“Trends” Report Excerpt: The Consequences of VAT Non-Compliance

Christiaan Van Der Valk
December 23, 2019

The following is an excerpt from “Trends in Continuous Global VAT Compliance,” the 11th edition of the industry’s most comprehensive guide to e-invoicing, e-archiving and VAT reporting. The full report is available for download

To reduce the VAT gap, countries are pushing taxable organizations to comply with VAT requirements and enforcing different types of legal consequences for irregularities. The consequences VAT non-compliance can be significant. 

As a result, most companies want to be as certain as possible they can quickly and easily prove their VAT compliance to avoid risks, including:

  • Administrative fines: If a company cannot prove the veracity of invoices, it may be fined. Trading partners who have been drawn into an audit that leads to this conclusion may also be penalized.
  • Sanctions under criminal law: In some countries, non-compliance with invoicing requirements can be equated with tax evasion, which is typically liable to sanctions (e.g., fines, imprisonment) under criminal law.
  • Protracted audits: Audits should generally take only a few days, but many companies are audited for weeks or even months. This eats up precious expert resources and creates risks of more processes and documents being scrutinized and, potentially, found flawed or lacking.
  • Spill-over effects into other areas of taxation or accounting: Once a tax authority has established that a sales transaction cannot be evidenced, a company may also face sanctions in other areas of taxation. For example, non-recognition of an invoice for tax purposes may undermine the credibility of a company’s annual accounts or deductible expenses under corporate income tax.
  • Trading partner audits: The tax authority may have no choice but to verify the records and original documents of the audited company’s trading partners. This can negatively affect a company’s relationship with business partners.
  • Mutual assistance procedures: Auditors may need to call on their counterparts from other countries to obtain evidence about certain aspects of the company’s operations. Such procedures tend to be long and can tie up expensive expert resources within a company for months or even years.
  • Loss of right to deduct VAT: A company that does not have sufficient evidence of purchases — that cannot prove it was in control of its processes at the time of the transactions — may need to pay back input VAT it reclaimed on such purchases. With an average VAT rate of 20 percent, this means a high risk of that company retroactively losing more than its profit margin.
  • Obligation to pay VAT over fraudulent invoices: If a fraudster can easily forge invoices that are not reasonably distinguishable from a supplier’s normal invoices, a tax authority without credible evidence to the contrary may in extreme cases consider such invoices to have been issued by that supplier and claim output VAT payment if the buyer reclaimed the corresponding VAT. 
  • CTCs and data analysis: The introduction of CTCs and tax authorities’ growing ability to analyze vast amounts of transactional and other economic data collected directly from source systems rapidly makes compliance a much more binary proposition than before. In the post audit world, compliance was often a matter of legal interpretation where courts upheld standards of reasonableness such as proportionality, which tempered the desire of many tax authorities to penalize taxpayers for mere irregularities. The consequences of non-compliance in the CTC world is expected to become much tougher and far-reaching.

CTCs drive harsher penalties 

A recent example of the trend for countries with CTC regimes to toughen invoicing-related penalties is a recently adopted Mexican law (CS-LXIV-II-1P-006) that makes invoicing for, for example, non-existent operations a felony, equating potential invoicing errors with tax fraud and organised crime.

Take Action

Want to learn how to avoid risks associated with VAT non-compliance? Download the 11th edition of “Trends in Continuous Global VAT Compliance.”

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Christiaan Van Der Valk

Christiaan Van Der Valk is vice president, strategy. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice and commercial issues. Formerly co-founder and president of Trustweaver (acquired by Sovos), Christiaan also holds long-standing leadership roles at the International Chamber of Commerce (ICC) and the European E-invoicing Service Providers Association (EESPA). Over the past 20 years, he has presented at and authored key papers for international meetings at the Organisation for Economic Cooperation and Development (OECD), the Asia Europe Meeting, World Trade Organization and several other UN agencies. Christiaan earned his Master of Laws degree from Erasmus Universiteit Rotterdam.
Share This Post

Latin America VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

North America Sales & Use Tax
March 1, 2021
Growth is great – but is your approach to tax keeping up?

When business is booming, the last thing you want to do is focus on tax liability.  But as you expand, so does complexity. Moving into new geographic areas or creating new products and services will likely affect your business’ sales tax obligations, so it’s vital to keep up with new requirements as you grow.  More […]

North America Sales & Use Tax
March 1, 2021
If cars can drive themselves, should filing sales and use tax be so hard?

Picture this scenario: You input your sales and use tax data into your automated tax management tool and wait for your filings to be ready. A few days later, you get your determinations and have 24 hours to sign off.  You try to do quality control, but the forms don’t provide visibility into what data […]

North America Sales & Use Tax
March 1, 2021
It’s 2021. No more unpleasant sales and use tax surprises

It’s no secret 2020 was a year of personal and professional disruption, requiring rapid adaptation. So long, office happy hour. Hello Zoom quarantinis! Of course, businesses have been adapting just like each of us. You may have been growing your online sales… perhaps quickly. Maybe you’re selling into states you’ve never done business in before […]

E-Invoicing Compliance EMEA India
February 28, 2021
India Signals an Expansion in the Scope of E-Invoicing

The new Indian e-invoicing system has been live since October 2020 and it has been rolled-out in phases. The first phase started in October 2020 with taxpayers with a 500 Cr. rupees threshold or more and the second phase continued in January 2021 covering taxpayers with a threshold of 100 Cr. rupees or more. The […]

IPT VAT & Fiscal Reporting
February 26, 2021
Meet the Expert: Andrew Hocking, VP of Consulting and Compliance Services, Europe

Meet the Expert is a series of blogs to share more about the team behind our innovative software and managed services. As a global organisation with tax experts across all regions, our dedicated team are always keeping abreast of the latest regulation changes to ensure our customers stay compliant. What is your role and what […]