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False and fictitious invoices and tax audit

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False and fictitious invoices can be obtained in a number of ways. Nowadays it is very easy to produce invoices that appear genuine with new generation printers and personal computers. Invoices can be purchased on the Internet. Companies that want to buy invoices and those which sell invoices get in touch either through a mutual acquaintance or through word of mouth.

A false invoice is, in the first instance, a false document. Most countries have a definition of a false document in their criminal legislation.

In this way, can be defined a false invoice as “an invoice on which incorrect information has been put intentionally”.

Some countries make a distinction between two kinds of false invoices. This distinction is made to differentiate between the uses that the false invoices are put to.

A fictitious invoice is an invoice where the transaction did not take place and the main purpose is to extract money from the business possibly for funds for the directors. A fictitious invoice could also simply be used to reduce the VAT liability in countries where no reverse charge system is in operation. This would include invoices from “missing traders”.

A false invoice is an invoice where a transaction took place but it was not the transaction that is on the invoice. An example of this is where the false invoice is for the supply of goods whereas the money allegedly paid for the goods is actually used to pay the wages of workers who are not on the payroll.

Most countries agree with these definitions.

In France, false invoices are categorized as either false (convenience) invoices or fictitious invoices. A false invoice is where the transaction has taken place but was not performed by the company whose name appears on the invoice. A fictitious invoice, on the other hand, is an invoice where the transaction on the invoice did not take place and the invoice was only used to extract money from the business. The tax penalties differ between false and fictitious invoices. In relation to false invoices, the penalty applies to the supplier and user of the invoices while it only applies to the supplier where the invoice is deemed to be fictitious.

In Hungary, the Ministry of Finance has issued a policy on false/fictitious invoices. It defines false and fictitious invoices as “invoices that fulfill the legal requirements but have significant content deficiencies and includes false information regarding the transaction or the participants”. An indication of a fictitious invoice could be if the transaction between the participants on the invoice did not take place at all or the contract between the participants is bogus. An indication of a false invoice could be if the real economic event is not the same as the transaction outlined on the invoice. Generally, if the issuer of the invoice is not tax registered or the registration was based on false or stolen documents, there is a case of false/fictitious invoices.

In Italy there is a different definition:

– Objectively non-existent: A transaction which is non-existent in the absolute sense. A VAT deduction is not allowed because the supply of goods or the services has not taken place.

– Subjectively non-existent: A transaction between other participants than those who appear on the invoice or the acquisition for goods or services, illegally, with participants other than the company that had issued the invoice. The tax consequences are also that a deduction of VAT is not allowed.

The reasons why false and fictitious invoices are used are often the same in different countries.

False and fictitious invoices are used to take money out of the company in order to:

  • Pay workers (illegal immigrants or otherwise) who are not on the official payroll;
  • Pay hidden dividends to the manager or other connected persons.

Sometimes these invoices are used to:

  • Finance criminal or corrupt activities;
  • Hide the illegal origin of goods.

The tax implications of using false and fictitious invoices are often the same in the different countries. They can reduce tax payments by:

  • Reducing corporate tax by increasing deductible expenses;
  • Obtaining a VAT refund;
  • Decreasing the VAT payable by increasing the input credits;
  • Altering the VAT rate applicable;
  • Paying wages that have not been subjected to payroll taxes or social contributions.

The following initiatives are being considered by various tax administrations or have already been introduced to combat false and/or fictitious invoices:

But, what are the initiatives of different countries in Europe?

The initiatives include:

  • Development of risk analysis systems (i.e. a data mining model) to assist in the detection of fraud through the use of false or fictitious invoices (various countries including Belgium).
  • National construction projects to tackle risks quickly and consistently (various countries including Slovenia).
  • Introduction in Poland of the “Plan of Tax Discipline” based on the main tax risk areas. This plan identifies how audits should be selected and provides guidance on how to lead and to address specific issues of interest during an audit. This information was based on problems identified and experiences gained during audits.
  • Introduction of the Reverse Charge System of accounting for VAT.
  • The MT-database was established in Slovenia. This contains information on missing trader companies discovered during audits, those traders receiving invoices, the value of the invoice and period during which false/fictitious invoices were issued.
  • Introduction of a Single VAT Deposit Account in Azerbaijan in 2008. This is the first tax administration in the world to introduce this initiative and has resulted in an increase in VAT receipts of 74.7% above the 2007 figure. It is an automated process where taxpayers transfer the VAT amount from their bank account to the VAT deposit account by showing the sellers TIN (Tax Identification Number). The amounts per TIN are reflected on the sub-accounts of those taxpayers. From their VAT sub-account the taxpayer can pay their tax liabilities.
  • Preventative controls. These are deterrent controls introduced in Italy to discourage tax evasion and are carried out before the deadline for the submission of tax returns. They are short visits to taxpayers to verify certain information to be included in the returns, checking for the existence of workers not on the payroll (for future inquiries relating to social security) and, among other things, for checking invoices and receipts. These checks, which are primarily for VAT purposes, give rise to fines and sanctions for any breaches found. The taxpayer also has the opportunity to correct the tax return to be submitted.
  • “Targeted Access” controls have also been introduced in Italy. These are checks carried out after the submission of the tax returns (as distinct from preventative controls which take place prior to the submission of the tax return) and are a way of establishing whether a more in depth tax audit is required.
  • Creation of fraud detection cells in Belgium. One to two persons have been appointed in each of the 10 local directorates to gather information received from inspectors and auditors relating to tax frauds whose impact extends beyond the local area. This information is then passed on to a central unit who determine which tax frauds must be tackled.
  • Joint and several liability. This has been introduced in a number of countries and is being considered in Norway.
  • Introduction of a procedure in France to enable the tax administration to react quickly when a fraud is uncovered in a letterbox company. The procedure, which only applies to a period where a return submission date has not passed, involves swift action against a company (e.g. on the bank account), where fictitious invoices are found or where the company has issued them. This procedure does not require the permission of a judge and can result in a penalty of up to EUR 20,000. It can also result in an audit covering a period of 6 years rather than the normal 3-year period.

Measures from tax administration to make the feasible all initiatives are based on:

  • Unannounced visits/checks (various countries including Spain, Romania and Germany);
  • Effective sanctions, including imprisonment and confiscation of assets in FYR of Macedonia;
  • Joint actions involving police, customs, tax auditors and labour inspectors (various countries including Denmark and France);
  • Establishment of specialised teams for carousel fraud in the Netherlands;
  • Crosschecking of bi-annual returns regarding invoices issued and received in Romania (audits are then undertaken on the riskiest cases identified);
  • Interrogation of financial networks (e.g. linking connected parties) in various countries including Latvia;
  • Reorganisation of the unit responsible for the detection of criminal and tax frauds in Croatia;
  • Highlighting of specific legislative measures in Portugal to collect the correct tax due or tax improperly reclaimed;
  • Introduction of identity cards for all persons engaged on a construction site in Norway;
  • Amendment of the relevant legislation is currently underway in Croatia;
  • Exchange of information between various authorities regarding illegal employment, illicit work, unlawful social benefits, reimbursement of social benefits, temporary employment and immigrant workers from other countries, and Tax authority and fiscal police. This occurs in a number of countries including Germany.

When a false or fictitious invoice is discovered during an audit it is necessary to confirm the validity of the invoice and all documentation supporting it. The supplier and purchaser documentation is usually crosschecked.

When it is proven that the invoices are false or fictitious the audit is stopped in some administrations and a report is compiled and the case referred to the police. In some other tax administrations the investigation/audit continues while the prosecution commences as a separate procedure.

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