The Fear and Loathing of VAT

By Anatoly Gaverdovsky

Chairperson and Founder

Digital Tax Technologies

Taxpayers in one of the countries have shared astonishing methods employed by local tax authorities. Tax authorities frequently accuse taxpayers of using so-called “false invoices” to optimize VAT and income tax, deeming such transactions as fictitious. In such cases, the tax authority can revoke VAT and income tax deductions, leading to additional payments to the budget.

Taxpayers provide all the necessary documents to confirm the transaction. These include contracts, invoices, waybills, invoices, transport documents, reports on completed work, payment confirmations, and more. However, tax authority employees attempt to argue that the supplier could not have delivered the goods or performed services due to a lack of staff, transportation, or warehouse facilities.

It is important to note that nowhere in the Civil Code, Tax Code, or other regulatory documents is there a requirement for the buyer to work only with suppliers possessing specific characteristics. There is no prohibition on intermediary transactions, subcontracting, renting premises, or transportation, as these are standard business operations. Nevertheless, tax authorities, at their discretion, may deem a transaction fictitious, despite its reality and impossibility of cancellation.

Such practices lead to the following consequences:

1. Rise in Corruption: Unclear requirements for transactions and suppliers, post-transaction assessments, and the subjective opinions of tax authority employees create a favorable environment for bribery.
2. Tax Uncertainty for Taxpayers: Taxpayers face tax uncertainty as they are unaware of their tax risks, leading to a slowdown in investments and business development.
3. Increase in Legal Disputes: Dissatisfied taxpayers increasingly resort to legal action against tax authorities as they cannot tolerate such treatment by the government and seek to protect their rights in court.

While tax authorities argue that their position serves the interests of the state, it hinders business development and contributes to the growth of corruption in the country, rather than reducing the share of the illegal economy and increasing budget revenues.?

This practice should either be clearly defined in legislation by establishing requirements for suppliers and fictitious transactions, or completely prohibited. To combat ghost invoices effectively, more inventive methods and approaches are necessary.

ABOUT DTT

Digital Tax Technologies?is an international expert in tax gap minimization, a trusted global digital transformation advisor & solution provider for national tax administrations.

We help tax administrations around the world to reduce the tax gap, improve tax revenue collection and reduce the share of the shadow economy.

Our mission is to increase global fiscal transparency, improve tax compliance and administration, and ensuring fair competition and welfare.

Our team consists of experts with experience in digital tax administration advisory and implementation in various European, CIS, Middle East, and African countries.

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