In this episode of VAT Talks we discuss how Croatia combats tax fraud and how technology can help to detect this fraud with Dame of Honour Ksenija Cipek. Ksenija is Head for Tax Risk Analysis at the Ministry of Finance, Tax Administration, Republic of Croatia, Member of the OECD Group Harmful Tax Practices, Lecturer at the faculty of Law at the University of Zagreb, Member of the Government Blockchain Association (GBA) and member of the Blockchain Chamber of Commerce (US). Read all about the tax system in Croatia, why she supports the further harmonisation of EU (and worldwide) VAT legislation, and why she thinks that taxes are a kind of art.
For how long have you been working in taxation?
I have been working with the Croatian Ministry of Finance, Tax Administration for 25 years, and I have been heavily involved in law-making in the realm of taxation. In this capacity, I was responsible for several tax reforms. For example, I was the project leader of one of the largest, and maybe even the largest, projects in the Croatian Tax Administration called the Compliance Risk Management (CRM) System. As a project leader, I worked together with IT companies and it was an amazing experience to see how the system works from both the business side and the IT side. For two or three years I have been investigating new technologies and I concluded that the paradigm of taxation and technology has shifted and some technological solutions could make a direct impact on law provisions. So, I’m very interested in those new technologies, such as blockchain and DLT, and I researched how we can use the advantages of new technologies for the tax system and the tax administration.”
Have you worked with VAT as well, and what do you like about VAT?
“During my career I have covered all types of taxes, so not only VAT. You could say that I’m an expert in direct taxes as I also like those taxes a lot. Still, VAT as an indirect tax is a very generous tax for the tax administration as it is very easy to collect. Two things about VAT are especially important to note. First, VAT legislation and VAT fraud could be very complex and we need much more simplification of VAT legislation. Besides, we need to be very fast in the current digital evolution to stop VAT fraud. The second point is that VAT provides the main part of the state budget of Croatia, if we are talking about taxes. This is one of the reasons why our focus is on VAT. However, that does not mean that there is no fraud in the field of direct taxes; this is especially the case with corporate taxes which is happening all over the world. To come back to VAT, VAT is a very interesting and relatively new tax as it was only invented in 1954. On the other hand there are a lot of challenges in VAT.”
Could you describe the VAT system in Croatia, for example, what is the history of VAT fraud in your country and what measures have been taken to tackle fraud?
“As a Member State of the EU our VAT legislation is compatible with the EU VAT Directive. In my opinion this legislation should be way simpler.”
“In terms of VAT fraud it is important to note that these fraudsters are very fast; fraud can be committed within a few hours. So therefore, we started building the CRM system I spoke about earlier, in 2015. This tool allows us to be faster and identify fraud, in some cases almost immediately. Important here is that the role of this system is to prevent fraud. The tool gives the possibility to categorise taxpayers in terms of risks and we have more than 600 risks in different composite models. Based on this information we categorise taxpayers from high risk, medium risk, low risk or fully compliant. The ones that are marked high risk are going to our audit department for further investigation, while for the compliant taxpayers the VAT refund can be automated. In this way the resources of the auditors, the most expensive instrument of the tax authority, are optimised. In other words, using this tool is way faster than conducting such an analysis on paper for example. Therefore, digitisation in that field of the tax administration is very important.”
Real-time reporting of invoices is one of the ways to further decrease the amount of VAT fraud. Is this something Croatia is also investigating, or does the CRM system already provide sufficient taxpayer information?
“Regarding the collection of data, the first rule of data collection is that the data collected should be of high quality and all this data should be used. We are not collecting just to have the data. The goal of collection is that it has a function.”
“Then, regarding the real-time data. We already have real-time data in the process of B2C. Ever since 2013, when you as a consumer buy a good or service you will receive a receipt. This receipt will be immediately, within 2 seconds, sent to the tax administration. For B2B, we do not have mandatory e-invoicing because we have to follow the VAT directive. I do think that in the foreseeable future, mandatory e-invoicing will come because digitalisation is pushing us in that direction. Still, we should be very careful with that, because we should not increase the administrative burden of the taxpayer too much as that would result in additional costs. On the other hand, that data could be used to introduce pre-completed tax returns which means that tax returns are no longer needed. This will lower the administrative burden. Therefore, I think e-invoicing comes with challenges, but also gives a lot of benefits to the taxpayer. Besides, it is also more sustainable as no paper is being used. So, I really think B2B e-invoicing is the future and I can only give my support to that.”
“But for now, we do not have mandatory e-invoicing, although we do have data from the VAT return. This data does not only come from the tax administration’s IT system, but also from other external sources. With that data we can make an automatic VAT refund for the fully compliant taxpayers. In this way we make it more attractive to be compliant and we try to get the non-compliant taxpayers also in the compliant sphere, because compliance is one of our strategic goals. Furthermore, often this non-compliance originates from not understanding legislation because it’s too complex, or just because they made a mistake. Those are not high risk taxpayers and we try to be some kind of partner to them; we want to inform them about legislation and potential errors in a way that we can learn from each other.”
Many countries are currently considering introducing, or have already introduced, real-time reporting. However, because most Member States took matters into their own hands there is now a wide variety of different types of such systems. Is this one of the reasons why you’re an advocate of more harmonisation, and how do you envision this?
