Fiscalization: Implementation for Enhanced Tax Compliance

Tax administrations are increasingly looking for opportunities to access data to better manage tax compliance risks and encourage voluntary compliance. This is achieved by assisting taxpayers in efficiently managing their businesses and meeting tax obligations at minimal cost. A global trend is emerging towards implementing electronic fiscal reporting, also known as fiscalization. Fiscalization is part of the digital transformation agenda, where revenue administrations replace traditional paper-based operations with digital solutions, benefiting both the revenue administration and taxpayers.

The objective of this piece is to provide an in-depth process on the implementation of fiscalization from a governmental standpoint. Fiscalization, a process that involves the use of fiscal devices to record transactions for tax purposes, is a critical component of modern tax administration. From a government’s perspective, fiscalization is not just a tool for ensuring tax compliance. It is a mechanism that can enhance the efficiency and transparency of the tax system, thereby building trust between the government and its citizens.  

Moreover, fiscalization can support broader governmental objectives. For instance, it can provide valuable data that can inform policy decisions, contribute to the fight against tax evasion, and promote fair competition in the business environment. So, let’s elucidate the complexities of fiscalization, and offer clear, actionable steps for government agencies involved in its implementation, from understanding the legal framework to integrating fiscal devices into the tax administration infrastructure.

5 Key Takeaways

1. Integration with Compliance Risk Management (CRM): Fiscalization significantly improves compliance when integrated with CRM processes. The rich data provided by fiscalization is crucial for risk identification and management. Failing to integrate and demonstrably use fiscalization data in risk management undermines the credibility of fiscalization and may lead taxpayers to attempt to avoid their obligations.
2. Consumer Engagement: Fiscalization empowers consumers to engage proactively in the tax collection process by requesting receipts and verifying receipt details to the tax administration. This involvement not only provides transaction data to the tax administration but also raises consumer awareness and ownership of the tax system, thus building social understanding of the importance of taxation.
3. Investment in Information Technology: Implementing a fiscalization system requires a significant investment in information technology by the tax administration and an initial cost outlay for taxpayers to modify their systems or purchase electronic fiscal cash registers. Despite these costs, the global trend of digitizing information technology and the increasing acceptance of digital solutions have led to sophisticated fiscalization models that provide standardized data automatically and in real-time.
4. Effective Implementation: Effective implementation of fiscalization requires careful planning and execution to ensure it integrates smoothly with existing compliance processes and supports both voluntary compliance and effective enforcement. This approach not only simplifies tax administration but also helps create a more equitable and transparent tax system.
5. Top-Down Authority and Priority: Establishing top-down authority and priority is key in ensuring that the strategic implementation plan is followed and implemented effectively. Clear communication from the top down ensures that everyone is on the same page and working towards the same objectives.

Fiscalization: Improvements in Compliance

Fiscalization automates the reporting of a taxpayer’s business activities, such as sales and purchases, to the tax administration. Typically, people use fiscal cash devices or software to generate data for e-reporting to Tax Authority using government prescribed protocols, like the Standard Audit File (SAF-T), ZUGFeRD, Factur-X or similar. The goal is to facilitate the documentation and visibility of business transactions to the tax administration through online and offline reporting processes. Customer ability to verify authenticity of the fiscal receipts helps reduce unreported business transactions and allows the tax administration to use detailed transaction data to improve compliance risk management processes. Additionally, tax administrations increasingly demand to use this data to prefill tax declarations and returns, reducing noncompliance and increasing voluntary compliance.

While some administrations have reported improvements in compliance through fiscalization, it is not a standalone solution for all tax compliance risks. Studies have shown that simply digitizing documentation does not necessarily improve tax compliance. However, if implemented correctly, fiscalization can be a valuable component of a tax administration’s compliance risk management processes.

