Digital tax reforms have fraud in their sights
A yearly boost of €11 billion is no small sum — but it is the payoff the European Commission is hoping will result from one of the most sweeping elements of its new VAT in the Digital Age set of reforms.
The digital tax reforms, known as ViDA, introduce the need for real-time digital reporting for VAT purposes based on e-invoicing, which the European Commission hopes will give Member States the ammunition they need to fight VAT fraud.
In the spotlight are a set of fraudulent practices known as carousel fraud — or more properly, missing trader intra-Community fraud — in which organised crime groups have exploited a lack of good data for criminal gain.
These work by having goods purchased into one EU country and selling them through a series of companies before the goods are sent to another EU country, obscuring the steps and ownership of the goods along the way.
Usually, a company in the chain charges VAT to a customer, but doesn’t pay this on to the relevant tax authorities, becoming the ‘missing trader’ in the transaction. The missing trader’s purchaser reclaims the VAT charged to it. Thus, they claim and receive reimbursement of VAT payments that never actually occurred. A VAT gap occurs.
Despite widespread awareness of the fraudulent practices, EU countries have struggled to crack down on VAT avoidance, says Marisa Hut, Partner in VAT and Customs Advisory at Baker Tilly in The Netherlands.
“As is traditional for governments, legislation doesn’t respond as fast as developments in the digital economy evolve, and the current set of rules is simply not effective in combatting fraud,” she says.
“It takes a significant amount of time before tax authorities have access to the information needed to act on potential fraud, particularly when they depend on the tax authorities of another member state to share information related to cross-border transactions.
“Therefore, it could potentially take up to six months before tax authorities are able to identify fraud and can start to act on it. By that time, the criminals have already disappeared — and the money has as well.”
“Legislation doesn’t respond as fast as developments in the digital economy evolve.” – Marisa Hut
Under the ViDA digital tax reforms, the European Commission expects e-invoicing to be mandatory by 2028, with a stipulated standard for invoicing between businesses.
Near real-time reporting will also be required, with businesses obliged to report all transactions within two working days of issuing an invoice.
Individual Member States will also have the right to broaden the range of digital reporting obligations for transactions in their jurisdictions — potentially including domestic supplies of goods or services.
The Commission predicts the introduction of e-invoicing should reduce VAT fraud by €11 billion a year over a decade, while reducing costs for EU traders, by cutting the time and resources needed to process invoices, as well as speeding up payments.
Anticipated savings for business run to more than €4 billion per year.
Yet despite the promised benefits, the shift to e-invoicing is far from simple.
“It will take an enormous investment in IT systems and business processes in order to get digital reporting implemented, for both tax authorities and entrepreneurs,” Mrs Hut says.
“Not all European tax authorities are capable of implementing digital reporting requirements into their systems swiftly or they do not have the means necessary in order to make such investments.
“For entrepreneurs it will also be a significant burden needing adjustments to their ERP systems. Given that thresholds for reporting are relatively low, the scope of the proposal will impact a lot of smaller businesses and we anticipate potential barriers in the investment needed and a lack of availability of software engineers.”
In Spain, e-invoicing has been mandatory for business-to-government transactions since 2015, and the country is expediting its introduction of business-to-business e-invoicing, which could become mandatory as soon as next year.
Initially, the change will impact large taxpayers, with turnovers above €8 million a year, but the obligation will eventually be extended to all taxpayers.
The experience of B2G e-invoicing should put Spanish companies in a better position to comply, says Maria Angeles Mariñas, a Tax partner with Baker Tilly in Spain.
“In the beginning, it was a big deal, because companies needed to spend a lot of money implementing the software and the systems and give extra time to employees to get used to obligations — or pay fees to advisors to work with them to comply,” she says.
“Things have obviously become simpler but it can still be challenging for small entities where they don’t have these kinds of resources or they don’t have enough money to implement this kind of system.
“We don’t know exactly how the new system will be implemented because there may be some changes in the draft legislation but as of right now, the new invoice regime will be compulsory both for big entities but also for small and medium enterprises and also for freelancers and individuals.”
“It can still be challenging for small entities where they … don’t have enough money to implement this kind of system.” – Maria Angeles Mariñas
The additional data and information captured through e-invoicing is obviously a boon for authorities, who can rapidly identify all the parties and details in a transaction (chain). For business, though, any mistake can become challenging to correct.
“If you made a mistake or the system made a mistake or the people accounting for the invoice made a mistake and the transaction was reported under an incorrect code, then tax officers will have some details that are not correct,” she says.
“If you aren’t checking those drafts or you want to change the records, that becomes difficult.”
For cross-border clients, who might be used to the simplified e-invoicing approach used in some other countries, the 60-plus fields used to track Spanish invoicing can also come as a shock.
“There are so many different codes that accounting for this in their ERP or accounting system can be difficult, so it will be interesting to see how the overall European position develops,” she says.
“They may choose — as we are doing — to have very detailed information but if that is not adopted across the European Union it may become difficult to cross-check that information.”
Mrs Hut says businesses should wait to see how the final ViDA proposals are developed before investing too heavily in preparation, as implementation could change based on the final e-invoicing requirements.
“It could very well be that the e-invoicing legislation will need to be adjusted in order to be approved by the EU.
At the beginning of July 2023, European Parliament members suggested more than 300 amendments to the proposals, including postponing the implementation with 24 months.” she says.
“However, if companies are implementing adjustments into their ERP system now, or planning to acquire a new system, we would recommend they at least make sure the new internal system is capable of managing e-invoicing as well.
“Getting the right system now will save time and money when the change becomes mandatory.”