“Absolutely. Harmonisation is very important, especially now as we are in this global pandemic and this global pandemic will change the economy, that’s for sure. Moreover, we are also in a worldwide recession, and maybe a depression. Therefore, we should create a very business friendly environment. As we already have the same structure of data on invoices and we have the same data on the VAT returns as prescribed by the EU VAT Directive it is time to actually harmonise VAT returns in the entire EU. This will make it way easier for businesses that are working in different Member States.”
“We were also talking about e-invoicing earlier, and first of all I think that the EU VAT Directive is really good because it provides clarity and lowers the administrative burden, but there is also a lot of room for deviation. So, more and more companies have different solutions and although it is indeed necessary to have real-time information to catch real-time fraud, it is not only about the fraud. It is also offering good services to the citizens. And this is also our role, we also need to take care of our citizens.”
“So I think in the field of e-invoicing, we can use new technologies such as blockchain for example or DLT technology which allows us to exchange information between countries. If we have all kinds of different systems, this will become problematic. We should go the way of mandatory e-invoicing in public procurement. This will make it way easier for businesses as you currently have different situations for example in Croatia, Finland and the Netherlands. This is an administrative problem, but if there is one common approach on the level of the EU this problem can be overcome. Ideally, a complete international approach would result in faster exchange of information throughout the world.”
So technology can help to further harmonisation, but do you think technology can also help in combating VAT fraud?
“Yes, absolutely. We are currently in the digital evolution and this is not something that can be stopped. So, what we should do is make use of the advantages of those technologies. Blockchain for example could enhance security and transparency, furthermore it is immutable. Those characteristics you can use and almost all tax administrations are now analysing and piloting blockchain technology. Especially from a EU perspective, I hope we can become the leader of the usage of new technologies and I think this is a great way of moving forward. Besides, blockchain also needs to be modified in order to meet the purposes of, for example, taxation. So, that’s a lot of work but the European Commission, EU institutions and different working groups are doing really great work on the usage of new technologies for tax purposes. And this is an excellent way forward, which I truly support.”
With the discussed real-time reporting taxpayers are required to share a lot of data, and the same thing holds true for the CRM system. How are you dealing with all this data from a security perspective?
“Indeed, it’s a lot of data we are talking about. However, when we built the system, we were very much focused on the quality of the data and the security thereof. Of course, that high level of security was achieved in the moment that it was built and new technologies can give us a higher and higher level of security. For example, applying blockchain technology could make the system more secure. On the other hand, our system is very secure and we have not experienced any problems with that. Still, we need to be very careful with the security of information, also in terms of privacy. So it really is a challenge to use this data, but a challenge with a positive outcome I would say.”
You are an expert in blockchain technology, do you think blockchain is ready to disrupt the tax administrations’ world?
“Maybe not today, but with time it will be. Otherwise, tax authorities from all over the world would not be testing and analysing this technology in the way they do now. It could be that it will not be implemented in the way we know blockchain as we do now, maybe there will be some other kind of DLT, but in the future, yes I believe that this kind of technology will disrupt not only tax administrations, but also other departments of the government. I think this will happen very soon even.”
You are working on creating and applying predictive analyses. With those systems tax authorities are receiving more data from the taxpayer, do you think this could also be a threat to compliance? I mean this in the sense that the burden of proof could then be fully moved to the tax authority?
“This is indeed something that could occur, but I would not be so worried about this. The digitalisation will change a lot in terms of data collection anyway. This means that we should be very careful about privacy as I mentioned before, and about what we are doing with the data; we do not have a data warehouse just for the collection of data. So, for example if we have a VAT return, we should make clear what we are doing with that data. We will not ask the taxpayer for more and more data without using it, that’s not acceptable. So I think shifting the burden of proof could happen, but it is not something ‘scary’. I do think that the new systems, tools and technology can give us the opportunity to increase the quality of the service we are giving to the taxpayer. So, no I would not be afraid of that.”
If you could give some advice to the European Commission regarding tackling VAT fraud, what would it be?
“First, legislation should be simplified. We need a reasonable level of compliance and if it is too hard to be compliant, taxpayers will not comply. Second, use, test, and pilot way more new technologies. Today we spoke about blockchain, but there are also other technologies that need to be investigated. And third, what is really important is the exchange of information between tax administrations. We are all doing the same work and if we want to stop tax fraud, we have to exchange information way faster. Those would be my recommendations.”
What would you say to make people excited about taxes?
“I would say to those people that, especially now with the introduction of new technologies, taxes are a kind of art. In tax legislation, you can achieve the same goals with all different kinds of approaches. If you are not forward-thinking, and you do not make the right decisions such as making use of the appropriate technological solution, this could mean that the legislation becomes too complex and the administrative burden will be too high. So today, when you are working in tax legislation it is not enough being a good lawyer, you also need people from the IT sector, you need academics etc. In this way, it becomes a kind of art; you can make many different decisions, but the goal is to make it very simple and to be an actual service to the taxpayer.”
We would like to thank Ksenija again for her time and for giving her 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 firstname.lastname@example.org
Read more about the Croatian CRMS here: http://www.porezna-uprava.hr/en/Documents/TA%20Strategy%202016-2020.pdf
Italy does have mandatory B2B e-invoicing, but had to seek a derogating from the VAT Directive which want granted to them by the EU in 2018: https://www.avalara.com/vatlive/en/vat-news/italy-wins-eu-approval-for-2019-sdi-e-invoicing.html