Much has been made of the Making Tax Digital initiative in the UK, but some countries are taking regulation one step further. Here are five nations reaping the benefits of completely transforming the tax return process.
As one of the first countries to adopt compulsory state-sanctioned real-time reporting, Poland is an innovator in tax. Since January 2016, it’s been compulsory for large VAT-registered companies in Poland to file an electronic invoice and in 2018 the requirement was extended to all companies, irrespective of turnover or staff numbers.
The Polish system is closely based on the Organisation for Economic Co-operation and Development’s standard developed for real-time reporting, called Standard Audit File for Tax, or SAF-T.
The file uses the regular XML format to mark up the relevant tax information. Files are submitted to the Polish tax authority monthly.
In case of a tax inspection, the authority can request the presentation of six additional SAF-T files related to accounting records, bank statements, warehousing information, sales invoices, tax register of revenue and expenses, and evidence of revenue. So it is a more complete picture than other European systems.
Motivation, as in other European Union members, is to cut down on evasion, which constitutes a major white-collar crime. VAT revenue makes up 40 per cent of the Polish budget. Progress so far has been impressive as the VAT gap has fallen from 24 per cent in 2015 to between 7 and 12 per cent in 2018, according to Visegrad Insight.
When it comes to VAT evasion no one suffers like the Italians. The black economy is vast and therefore the Italian government is incentivised like nowhere else to crack down on malpractice. The heart of the new Italian regime is the sistema di interscambio (system of exchange), or SDI.
It’s an interface for receiving, processing and then transmitting invoices to the intended recipient. It also, under certain circumstances, takes care of the storage of invoices for ten years. The invoices must be prepared in XML format and submitted to the SDI within ten days of the month following the date of issuance. E-invoicing is not optional and invoices not submitted through the SDI system are subject to penalties of between 90 per cent and 180 per cent of the VAT due.
The Italian tax authorities are aware the move to electronic invoices is a big leap for smaller companies, so has provided free advice services and a smartphone app, which enables small and medium-sized enterprises to create and transmit e-invoices. The hope is that digital VAT will make fraud all but impossible, leading to improved revenues and therefore better public services. As the EU reports: “The biggest challenge for Italy is to make stakeholders understand that implementing e-invoicing is not only a legal obligation, but also an opportunity that will be beneficial to all transaction parties.”
On July 1, 2017, the Spanish tax authority introduced a new obligation called suministro inmediato de información del IVA (immediate supply of VAT information), known as SII. It’s similar to SDI in Italy, but with a few notable variations. Filing invoices to SII is mandatory to all taxpayers who have the obligation to submit monthly VAT returns in Spain, but it is available to any taxpayer who wants to apply for it.
SII files must be prepared in a specific XML format that contains information about sales and purchases invoices. There are four types of SII files required: register of invoices issued, register of invoice received, register of certain intra-community operations and register of investment goods.
The files must be directly transmitted through the Spanish tax authority portal. In the case of sales invoices, they should be transmitted within four working days after the date the invoice was issued. For purchase invoices, the deadline for transmission is four working days after the date the invoice was recorded for accounting purposes.
Taxpayers under the SII obligation benefit from an extended deadline of ten days to submit their monthly VAT return. Additionally, they are exempt from submitting the annual summary VAT return, VAT ledgers return, and annual sales and purchase listings.
In the event of failure to transmit the XML file within the established deadline, or in the case of incomplete or incorrect data, a penalty of 0.5 per cent of the amounts omitted can be applied, with a minimum of €300 and maximum of €6,000 per quarter.
In 2018 the Hungarian tax authority introduced real-time invoice reporting, or RTIR. It is mandatory for all taxpayers registered in Hungary for VAT purposes and must contain information about invoices issued to companies with a VAT amount equal or higher than HUF100,000 (£280).
RTIR replaces the former local sales list, which was submitted on a monthly basis alongside a VAT return.
The information in the invoices issued must be declared electronically using a specific XML-file format. The report should be performed at the same time that the invoice is issued and should be reported to the National Tax and Customs Administration (NAV). The submission process must be fully automated over the internet from accounting, enterprise resource planning or billing systems, without manual intervention. The NAV performs a validation of each document and returns a message to the sender with the status of each invoice submitted.
RTIR enables the Hungarian tax authority to acquire more detailed information about taxpayers’ operations. As a result, the authority can conduct cross-checks and audits more effectively.
Failure to report invoices in real time is subject to penalties up to HUF500,000 (£1,400) per invoice.
An emerging economy, India is moving fast towards electronic invoicing with pre-approval for goods and services tax, or GST. The Indian authority behind the project has proposed mandating an entirely electronic system of filing to the state for approval as soon as September 1, for business-to-business transactions. If successful, the scheme could be extended to business-to-consumer transactions too.
Sales invoices would be sent in real time to an online hub for analysis and approval. The previous model of sending direct to business customers would no longer be possible.
GST itself is still new in India. Introduced in the the summer of 2017 to replace a complex patchwork of consumption taxes, it has an unsual complexity in treating transactions between the 29 Indian states as IGST (integrated GST), which also applies to imports.
The situation is moving fast. Currently the team overseeing the transition is recommending setting the initial threshold at a high level, to catch only 1 per cent of the largest companies. The fear is that the technology transition may challenge smaller companies.
According to finance minister Nirmala Sitharaman, fighting tax avoidance and evasion is a priority. Speaking at a recent G20 global forum, she asked fellow finance ministers to improve global co-ordination on tax, including information exchanges such as the automatic exchange of financial account information, which launched in almost 90 jurisdictions in 2018.
Introduction of an e-invoicing system would be a major upgrade for India’s tax inspection regime. Confidence in far-reaching schemes is high, boosted in part by the success of another digital scheme, the biometric ID programme for citizens, known as Aadhaar. More than 99 per cent of adults have been enrolled, helping to end identify confusion for for banking, tax and other government services.