Control of VAT refunds

A general problem in the tax administrations

blog-El control de devoluciones en el IVAThe VAT(1) applied in most countries follows the destination principle whereby collection is attributed to the country wherein the consumption of goods and services ultimately takes place. It is for this reason that in the case of goods exported to another country, the VAT applied throughout the production chain must be returned to the exporter, so that when these goods are imported in another country, they may be in the same situation as the goods consumed therein (border tax adjustment).

I will describe here a proposal for improving this control, based on the information found in the electronic invoices. I thus begin with a brief conceptualization of electronic invoicing, continuing with the concept of events, existing in Brazil, and conclude by describing how these events could improve control of VAT refunds in export processes.

Electronic Invoices

Many countries have implemented the electronic invoice (EI) as a fiscal document, therefore subject to the tax laws and regulations. Normally, the EI is an exclusively digital document , issued and stored electronically, whose purpose is to document a transaction in goods or the rendering of services, whose legal validity is guaranteed by the digital signature of the issuer.

In simple terms, the electronic invoicing operational model is usually as follows: the issuer generates a file in XML (Expansible Markup Language) format, which must be digitally signed (2) aand transmitted via Internet to the Tax Administration (TA). Following a formal analysis of the document, the TA returns a receipt protocol, which transforms the electronic document into a fiscal document wherein transactions involving VAT may be registered. The EI is uniquely identified by some kind of access code, which should consist of the XML file as well as the printed form of the note and will allow the person consultation of the EI the EI query on the Internet by the person who is familiar with the code to consult the EI through Internet.

The events in the electronic invoicing: the Brazilian experience

Following the issuance of the EI, situations with significant consequences for the transaction described therein may occur. These situations are called events and the latter are related to the respective EI through the use of the access code.

Brazil introduced the event structure in EI (3) in the first semester of 2011. In a recent discussion of electronic invoicing models in the American continent (4), where I have presented this concept, none of the other speakers (Argentina, Chile, Ecuador, Guatemala and Mexico) stated their intentions in this regard.

Some of the events currently used in Brazil are:

  • Confirmation of occurrence of the transaction by the recipient;
  • Lack of knowledge of the transaction: the person named in a NF-e as recipient states that he has no knowledge of the transaction described;
  • Correction of data of the NF-e which may not result in change of dates, recipient or amount of tax due;
  • Goods were received by carrier for shipment.

Events may be classified in two ways: according to who requests the registration (taxpayer, TA, another party interested in the transaction), or according to who may have access to it (anyone who can visualize the NF-e in Internet, persons mentioned in the XML file, only the person who registers the event, obviously the TA will always have access to all events).

The NF-e consultation in the Internet displays in its first screen general information of the invoice, such as issuer, recipient, total value, among others, and a list of all events registered for this NF-e that may be displayed without violating tax secrecy.

The TA systems may show all the events, including some that are for exclusive use by the Treasury, for example, NF-e used as evidence in a tax administrative process for applying sanctions, for example.

Events in the export process

As already mentioned in the introduction, the VAT applied in most countries is based on the destination principle, whereby the collection is attributed to the country where the final consumption of goods and services takes place. Therefore, export transactions must be free from value-added taxes. The most common fraud is to simulate an export transaction so as not to collect the tax that would be due in an internal transaction, or to unduly receive a refund in the same case.

The concept of EI event may be used to facilitate this control as follows: the incidental fact, which in this case will be the confirmation that the goods were actually exported, i.e., an event that may be called “export confirmation.”

This event should be automatically recorded to the extent the export process runs its normal course. When the customs authority records in its information system that the export was completed (for example, boarding on the ship or airplane), the system, in addition to the relevant records for Customs purposes, must use a Web Service displayed by the electronic invoicing system to register this as the export confirmation event.

No alteration of the work processes is proposed: except that the very information system used in the customs office may carry out the pertinent registration, thereby generating the respective event.

The application of events to VAT refund control

Once the structure of events is built and available to the TA, the possibilities of use in order to control the export operations are evident: returns are only authorized for invoices that have been object to the “export confirmation” event record.

Note that the same scheme is applied without modifications in the case of VAT refunds on purchases made by non-residents: when the non-resident actually leaves the country, invoices and goods are submitted at the checkpoint (for example, at the airport) for the pertinent registration of the event, which is the instrument that will release the tax refund.

In countries where the exemption takes place outside the exporter’s premises [5] the legislation should provide for a time frame wherein the pertinent customs authority may register the “export confirmation” event. After this time frame has elapsed, the taxpayer must record the return of the goods to its premises (in case the export has not occurred, even though the export was intended at the time the EI was issued), or ensure that the tax normally due in internal transactions is collected, along with the legal sanctions, if appropriate.

Use of the proposed model in countries with electronic invoicing

Therefore, it is necessary that any electronic invoice dealing with the export process or an acquisition by a non-resident be transmitted to the TA, and that events, at least the “export confirmation” event be recorded. Generically, countries that are already working with XML formats and processes involving web services will have no difficulty in implementing this model; rather, what is most important is to guarantee a data base structure that may relate the event to the respective electronic invoice.

Weaknesses of the proposed model

As it is evident, according to the proposed model, the tax exemption control in the export transaction is fundamentally based on the recording of the “export confirmation” event.

Therefore, the TA should ensure that the process for recording this event be carried out in a reliable manner, perhaps by more than one customs agent independently, making sure that it does not merely become a bureaucratic process of no great significance.

(1)The ideas of this paper are an evolution of a work presented on the topic of “Organizational Models of Tax Administrations and advanced organizations strategy “, International Master’s Program on Tax Administration and Public Finance, Institute of Fiscal Studies, Spain.
(2)The common practice is that laws governing electronic commerce provide that the digital signature using a digital certificate issued by a recognized certification chain in the country confers to this digital file the status of electronic document, with authorship, integrity and non-rejection guarantees.
(3)The electronic invoice in Brazil is called Nota Fiscal Electronica, or NF-e.
(4)CIAT-EC-IRD -Trinidad & Tobago Workshop on Electronic Invoicing-Port of Spain, Trinidad & Tobago, March 27-29, 2012.
(5)VAT is not itemized in the invoice, for example.

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