Effective Transition to Electronic Tax Invoices in B2B and B2C

Prerequisites for Transition to Electronic Invoices

Tax authorities often see a transition from business or tax invoices (VAT, GST, and Sales Tax invoices) to the submission of electronic forms as a fundamental tax administration project that will increase tax collections and narrow the tax gap. We should note that the collection and storing of primary data by the tax authorities is a necessary but not sufficient condition for closing the tax gap, as there is a need to build a separate infrastructure and solutions for the processing of the gathered data. But now we are going to talk about electronic invoices and their features.

Business entities registered as VAT payers and conducting taxable transactions must issue electronic VAT invoices to the persons to whom they provide goods or services. Entities not registered for VAT purposes may not issue VAT invoices.

The most important distinctive point in transitioning to electronic tax invoices is to identify counterparties in a transaction for the purchase/sale of goods, works, or services. If a transaction occurs between companies, it requires using a contract, an invoice, a bill of lading, and a tax invoice, if the seller is a VAT payer. We call such tax invoices as b2b invoices.

If the transaction occurs between the company and an individual consumer, then a seller must issue a cash receipt, which serves as the evidence of the transaction. A cashier’s receipt, or a fiscal receipt, we call a b2c invoice. Naturally, each country has its terminology. For example, in Saudi Arabia, a b2b invoice is a standard invoice, and b2c invoice is a simplified invoice.

Tax Invoices in B2B

As noted above, a transaction between companies generates a lot of documents: an agreement that fixes the terms of the transaction, an invoice to make a payment, a bill of lading or an act that confirms the delivery or acceptance of work, as well as tax documents that help to calculate taxes.

In most cases, the tax authorities convert only tax documents into electronic form, leaving the rest on paper. This is because the tax authorities work only in their area of responsibility and do not want or cannot go beyond their borders. Only a few tax administrations think about the taxpayer and try to add tax data to business documents and organize the transmitting of business documents in electronic form. This approach not only reduces the costs of the taxpayer but also encourages him to switch to electronic documents, which stimulates the digitalization of the state.

Importantly, the b2b buyer is vitally interested in getting documents from the seller. It helps to apply for the VAT deduction, accept the purchase as expenses and decrease the income tax. Therefore, tax administrations must deal with the balance of interests between the seller and the buyer. The buyer, demanding documents from the seller, ensures the correct execution of documents, and the tax administration can correctly calculate the taxes of the seller and the buyer. To do this, you only need to transfer the invoice electronically and register it.

Tax evasion schemes involve the buyer trying to move away from the taxpayer—the seller, who either avoids filing a tax return or files it but does not pay taxes. The buyer, as the beneficiary of tax evasion, will use multiple intermediate companies between himself and the unscrupulous seller so that the tax authorities cannot identify the connection between them and charge additional taxes to the buyer. There are international criminal groups that provide such intermediate companies and unscrupulous sellers for buyers who want to optimize taxes.

Thus, for the administration of b2b taxpayers, it is crucial not only to collect electronic tax invoices, but also to develop methods and tools to deal with complex fraud schemes.

Tax Invoices in B2C

When a retail company interacts with a buyer—an individual consumer—a cash receipt recorded the fact of the transaction. Usually, the buyer is not interested in receiving the receipt and will not verify its correctness. That means that the seller may alter the receipt’s information and underestimate the amount of the sale to reduce the amount of taxes.

Tax administration in b2c is developing around the objectives of fiscalization and protection of fiscal data from modification by the seller. Tax regulation requires using specialized fiscal devices to record all sales in a fiscal memory protected from any changes. The seller cannot correct the sales amounts, and the tax authorities can get unaltered data from the device. Further, instead of using manual withdrawing, the online electronic cash register devices (OECRs) can transfer fiscal data, including each fiscal receipt, to the tax authorities in real-time

These devices are useful not only for tax authorities but also for the business. They support accounting processes for cash and goods, as well as monitor the activities of employees. The problem with equipping merchants with such devices is their price and who bears the cost of buying and maintaining them. If the state requires purchasing the fiscal equipment at the expense of business, then there is a risk of meeting significant resistance, if retailers see no value for their business.

A phased transition plan should help to mitigate the transition risks, but in many situations, it delays the problem rather than fixing it. Sometimes, the state can deduct the cost of cash registers from the tax returns. Another option is to supply integrated cash registers and payment terminals for free, and later recover the costs either from the monthly payments or from the commissions on sales transactions.

How to Motivate Consumers to Demand Fiscal Receipts from Retailers?

The fundamental challenge with the cash receipts and cash registers is that the seller may simply not issue a receipt and the fiscal device and tax information systems will not store information about the sale. Unfortunately, all taxpayers understand such a simple idea, but not all the tax authorities.

Naturally, the presence of the obligation of the seller to issue a fiscal receipt with penalties for incompliance does not guarantee that sellers will adhere to it.

The only way to solve this problem is to increase the motivation of the consumers to demand receipts and create the same level of interest as for the participants in the exchange of b2b invoices. Countries around the world use different methods to increase buyer engagement, for example:

• Option to accept receipts as expenses when paying income taxes. Consumers can use it either for all purchases or for purchases of a specific type of goods and services, such as expenses on medicine and education.
• Registered receipts can serve as lottery tickets.
• Consumers can exchange receipts with third parties for incentives, e.g., cashback from banks, discounts on goods from the brands, and others.