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Real-time reporting and corporate income tax fraud

Corporates

In many of our articles, we have analysed the potential of real-time reporting in tackling VAT fraud while producing benefits for businesses. Nevertheless, real-time reporting systems can be a valuable tool also in the fight against corporate income tax fraud. In this article, we will better explain how this is made possible and what are the benefits for tax authorities and businesses.

What is real-time reporting

Real-time reporting is an innovative solution to tackle fraud and increase country revenues. These types of systems require every business in a jurisdiction to share its invoices with the tax authority in order to run automated controls on the invoice information. These solutions were first introduced in Latin America with astonishing results. Today, more and more countries around the world have implemented or are planning to implement a real-time reporting system. [1]

Real-time reporting was first conceived as a tool to reduce VAT fraud and increase compliance. By collecting invoice information from companies, tax authorities can estimate the amount of VAT due at the end of a period and can react more quickly in case of fraud or unwanted errors. Moreover, this system allows the rapid increase of VAT revenues without touching the VAT rates.

In Europe, Hungary, Spain, and Italy have already implemented a real-time reporting solution. Preliminary results from Italy show that in the first year of implementation real-time reporting helped to reduce the Italian VAT gap by 3.5 billion €.[2] For this reason, other countries in Europe are planning to implement this system, like France starting from 2023, or investigating its possible implementation (Belgium and Slovakia). Nevertheless, this system can also be helpful in order to tackle Corporate income tax fraud.

Tackling corporate income tax fraud

A corporate income tax is a tax on the profits of a corporation. This tax is paid on a company’s taxable income, which includes revenue minus cost of goods sold, general and administrative expenses, selling and marketing, research and development, depreciation, and other operating costs.[3] This type of tax is prone to fraud: businesses may try to hide revenues by not putting all invoices into their bookkeeping to hide information.

Tax authorities around the world usually focus on invoices issued by businesses in order to assess their income and the amount of taxes due. Nevertheless, businesses may decide to distort the analysis of the tax administration by hiding relevant invoices which may disclose their revenue. For instance, some tax administrations usually double check the income declared by restaurants or bars with the amount of napkins bought by the company. If the amount of napkins delivered to a restaurant is consistently higher than the amount of bills or clients declared, this could be a reason for further investigating fraud allegations.

Nevertheless, businesses may decide to hide important information from the tax authority like the one concerning the amount of napkins consumed by not including it into the bookkeeping. In this case, tax administrations will have very few tools in order to assess the actual income of an enterprise. Real-time reporting can help to face this challenge.

By requiring every company to register their invoices with the tax administration, businesses won’t be able to hide important information from the tax authority anymore, therefore the quality and consistency of company books will increase. Coming back to the example of the napkins, if a restaurant (napkin-buyer) does not report the invoice, the napkin-producer company may still register its selling-invoice with the tax authority. Therefore, tax administrations will still be able to assess the number of napkins or every other goods provided to a company in order to determine its actual income.

To put it differently, as long as at least one of the parties in a transaction is honest, an invoice will be reported, ensuring that tax administrations get more accurate information about companies' VAT, and in turn also CIT liabilities.

Conclusion

Real-time reporting solutions were born to tackle the VAT gap. Nevertheless, their range of implementation is much broader and allows for a better and more efficient compliance with other types of taxes, like the corporate income tax. This system can help to speed up the auditing process regarding corporate income tax fraud, providing tax authorities with more insights and information in order to fight this phenomenon.

If you are interested in this subject and would like to know more about real-time reporting and summitto, please contact us or visit our website at https://summitto.com/

[1] Summitto https://blog.summitto.com/posts/invoice_reporting_vs_confidential_reporting/

[2] Parliamentary audition of the director of the Italian Tax authority: https://www.camera.it/leg18/1132?shadow_primapagina=10785

[3] Corporate income tax definition: https://www.investopedia.com/terms/c/corporatetax.asp