authority database, it can’t be used. This also addresses privacy concerns by giving tax authorities a look at transactions as they’re processed rather than handing keys to the entire data kingdom to third-party service providers after they’ve been recorded.

Mexico has the technological capacity to build this. It already employs methods to standardize tax documents and therefore has experience working with structured data—it’s a short step from structured data to validated data.

What’s missing, however, seems to be the political will to replace symbolic punitive measures with operational reform. To fight fraud, the work must start at the system’s core, not the periphery.

Andrew Leahey is an assistant professor of law at Drexel Kline School of Law, where he teaches classes on tax, technology, and regulation. Follow him on Mastodon at @andrew@esq.social

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