The Case for Fiscalization

Fiscalization facilitates the documentation and online availability of business transaction data, enabling tax administrations to analyze these data to improve tax compliance. The general expectation is that fiscalization will increase tax compliance and reduce the tax gap by enhancing the transparency, access, richness, and accountability of data related to business activities.

Extended Ownership of the Tax System

Fiscalization empowers consumers to engage proactively in the tax collection process by requesting receipts and verifying receipt details to the tax administration. This involvement not only provides transaction data to the tax administration but also raises consumer awareness and ownership of the tax system, thus bridging social understanding of the importance of taxation.

Businesses benefit from fiscalization as it encourages and requires electronic communication with the tax administration. This creates standardization and consistency in the exchange of information between businesses, leading to efficiency improvements in invoicing, bookkeeping, and data reporting to the tax administration. Ultimately, fiscalization can lead to the prefilling of tax returns, benefiting both taxpayers and the tax administration.

Not for Collecting and Storing Digital Documentation Only

However, fiscalization limited to merely collecting and storing digital documentation is unlikely to have a sustainable impact on taxpayer compliance behavior and cannot address all tax noncompliance. Unless the tax administration actively uses the data to identify and act on committed noncompliant taxpayers, they are unlikely to respond.

Nevertheless, if implemented, fiscalization is a crucial component of the compliance risk management process as it improves data collection, engages consumers in tax collection, provides timely and richer data for analysis, assists in identifying and assessing risks, enables error detection and prediction, and provides data for enforcement actions.

The fiscalization process requires initial and ongoing management, involving consultation, planning, communication, monitoring, and evaluation. When considering the implementation of a fiscalization system, careful assessment of the costs and potential benefits is necessary, along with evaluating the capability of the tax administration and taxpayers to implement and maintain the process. Establishing baseline compliance levels across registration, filing, reporting, and paying is essential for monitoring the effectiveness of fiscalization.

Integrating Fiscalization with Compliance Risk Management

Fiscalization significantly improves compliance when integrated with compliance risk management (CRM) processes. However, fiscalization alone cannot mitigate all risks across the four pillars of compliance and is not a substitute for a comprehensive CRM function. The rich data provided by fiscalization is indispensable for risk identification and management. The integration and demonstrable use of fiscalization data in risk management is vital. Without it, the credibility of fiscalization may be compromised, potentially leading to taxpayers seeking ways to evade their obligations.

When used as an integral part of the CRM process, fiscalization can shift the tax administration’s focus to voluntary compliance strategies, aiming to prevent noncompliance proactively rather than reacting to it. Historically, compliance strategies have emphasized enforcement through audits, recovery, sanctions, and investigations to deter and correct noncompliance. The high quantity, quality, and timeliness of fiscalization data enable tax administrations to support voluntary compliance and adopt prevention strategies. For example, providing reported data back to businesses and pre-filling returns/declarations can encourage voluntary compliance.

A voluntary compliance support system can be developed in several ways:

– Before returns/declarations are submitted, by estimating the values that must be declared.

– When returns/declarations are submitted, by detecting mismatches with transaction data already reported and issuing online alerts.

– After returns/declarations are submitted, by further analyzing the data and comparing the return data to predicted data based on peers, industry, tax types, and known risks.

However, voluntary compliance strategies alone are not enough to effectively reduce noncompliance; enforcement is still necessary. Improving the identification of high-risk taxpayers and transactions allows for better targeting of audit and investigation resources. Authorities should review, modernize, and strengthen audit procedures, sanctions for noncompliance, debt management processes, and other administrative procedures to ensure an effective overall CRM function.

Data collection

Data collection is fundamental to the effectiveness of fiscalization. It begins with the creation of documents that taxpayers use to manage their businesses, such as sales invoices or fiscal cash register receipts, which are essential for calculating and reporting tax obligations. The complete and accurate reporting of data to the tax administration depends on the timely capture of this documentation and data.

