The guaranteed e-invoice as a new tool to combat tax fraud

The Ministry of Finance has come up with a proposal to introduce a new measure to boost efficiency of the fight against tax evasion. The introduction of the guaranteed e-invoice is intended to reduce the tax gap while ensuring a higher tax revenue for the state budget.

New administrative obligations will be in place with the introduction of the guaranteed e-invoice. It is expected that the reporting obligation will apply across the board to all entrepreneurs – sole traders as well as legal entities. The group of concerned persons and entities will therefore be wider and the obligation to issue e-invoices will also apply to cases where such duty is not imposed by the VAT Act as yet.

As early as January 2021, the Ministry of Finance published preliminary information on the draft act on the sending of data from invoices by taxpayers to the Financial Administration Authority. According to this information, all business entities will be obliged to issue within a specified deadline an invoice from all completed business transactions, for which the obligation to report sales via e-cash register does not apply. Pursuant to this legislation, taxpaying entities will be obliged to send selected invoicing data to the Financial Administration Authority and do so before preparing the ‘final version’ of the invoice and before its sending to their customer. It is anticipated that the legislative form of the act will soon be available for inter-ministerial comments procedure.

1)    Reasons for adopting this instrument

Combatting tax evasion is one of the key points in the manifesto of the current Government of the Slovak Republic. Within the set targets, the government has committed itself to reducing the tax gap; indeed, compared to other Member States, the Slovak Republic is lagging behind in effective tax collection, despite the already established reporting tools (such as the VAT ledger statement, known in Slovak as "kontrolný výkaz"). The aim is to achieve tax revenue that reaches at least the European average levels. The guaranteed e-invoice should provide the authorities with real-time information on transactions as they are being carried out. If there is a well-established control mechanism in place for processing data from the submitted invoices, the authorities should be able to detect possible tax fraud at its earliest stages. Advancing from the above basics, the authorities want to proceed to introduce the guaranteed e-invoice, in which the entrepreneurs will be reporting data on their supplies and deliveries in real time to the authorities.

2)    The benefits of introducing the guaranteed e-invoice

The professional as well as lay public had the opportunity to express its opinion on the submitted preliminary information in the comments procedure. Based on this discussion, it is expected that introducing this mechanism into practice will result in a positive contribution in the form of higher tax collection or gradual removal of reporting obligations (termination of the VAT ledger statement). At the same time, this change will introduce some new obligations for taxpayers in general.

In the following section, we provide an overview of anticipated changes associated with the introduction of the guaranteed e-invoice.

• Increasing of the administrative burden on entrepreneurs

Several experts have agreed that the adoption of this legislation will again increase the administrative obligations for all entrepreneurs across the board. Although the preliminary information contains a comment that the currently applied measures will be reconsidered, we can conclude with certainty that during the transitional period, there will be duplicity in the information provided to the Financial Administration Authority - i.e. both via the e-invoice and the VAT ledger statement. It should be added, however, that should this new control mechanism prove successful in practice, the Ministry has declared it will terminate the VAT ledger statement.

• Higher tax collection

As mentioned above, the main reason for introducing the guaranteed e-invoice system is to increase tax revenue and reduce various types of tax fraud. However, what remains questionable is the grey area where entrepreneurs knowingly/unintentionally do not keep official record of their revenues (e.g. via the e-cash register, known in Slovak as “e-kasa”).

• Sending of billing information before issuing the final version of the invoice

Preliminary information implies the obligation to send invoicing data to the authorities before issuing the final version of the actual invoice. In practice, however, there are often cases where entrepreneurs do not have all the necessary data to issue an invoice, and therefore the invoices are later modified (change of the terms of delivery, change in the effective supply date, change in the ordered quantity or adjustments in the entity of the customer, etc.). In the future, suppliers will thus have to verify this information before issuing their invoice. After uploading the document to the servers of the Financial Administration Authority, the authority should generate a specific unique character for the given invoice (a QR code). Subsequently, before sending the invoice, the supplier will be obliged to add this specific character to his or her invoice.

•  Additional costs related to software modifications and the risk associated with the provision of the             state-run application

Entrepreneurs have to reckon with additional investments in their information systems. It is anticipated that entrepreneurs will be able to use their in-house billing software to send the invoicing information to the authorities, provided they know how to set up this feature in their systems. However, we perceive the new rules as an issue especially for those taxpayers who use group accounting software, which is not so easy and simple to adjust to ensure compliance with the Slovak legislative context. An application offered by the Ministry of Finance, which should be available to taxpayers free of charge, will represent an alternative. What the Financial Administration Authority will also have to deal with is the security of this system preventing the leakage of sensitive data and the capacity to process a huge amount of data that will flow to its server daily. At the same time, a large number of small businesses still do not use any enterprise software for invoicing and issue their invoices using other means. These entrepreneurs will have to migrate to the new system and change their established procedures.

• Reporting obligations for all entrepreneurs

Yet another category of entrepreneurs who will be affected by the introduction of this measure are those who so far have not been required by any law to issue invoices. We assume that this obligation may in certain cases also concern foreign entities trading with Slovak companies.

• The time discrepancy between the receipt of the invoice and its registration in the accounting system

In practice, there often appear cases where some time elapses between the receipt of an invoice and its actual registration in the books, depending on whether this concerns an entrepreneur who is a monthly or quarterly VAT payer or an entrepreneur who is not a VAT payer at all and applies flat-rate expenses in his or her accounting. In these situations, entrepreneurs often register their documents only after the end of the given tax period. In the case of entrepreneurs who are non-VAT payers, this may only be after the end of the year. Therefore, the adoption of this measure will again increase the costs related to bookkeeping or tax reporting, as invoices will have to be sent on an ongoing basis and not only after the end of the relevant tax period, as many entrepreneurs typically did.

3)    The preliminary plan for putting into practice the submitting of invoicing data

The plan for launching the new reporting obligations is divided into the following 3 stages:

• Stage 1 will concern business transactions carried out between the public sector and private entrepreneurs, the so-called B2G (Business to Government) segment. This stage should be launched first, on 1.1.2022.
• Stage 2 will concern business transactions conducted between entrepreneurs, the so-called B2B (Business to Business) segment. This stage is tentatively planned to be launched on 1.1.2023.
• Stage 3 will concern business transactions carried out between entrepreneurs and their customers, the so-called B2C (Business to Consumer) segment. This stage is tentatively planned to be launched on 1.1.2023 as well.

The testing and development within the scope of Stage 2 and 3 should take place by 31.12.2022.

As the actual wording of the legislation is currently unknown, it remains to be seen what will really change with the introduction of the guaranteed e-invoice and whether the implementation of this instrument into tax legislation will truly represent an appropriate and effective tool in combatting tax fraud.

Check this article for later updates.