Best Practices to Encourage the Issuance of Invoices

In the present commentary, I want to highlight the importance of backing up sales  of goods and services with invoices to facilitate the payment of the corresponding taxes.

I comment on some of the best practices of the topic, what the different countries have done to promote the issuance of invoices, and finally I share some reflections.

Importance of the topic

It is clear that the non-issuance of the invoices that support the operations conducted causes loss of tax revenues in the various taxes in force in each country.

Also, it should be noted that many times the voucher is not issued in the name of one taxpayer but is then issued in the name of another, to calculate tax credits in VAT or deductions/expenses in income tax.

It would seem that the phenomenon may be more important in transactions with final consumers since these subjects, by not computing tax credits in VAT or deductions in income tax, do not have a concrete incentive in economic terms to request sellers/service providers to issue vouchers.

In this topic there may be cases of sellers /service providers who make discounts for cash payments with the hidden purpose of not issuing the voucher.

Also, cases where debit/credit cards are used for payment, but posnets or third-party tax controllers or digital transfers to a third party are used, whereby the invoice is not issued, and the transaction is not declared for tax purposes.

On the other hand, the non-issuance of invoices in simplified regimes produces the phenomenon of “fiscal dwarfism” since taxpayers are registered in the lowest categories by not declaring their operations.

Also, with the expansion of crypto assets, the tokenization of the economy and the new business models, there are cases of digital payments with cryptocurrencies are presented in which the receipt supporting the sale of physical or intangible goods, or the provision of services is not necessarily issued and where the identification of jurisdictions may be gray.

It is also clear that the non-issuance of invoices produces an increase in informality in the various countries.

Finally, a not minor issue is that there are other non-fiscal reasons for not issuing invoices, such as irregular purchases, corruption, money laundering, drug trafficking, etc.

In summary, I understand that the phenomenon is complex, not easy to address and, in many countries, of great magnitude.

Best practices to encourage issuing invoices

The electronic invoice is one of the implemented measures that allows (almost everywhere) the recipients to validate that the document was transmitted and approved by the Tax Administration, for example in countries such as Brazil, Mexico, Colombia.

Undoubtedly, the bankarization of transactions contributes to the issuance of invoices since many countries have mandatory information regimes for financial institutions, credit/debit card issuers and payment service providers, to report to TAs the operations conducted.

With regard to the measures adopted to encourage issuing invoices, among others, it is worth highlighting the programs that encourage taxpayers to request invoices, and with them participate in prize draws. These tax lotteries were implemented in countries such as Argentina, Mexico, Colombia, Paraguay, Brazil to name a few cases.

Another way to encourage the issuance is by compelling taxpayers to enter in the application program by which the income tax return is generated all the data of the voucher received, in order to make the deduction of an expense or service in the income tax or obtain credits for other taxes.

For example, in Argentina, in order to deduct the expense of a paid rent from income tax, the voucher number, issuer data and the amount must be identified.

The legislations of many of the countries such as Argentina, Peru, Mexico include penalties of fine and closure of the establishment, which is applied to those who do not issue invoices for their sales operations or service provision.

Some countries such as Argentina or Panama have also established the obligation of final consumers to demand receipt of their operations and the application of sanctions for the final consumer if they omit to request their receipt or invoice.

Other legislations require identifying the final consumers when the transactions exceed a certain amount, by entering their identity card or identity document on the invoice.

Another specific measure that encourages issuing invoices is the so-called “Personalized VAT” which, in short, promotes generalizing the tax base, ensuring that it is taxed at a single rate to maximize the neutrality of the tax and favor its management and achieve relief by returning the burden of the tax to those individuals who wish to benefit from it[1]. Currently, five countries apply this compensation through different mechanisms: Colombia, Argentina, Ecuador, Bolivia and Uruguay.

Another potential measure to encourage issuing invoices and also reduce informality is the obligation to use Digital Currencies Issued by Central Banks (CBDC) to make payments for operations, thus decreasing the use of cash.[2]

In some countries, a proposal was presented to create “benefit programs”, similar to those granted by financial institutions or airlines, where points or miles are added. The objective is by uploading the data of the received vouchers benefits can be obtained.

Finally, another measure is to allow a percentage of purchases supported by invoices to be deducted from income tax. Recently, a law was passed in Colombia by which from January 2023, 1% of purchases backed by electronic invoices may be discounted on the 2024 income statement[3].

Final thoughts

Although I am not aware of the existence of published studies of specific evasion due to this issue of non-issuance of invoices, the tax evasion that occurs when failing to provide invoices is an issue that due to its relevance and social consequences should be considered in any control strategy of the Tax Administrations (TAs).

It is key to investigate in each country regarding the causes of these maneuvers and their magnitude in order to combat them more efficiently, for which sectoral studies of evasion are very useful, as they allow us to know not only which sector or which group of taxpayers are committing the maneuvers, but also which type of maneuvers are the most common. The results of the inspection, the complaints, or the intelligence actions may allow the TAs to know more precisely the maneuvers.

I think the main objective should be to anticipate maneuvers more and more within a single control strategy. New technologies and the continuous control of transactions generate an opportunity for this through the effective use and exploitation of information to manage more in real time.

The new research and control methods based on predictive models of behaviors associated with risk profiles, data mining and big data can be important to anticipate these forms of tax fraud.

One positive aspect about the COVID 19 pandemic is that it has induced made many companies to digitalize and sell more products or provide services by accepting all means of bank payments. Therefore, it is vital for TAs to have the information of such operations.

The proposal of personalized VAT is very interesting and should be explored further, since it would also allow preferential treatments to be not for goods but for the taxpayers. The personalized VAT, when reaching low-income and informal households, forces them to use electronic means of payment and transactions are invoiced. It creates a relationship of these informal sectors with the State which is positive to reduce informality and make VAT more progressive.

The personalized VAT is useful for the issuance of the invoice because it obliges to use banks for the payments using debit / credit card, by which the TAs can know those operations through information crossings.

Cooperation with other TAs and other agencies in the country and abroad is also vital, not only to share information but to jointly address the different types of fraud.

The generalization of electronic invoicing is a great advance that has multiple benefits for TAs and added to other preventive control measures, this can decisively help to combat fraud.

The traceability of products in order to associate the physical movement of goods with the issued electronic documentation and financial flows is also very useful when combating this type of fraud, especially in countries that depend on natural resources and products of primary production of the agricultural chain.

Citizens should continue to be made aware of the consequences of these frauds and effective sanctions must apply to these crimes in accordance with the criminal codes of each country.

Finally, I understand that it is important to analyze these best practices I commented, always considering the context and scope of action, since the experiences of applying solutions imported from other countries have not always been successful.

[1] Barreix Alberto, Fonseca Oscar, Fonteñez María, Pineda Emilio, Bes Martin, Roca Jerónimo Revised personalized VAT: a tool for fiscal consolidation with equity, IDB 2022

[2] IGROUP, October 2023. The “Argentine digital currency”, Massa’s new promise: does it serve to curb inflation or is it another request from the IMF?

[3] Meza Pastrana Lizeth 1% deduction for all your purchases with electronic invoice

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Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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