We’re starting the new year with a very exciting episode of VAT Talks as we had the honour to speak with Jānis Taukačs! Jānis is Partner at the Latvian Law Firm Sorainen, part of the EU VAT Club and has its own podcast Tax Stories. As Latvia is planning to introduce e-invoicing in 2025, it’s an excellent time to have a discussion with Jānis about Latvian VAT. Jānis gives valuable insights into the Latvian VAT landscape and provides his view about developments regarding real-time reporting on the EU level. Besides, he explains why tackling VAT fraud is so important for society. And last but not least, he gives an excellent movie recommendation!
Can you tell a bit more about how you ended up in taxation and also about your current work?
“When I was still at the university studying Law, I started to practice in a small boutique on Customs Law. At some point, I understood that the pond was too small and I started to look for some international grasp in the area of customs consulting. Then I saw an offer by KPMG in the newspaper. It was back in 1997, at that moment KPMG started an entirely new team for their tax practice from scratch. I was selected and I started to deal with indirect tax, mainly VAT.
At some point, I understood that there was an opportunity to create something new on my own within a law firm. Therefore in 2004, I made the move to Sorainen. Since then Sorainen has grown to the number one tax practice in the country according to International Tax Review rankings. We have been voted tax firm of the year 9 times out of 17. So we must have done something right. Now we are a team of thirty people and the biggest alternative to the Big Four.”
You have a great podcast called “Tax Stories”, what is your own favorite VAT story?
“I would like to highlight one documentary that anyone can watch on Netflix, which is called “Lords of Scam”. If you haven’t seen it, I truly recommend it. It is a fascinating story. Although it’s sad how fraudsters have been made sort of superstars in this documentary, but at the same time, it’s fascinating to see how simple VAT fraud is. The documentary nicely explains what these guys exactly did.
They just brought mobile phones from the UK to the French market, after which they sold them in retail and wholesale chains. Afterwards, they basically disappeared with VAT in their pocket. It was as simple as that. Then they expanded, created more companies, mainly with offshore structures and started operating on a larger scale mainly with CO2 certificates. They managed to build up a simple carousel going from France to other European countries and then coming back to France. This domestic supply was subject to VAT, which they pocketed and took off-shore. This shows how simple it is and how the current VAT system has such possibilities, such loopholes all throughout the EU. All taxpayers are paying for this in large amounts and we sometimes don’t even realise that this money could go anywhere. It could go to terrorist financing and other illegal activities.
So this is my personal ‘highlight’ in terms of VAT stories, but if we look at the podcast itself, there are four or five episodes where VAT is discussed at lenght. The highlight here would be the discussion with VAT Prof. Rita de la Feria. She’s an amazing, astonishing storyteller with a lot of interesting stories. If readers have the opportunity, I would recommend you to go and try it yourself.”
Latvia already has a so-called VAT listings system, where companies need to provide invoice information to the tax authority on a periodic basis. How does this exactly work and does it tackle VAT fraud?
“In my opinion it’s not enough to truly tackle VAT fraud, but it did have positive results and we can see that actually the introduction of VAT listings was the main moment when the VAT gap started to decrease in Latvia. This was connected to domestic reverse charge mechanisms introduced in some sectors where VAT fraud was problematic. We helped some of these industries to lobby the Ministry of Finance for such an introduction to have a level playing field for companies.
The fact that Estonia copied to a certain extent the Latvian model with good results, proves the success of this idea. For the current VAT listings model in Latvia, companies need to attach to the VAT return a list of all invoices that exceed a certain threshold. This threshold initially was €430, it was reduced to €150. So now quite a lot of transactions have to be reported individually. This gives the tax authority and also their IT systems the possibility to quickly indicate mismatches between what has been reported by the supplier and not by the customer. For the domestic suppliers, it has definitely been a success story and the amount of fraud has decreased.
What we see is that the tax authority is now focusing on international supplies, particularly on domestic exporters who apply zero VAT rate on their supplies (intra-Community supply). Sometimes the exporters have an impossible task to prove that they didn’t know that someone in some other country at some later point in time will commit VAT fraud. Those VAT audits are going on for a couple of years because they are international. This is a heavy burden for businesses. Also from this perspective, I am hoping for a solution like summitto is presenting.”
Latvia plans to introduce mandatory e-invoicing (highly likely combined with real-time reporting) in 2025, which is also meant to tackle VAT fraud. What do you think of this development?
“I definitely support this and will support it as much as I can. I don’t think there is any decision made yet, but considering what is happening currently in the European Union with the success stories of Italy, Hungary, Spain, etc. I think it is an inevitable movement throughout the European Union.
I hope in Latvia it will be sooner than 2025 because the level of VAT fraud is still too high. Stories like “Lords of Scam” just prove how simple it is for fraudsters.”