Traditional tax reporting models rely on the periodic collection of aggregated business activity data without detailing individual transactions. Fiscalization and digitalization enable tax administrations to obtain real-time, granular data on a taxpayer’s business transactions. However, not every fiscalization system ensures the recording of fiscal receipts at the sales point without an Internet presence.

Models of data collection

There are several models of data collection, categorized into four types. People refer to the centralized model and the clearance models as closed systems because the tax administration controls the issuing of both sales invoices and purchase invoices. These models can reduce fraudulent purchases and identify potential unreported sales, though their efficiency depends on the system’s ability to detect and include all taxpayers. The implementation costs of closed systems are lower compared to open systems.

The automated reporting after issue model and the real-time model are known as open systems. In these models, taxpayers control the issuance of sales invoices. People consider these models more flexible to taxpayers’ needs because they provide the tax administration with data and the capacity to cross-check purchases by buyers to sales by sellers, and to detect nonregistered taxpayers. However, recipients of an invoice cannot be certain that the seller has declared the invoice unless a verification system is in place.

Fiscalization: Data Analysis Importance

Fiscalization solutions encompass a range of tools and technologies that help governments monitor and analyze financial transactions in real-time, ensuring timely and accurate tax compliance.

Utilizing the power of data analytics enable governments to gain valuable insights into taxpayer behavior, identify potential tax evasion or fraud, and make informed decisions to optimize tax collection strategies. Data analysis allows governments to track revenue trends, forecast future tax revenues, and detect anomalies or discrepancies in financial transactions.

Furthermore, data analysis can help governments simplify tax administration processes, reduce administrative costs, and improve overall efficiency. By automating data collection, processing, and analysis, governments can eliminate manual errors, reduce paperwork, and ensure compliance with tax laws and regulations. This not only saves time and resources but also enhances transparency and accountability in fiscal management.

Moreover, data analysis can enable governments to identify areas of tax non-compliance and target enforcement efforts more effectively. By analyzing transaction data from various sources, including point-of-sale systems, electronic invoices, and financial reports, governments can pinpoint high-risk taxpayers, detect patterns of tax evasion, and take appropriate enforcement actions to deter non-compliance. This not only helps increase tax revenue but also promotes fairness and equity in the tax system.

Considering the growing digitalization of financial transactions and the rise of e-commerce, the need for advanced fiscalization solutions and data analysis tools is more pressing than ever. Governments must adapt to the changing landscape of tax compliance and use technology to enhance their fiscal management capabilities. This is the main reasoning behind the need for investment in strong data analysis tools and use of data-driven insights. From the get-go, governments can strengthen their revenue collection efforts, improve compliance levels, and better serve their citizens.

Fraud Detection Using Machine Learning Models

Extracting patterns for possible tax fraud scenarios relies on analyzing taxpayers’ historical behavior by monitoring predefined attributes and using models like artificial neural networks, Bayesian networks, and logarithmic regression. The system categorizes taxpayers into low, medium, or high risk based on their likelihood of matching defined tax fraud scenarios. Machine learning helps identify suspicious behavior, allowing inspectors to focus on high-risk cases, thereby increasing productivity and recovering lost tax revenue. This data-driven approach is more efficient and objective than manual searches.

Tax regulations define tax fraud as willful non-compliance, and it represents a subset of tax violations, which occur when taxpayers do not settle their tax liabilities. The key to identifying tax fraud lies in distinguishing intentional fraud from accidental mistakes, using historical data to differentiate intent from coincidence, primarily by analyzing the frequency of violations.

Starting data mining will reveal many anomalies; high-risk anomalies must be separated from low-risk ones, and expected anomalies should be disregarded. Utilizing the fiscalization solution, will help identify potential frauds.

The accuracy of fraud detection models depends on the correctness of input data, which relies on accurate data entry by taxpayers. Defining initial conditions and attributes for risky behavior scenarios is necessary, utilizing synthetic data when expert feedback is not available. Testing various machine learning methods for their accuracy is also recommended. Feedback from field inspections can validate the methods used.

