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