On what aspects should the Latvian Ministry of Finance focus especially when implementing such a solution?
“One of our clients is a taxi service provider. They have an app for their services and the Latvian government introduced a real-time reporting model for those taxi service providers. From that moment on, we saw quite many problems at the tax authority. This was mainly due to all sorts of mismatches between the legislation and the practical IT solution. We also saw problems regarding the communication with the business community and even within the tax authority. I think that now Latvia should learn from these mistakes and have a more coordinated communication with the business community so they can timely prepare for a solution such as real-time reporting.
I think it will also be a difficult decision considering the reform of the cash-registers that was passed in 2016. In my opinion, this was not an optimal solution, but let’s discuss that some other time [laughing]. In any case I think it will also be a very difficult task to have a new system introduced so quickly after the cash-register reform. An additional challenge would be to explain why it is needed and why could it not be implemented already instead of the 2016 reform.
These kinds of legislative and policy making decisions have to be properly taken and communicated to businesses. At the same time, judging based on the level playing field of all businesses in the market that want to reduce fraud, it will be a good flag under which the decision can be made.”
How should the topic of data protection be tackled according to you within this discussion?
“Good question. Although I must confess that I’m not a data protection specialist, I can only see that for the IT solutions already presented to the tax authority data protection was always part of the debate. Questions like, how will the data be stored, how will the data actually be protected are part of that discussion.
I’m a big fan of the Darknet Diaries podcast, where they explain in great detail how this data fraud and cyber attacks are happening. They show that sometimes it’s actually quite easy to perform a successful cyberattack on this type of data. In Latvia we actually had such an accident, where hackers stole data from the tax authority. This really led to distrust in the fact that the data stored with the tax authority is secure. We also had some very sad moments, even last year, where the tax authority leaked tax audit file data. Audited companies were approached by people that got hold of this leaked data, proposing that in exchange for a fee, they would make sure that the tax audit would end up with no tax and penalties assessed.
So this topic really raises a lot of questions and for that reason summitto’s solution is also very interesting. It implies that no actual data is transferred to the tax authority, but only a hash is recorded which is fully encrypted. This could be an excellent answer to those questions.”
The European Commission is currently looking into real-time reporting for intra-Community transactions, what do you think of that development?
“So, real-time reporting for domestic supplies is one part of the equation and the other part is intra-Community supplies. For the latter, tax authorities really sometimes go all out of line regarding ignoring company’s rights to make a simple supply by making companies liable for something that will happen in the future in another EU Member State.
So from that perspective I think it’s really necessary to have a unified approach from the European Commission side on this. I think that if the EC will be tackling those problems, it will solve both sides of the problematic VAT fraud cases as domestic supplies are only one part of the story. As we know the sooner the tax authorities see the mismatches between suppliers and customers, the sooner they can take actions on VAT deregistration of companies that are not responding to requests of the tax authority and are not willing to explain the mismatches. and investigate if there is VAT fraud. This would be a great help in solving many issues.”
If you could give the European Commission one piece of advice regarding VAT, what would it be?
“[laughing] Well, who am I to give advice to the European Commission? In any case, I’m aware of the different actions of the European Commission in this regard and also of the workshops organised in October regarding VAT in the Digital Age. So different solutions were discussed regarding the future of VAT. I just can say that out of those four different options that were put forward I’m a big fan of the full harmonisation of Digital Reporting Requirements (DRR). So, I think that that would be a great solution because, judging by the court cases that we have in the domestic courts, I believe that we cannot threaten with criminal liability. This would only hit a small portion of the fraudsters, but we really need to hit the jackpot. For this, we need a solution like what Spotify was for the music industry. Spotify made it easy to buy music in a legal way. We now need to make it easy to comply with VAT regulations via a EU unified solution. Because if we solve this issue only in one of the countries the fraudsters can easily move to other Member States and then continue doing what they did. This is not a solution in a broader sense.”
What would you say to the readers to make them more enthusiastic about VAT?
“I think VAT may seem to be boring, but at the same time, it’s a great source of income. Besides, it’s a neutral tax. Therefore I can only agree with Rita de La Feria that it’s the best tax we have. We just need to fix some of the loopholes that this tax has which will actually make many lives better. It’s important to understand that the VAT gap has a real impact on society. Several years ago we were calculating for Latvia that during most of our independence at least every 10th euro of VAT is going to fraudsters. That’s a huge amount, a huge burden that we are all paying for mainly because the system makes it easy for guys like the ones in the Netflix documentary. And God knows where the money is actually going. So, I think we really need to fix these loopholes and then VAT can have a positive effect on society, especially in these tough COVID times.”
We would like to thank Jānis again for his time and for giving his perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via email@example.com