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Deploying effective strategies in
tackling VAT fraud
Portugal’s experience
Second Global Forum on VAT
Tokyo
18th of April, 2014
European context
European efforts to fight tax fraud and evasion
Study on alternative methods for improving collection of VAT
VAT compliance
issues
Alternative methods
of VAT collection
Green paper made by
Commission
• VAT legal framework is being abusively used to
allow situations of tax evasion and fraud
• Analysis of various assessment and control methods
• In depth analysis is made of 4 alternative models
• COM issues a report (Dec2010) on the future of VAT
• All 4 methods have a positive cost-benefit ratio,
although the cost of implementation of the methods
varies
European context
European efforts to fight tax fraud and evasion
Study on alternative methods for improving collection of VAT
Description
Against
In favour
• Bank splits the payment
• The taxable amount is paid to the supplier
• The VAT amount transferred directly to the tax authority
• Eliminates ‘missing
trader’ fraud
• Substantial changes
in the way all
businesses and tax
administrations
handle VAT
Split payment
model 1
Model
• Invoice data is sent in
real time to a central
VAT monitoring
database.
• Possible elimination of
VAT obligations
• More effective if e-
invoicing is used for
all B2B transactions
• Costs of implementing
• Data management
• Protection of
confidential data
Central monitoring
database model 2
• Company uploads predefined transaction data into a secure VAT data warehouse
• Company maintains the database and accessible to the tax authority
• This model allows
quicker detection of
‘missing trader’ fraud
• Does not prevent
‘missing trader’ fraud
• Useless if the trader
goes missing
Data warehouse
model 3
• VAT compliance
process and internal
controls are
certified.
• Increase trust
between tax
authorities and
taxpayers.
• Time-consuming
• Requires substantial
investment by tax
authorities in human
resources.
Certified taxable
person model 4
Implementation of Green paper - VAT measures
Model 3 - Implementation of the Standard Auditing File system
Portuguese Government VAT Measures
Measure
Objective
Scope
• OECD recommendation implemented in 2009
• Computer file that allows the easy export accounting records [SAF-T (PT)].
• Easier for taxpayers to provide their electronic records
• Easier for auditors to review accounting records.
• SAF-T provides tool to meet the requirements of other entities
• Easier to switch from one accounting package to another
Advantages
• Corporate income tax (CIT) taxpayers
• VAT taxpayers with turnovers above €100.000
• All invoicing software be previously certified by the tax authorities
Measure
Objective
• Information contained in the SAF-T file is accurate
• Reduce the risk of non registration of taxable transactions
• Standard for invoicing software with full integration with SAF-T
• Not time/resource consuming
Scope
• Corporate income tax (CIT) taxpayers
• VAT taxpayers with turnovers above €100.000
Advantages
Model 4 – Certified Invoicing Software
Portuguese Government VAT Measures
Measure
Objective
Advantages
Scope
• All taxpayers to communicate in real time (or via a monthly export
from the SAF-T file) all invoices issued
• Tax authorities receive invoicing information as soon as possible,
reducing risk of VAT fraud and evasion, namely through missing
trader practices
• Reduces costs for taxpayers and tax authorities
• Certification of invoice software ensures compatibility
• Information filters avoids reception of personal/private information
• All corporate income tax (CIT) taxpayers
• VAT taxpayers with turnover above €100.000 send invoice
information electronically (remaining have a simplified regime)
Implementation of Green paper - VAT measures
Model 2 – Central VAT monitoring database
Portuguese Government VAT Measures
Implementation of Green paper - VAT measures
Three additional measures to improve Central VAT monitoring
database effectiveness
Measure
Objective
Advantages
Scope
• All VAT taxable
transactions must be
documented by an invoice,
• Ensure that all transactions
are properly invoiced
• Information is sent to the
tax authorities
• Change of cultural
behaviour
• All VAT taxpayers,
regardless of turnover
(some small exceptions
apply)
• Invoice issued entitled to a
15% refund of VAT paid
against PIT assessed in the
following year (up to €250
per household).
• Increase incentive of
asking for an invoice in
hard-to-tax sectors
• Consumers can “control”
businesses
Mandatory invoices
• Incentive covers
restaurants, hotels, car
repairs and hairdressers.
Tax benefit for requesting
invoices
• Weekly lottery
• Each 10€ entitles a
participation coupon
• Prize: Audi A4 and Audi A6
for extraordinary lotteries
• Increase incentive of
asking an invoice with TIN
in all economic sectors
• Low cost of implementation
• Consumers behaviour
allows to increase TA’s
control capacity
• All invoices issued are
automatically eligible
regardless of the economic
sector, as long as they
contain the TIN
Tax lottery
• The VAT reform has been considered a success, due to the
implementation of the central monitoring database model:
• The cost for the tax authority was lower than expected and the cost for
taxpayers was limited, as the system uses already existing electronic
standards
• Over 4,2 Billion invoices sent to the tax authorities (360 M per month) -
over 600 Million invoices in the restaurant sector
• Total tax revenue increase 13% in 2013 and VAT revenue in hard-to-tax
sectors (which grant the tax benefit for consumers) increased 20% in given
months
• Estimated 140% increase in VAT revenue from restaurant sector (250M€ to
600M€) between 2011 and 2013 – 50% resulting from the implementation of the
VAT reform and other set of measures
• Roughly 19 M€ in tax benefit given to ca. 2,5 M taxpayers in 2013
• 51.000 companies invoiced and did not submitted the VAT for
• 71.000 companies assessed less or deducted more VAT than due
• Overall, 128.000 companies detected with irregularities - 40% of these
companies voluntarily corrected their tax return.
Main results achieved
50% increase in the number of invoices issued and
submitted to the tax authorities (in comparison to the
four billion submitted in 2013)
Number of consumers that indicate their taxpayer
identification number may increase to over four million
Increase in revenue as a result of the development of
the invoicing reform between 600 and 800 million
euros.
Medium term objectives
• Innovative model in Europe to curb shadow economy
• Results above expectations in the first year of application
• Good acceptance by the business community and overall
society
• Major changes in cultural behavior are already observable
• Effective communication and close cooperation with
stakeholders is key
Conclusions