Tax IDs and List Checks: The New Trend

Gabriel Pezzato
July 9, 2020

VAT gaps can generally be found in countries that collect indirect taxes. This hiatus has led many tax administrations to implement Continuous Transaction Controls (CTCs), through which transactional and accounting data are monitored in real-time or near real-time. However, even countries with sophisticated CTCs may encounter fraud involving missing traders and non-existent supplies. This creates holes in the VAT collection chain leading to significant shortfalls. Although taxpayers are used to validating incoming e-invoices and e-signatures, many governments have introduced additional validation requirements to tackle the loss of revenue.

Validation requirements

Accepting losses due to invalid transactions is normally off the table for the tax authorities. Therefore, methods to pass the debt over to other taxpayers that are part of a VAT credit chain have been implemented. To ensure these methods don’t override proportionality requirements that typically exist in legal regimes, tax administrations generally expect taxpayers to carry out auxiliary checks before relocating the VAT cost in the chain. The thinking behind such validation requirements is to assign tax liabilities to taxpayers that know or should know that the supply or trading partner is in breach of the law. These obligations are varied.  They can be as simple as checking the tax identification of the trading partner or as complex as ensuring that the VAT amount was collected by one of the trading partners.  

Tax ID checks requirements

Among the simplest alternatives are the tax ID checks requirements. Here, trading parties must validate each other’s tax IDs before carrying out a transaction or payment. If the VAT amount is not paid because one of the trading partners is missing, and the checks were not done, the remaining trading partner is accountable for the VAT not collected. This technique has gained traction in the EU where exemptions granted to intra-community supplies depend on the correct information being provided by the interested parties in the recapitulative statement. In practice, suppliers must check the buyer’s VAT number through the VIES platform. If the information is incorrect (or if the trading party doesn’t exist), the supplier bears the VAT burden that otherwise would be the buyer’s responsibility – unless the company proves that the buyer’s VAT number was deemed valid in the VIES platform on the date of the supply.

Further validations

Some countries have gone beyond ID checks and implemented other validations to be executed by the trading parties to ensure the taxes can be collected. What is not so different is the assumption that the negligent party will close the gaps in the VAT credit chain through joint liability with the other party’s VAT obligations. In Poland, for example, apart from the VIES checks performed in intra-community supplies, buyers must carry out payments to bank accounts registered with and listed by the Polish tax authorities. If a taxpayer pays into a supplier’s unapproved bank account, the payer is accountable for the supplier’s VAT obligations. In Mexico, despite early adoption of CTCs, buyers must check whether their suppliers are on an unapproved list (e.g. deemed to have issued fraudulent invoices or been part of sham transactions). Since invoices issued by unapproved Mexican blacklisted companies lack fiscal value, they cannot endorse VAT credit claims; consequently, the buyer assumes the VAT cost of the transaction.

Increased efficiency

A smooth VAT credit system that goes hand in hand with business processes is key to efficiency. Consequently, tax authorities should avoid imposing measures hindering a straight-forward credit-debit system. India is moving to a CTC system through which the tax authority will perform automated tax ID controls. Nevertheless, the country is still expected to keep its current framework through which buyers are only entitled to credit taxes if their suppliers had correctly collected the GST amount to the government treasury. On one hand, this approach makes an auditor of each taxpayer, whilst on the other hand, it causes an immense administrative burden for taxpayers that cannot rely on the payment presumption and must reconcile data that might not be readily available.  

The validation of tax IDs and lists is a trend that affects both post-audit and CTC countries alike. Nevertheless, tax administrations of the latter category can leverage their systems to perform automatic checks and notify interested parties when the transaction is performed. This is the case in Italy, where the SDI (the centralized e-invoicing platform) checks VAT numbers – and also if these tax IDs are part of a larger VAT group – appointed in an e-invoice, rejecting documents with invalid data. In Brazil, these checks are also executed at the core of the multiple State e-invoicing platforms, as is also expected to happen in India.

The cost of noncompliance

The cost of noncompliance is high. The risk of becoming liable for unexpected VAT charges is particularly great since each inadequate tax ID or list check may hide a VAT cost associated with the supply.  All in all, account payable and receivable systems must catch up with the trend and be able to either conduct required checks themselves or have the flexibility to integrate with government platforms or service providers to ensure that checks are duly performed.  

Take Action

To keep up to date with the changing VAT compliance landscape, download Trends: Continuous Global VAT Compliance and follow us on LinkedIn and Twitter to stay ahead of regulatory news and other updates.

Sign up for Email Updates

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


Gabriel Pezzato

Gabriel Pezzato is a Regulatory Counsel at Sovos. Based in Stockholm and originally from Brazil, Gabriel’s background is in tax, corporate and administrative law. Gabriel earned a Law degree and a specialization degree in Tax Law in his home country and has a master’s degree in International and European Tax Law from Uppsala University (Sweden).
Share This Post

LATAM 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 […]

EMEA VAT & Fiscal Reporting
August 4, 2020
New VAT Rules for Online Marketplaces and Imports of Goods into the UK

The United Kingdom’s HMRC has issued new guidance on the VAT treatment of cross-border sales of goods and online marketplaces beginning 1 January 2021, following the end of the transition period. Cross-Border Sales under £135 New rules will apply when a business sells goods for £135 or less to a UK customer and the goods […]

EMEA VAT & Fiscal Reporting
August 3, 2020
New EU Tax Package: VAT Priorities

On 15 July 2020, the European Commission (EC) adopted a new Tax Package, intended to increase tax compliance while reducing administrative burden on businesses. The Tax Package contains a number of proposals related to VAT, of which three in particular stand out: A single EU VAT registration for taxpayers; Modernized VAT reporting obligations; and Facilitated […]

August 3, 2020
Should Insurers Receive an IPT Holiday From Their Governments?

It’s been a tough year for businesses. Whilst many have accepted that 2020 is likely to be a year to forget, unfortunately tax still needs filing and paying. Tax authorities have been understanding – nobody could have foreseen this – and there has been a concerted effort to provide SMEs with tax relief and postponements […]

Asia Pacific E-Invoicing Compliance EMEA India
July 31, 2020
India: Last-Minute Changes to the Proposed E-Invoicing System

The October deadline is fast approaching for the Indian CTC invoicing mandate, but it remains a moving target. In a swift move that was published just two months prior to go-live, authorities have now changed the scope of who is affected by the reform, as well as updated the JSON format. Why the change? The […]

ShipCompliant United States
July 30, 2020
2020 DtC Wine Shipping Mid-Year Report

Since we released the annual Direct-to-Consumer Wine Shipping Report in partnership with Wines Vines Analytics back in January, a lot has changed when it comes to how consumers are getting their wine. The COVID-19 pandemic swayed buying channels drastically, shifting traditional retail and on-premise sales over to ecommerce sales. With brick-and-mortar retailers being closed down […]