If historical data on proven tax frauds exist, supervised methods can identify future potential fraudsters by comparing all taxpayers’ transactions to those of known tax fraudsters. Without such data, unsupervised methods, though less precise, can identify irregularities and suspicious behavior, aiding tax inspectors in prioritizing controls and enhancing tax collection efficiency.

Consumer Engagement

Globally, many tax administrations are promoting citizen engagement to improve taxpayer compliance by encouraging, and sometimes requiring, citizens to request fiscal cash register receipts or invoices and verify their declaration. Engaging consumers in the tax collection process can lead to increased awareness, ownership, and community confidence in the integrity, fairness, and importance of the tax system, thereby boosting voluntary compliance.

Several methods can be used to achieve citizen engagement:

– Mandate consumers by law to obtain and retain invoices and fiscal cash register receipts.

– Encourage consumers through media and communications to check that invoices and receipts are reported or to submit the receipts to the tax administration.

– Enable consumers to easily check and report receipts by providing smartphone applications that can read and verify quick reference codes on fiscal cash register receipts.

– Offer rewards such as prizes, lotteries, tax deductions, or refunds for checking or submitting receipts. These measures should be specific, non-generalized, non-regressive, and cost-effective for the tax administration.

Additionally, some countries allow personal income tax expense deductions to encourage consumer engagement. In Portugal, for instance, a receipt’s submission and acquisition to the tax administration corresponds to an entitlement to a deduction in personal income tax. A deduction, which is a percentage of the value-added tax paid on specific expenses, is applicable in sectors that are at risk of tax evasion. These sectors include health, education, housing, restaurants, and hotel accommodation. Allowance for deductions also applies to expenses in high-risk industries like restaurants, hair salons, and vehicle repair shops. The administration’s CRM processes use the data obtained through these credits.

These measures should not be generalized or regressive and should be cost-effective for the tax administration. The effectiveness of consumer engagement programs also depends on the efficiency of the tax administrations’ audit, enforcement, and sanctioning processes.

Implementing Fiscalization

Implementing a fiscalization system requires a significant investment in information technology infrastructure by the tax administration and an initial cost outlay for taxpayers to modify their systems or purchase electronic fiscal cash registers. Despite these costs, the global trend of investing in information technology and the increasing acceptance of digital solutions have led to the widespread adoption of fiscalization by tax administrations. This has resulted in sophisticated fiscalization models that provide standardized data automatically and in real time, with minimal human intervention.

Fiscalization impacts all functions of a tax administration, necessitating a broad strategic implementation plan. The plan should be progressive, staged over an extended period, and comprehensive, involving engagement with taxpayers, consumers, citizens, tax administration officials, relevant government stakeholders, and business associations. It should be inclusive, seeking contributions from all stakeholders and emphasizing overall benefits, measurable, with outcomes monitored, measured, and communicated, qualified, ensuring appropriate awareness and training for all participants, and transparent, with a critical internal and external communication plan.

A project of this significance requires a leadership team and a multidisciplinary approach. Specialists on different taxes, from various functional areas, and information technology experts should form the implementation team.

Outlining the Fiscalization Project

It is pivotal to define the objectives of the project, scope of work, exemptions, legal framework, hardware, software, data warehouse, data analysis tools, voluntary compliance initiatives, enforcement mechanisms, and sanctions for non-compliance. These elements collectively establish the project’s foundation and guide all activities toward achieving the desired outcomes.

Setting clear goals to achieve, outlining the project scope to prevent scope creep, estimating costing accurately, and predicting benefits that will result from improved tax compliance and enforcement measures are essential. By having a clear understanding of the purpose and expected outcomes of the project, stakeholders can align their efforts and resources towards achieving success.

Various stakeholders play decisive roles in the implementation of tax compliance and enforcement projects. These include taxpayers, their representatives, consumers affected by tax policies, government agencies responsible for tax administration, consultants providing expertise, and staff from departments such as IT, risk management, audit, taxpayer services, and communications. Collaboration among these diverse groups is essential for the success of the project.

Focus on securing top-level support for the project, appointing a capable project leader, forming a dedicated project team with expertise in relevant areas, developing a comprehensive plan that encompasses all tax functions, and establishing mechanisms for ongoing evaluation and monitoring of progress, is fundamental. By following a structured approach and involving all relevant parties, the project can proceed smoothly towards its objectives.

Finally, clear deadlines, defining key milestones to track progress, and taking timely actions to address any deviations from the plan are key. Adherence to timelines and milestones is instrumental for ensuring that the project stays on track and achieves its intended outcomes within the stipulated timeframe.

Strategic Implementation Plan

To achieve fiscalization objectives, it is essential to analyze both capital and operating costs and benefits, secure the necessary resources, ensure top-down authority and priority, set up a project team with clear terms, stimulate trust and teamwork, and identify quick wins.

First and foremost, by thoroughly analyzing the capital and operating costs and benefits of strategic implementation plan, we can make informed decisions regarding the allocation of resources. This will enable governments to maximize the efficiency and effectiveness of their operations, ultimately leading to higher returns on investment.

Securing the required resources is another key component of strategic implementation plan. Without the necessary resources, it will be difficult to successfully execute goals and initiatives. By proactively securing the resources needed, governments can ensure that they have everything necessary to achieve success.

It may be important to establish a clear hierarchy and prioritization to ensure effective adherence and execution of the strategic implementation. By clearly communicating the importance of goals from the top down, government needs to ensure that everyone is on the same page and working towards the same objectives.

Setting up a project team with clear terms is also essential in ensuring the success of strategic implementation plan. By assembling a team of dedicated professionals with clearly defined roles and responsibilities, everyone will be working towards the same goals and objectives.

Lastly, identifying quick wins is an important aspect of strategic implementation plan. By identifying and achieving quick wins early in the process, government can build momentum and demonstrate progress towards goals, ultimately leading to greater motivation and buy-in from all stakeholders.

Communication Plans

External Communication Plan

The External Communication Plan will be an elementary component of every fiscalization project, targeting consumers, citizens, and taxpayers as the primary recipients. The plan should aim to educate and inform these groups about the importance of obtaining receipts/invoices, their rights and obligations as consumers, and the role they play in reducing the shadow economy.

Information regarding incentives and mobile applications will be actively distributed to promote tools that simplify compliance and make it more advantageous. Incentives could range from instant awards for performing field audits to fiscal lotteries designed to generate demand for receipts.

Upon rollout, the communication plan will also need to share results in reducing the shadow economy, providing tangible evidence of the positive impact of fiscalization. This will not only demonstrate the effectiveness of the system but also encourage further compliance and participation.

Various channels may be utilized in the communication plan to ensure the message reaches its intended audience effectively. A comprehensive approach could help in keeping all stakeholders well-informed and engaged, which may contribute to the successful implementation of the fiscalization system. The ultimate goal is to forge a culture of compliance, transparency, and fairness, driving the growth and prosperity of the economy.

Internal Communication Plan

The Internal Communication Plan is another integral part of the communication segment, focusing on tax administration workers as the primary recipients. The plan will aim to clearly define the system objectives and main functionalities and share results in reducing tax evasion.

The system objectives will be clearly defined, providing a clear understanding of what the fiscalization system aims to achieve. The main functionalities of the fiscalization system will be explained in detail. This will include the operation of Electronic Fiscal Devices (EFDs), the role of the back-office component in managing the entire fiscalization system, and the use of various software components and applications. The communication plan will ensure that all tax administration workers have a thorough understanding of how the system works and how to use it effectively.

Training Plans

External Training Plan

The External Training Plan should focus on taxpayers as the primary recipients. The plan will aim to educate taxpayers on their main tax obligations, the applicable legislation, and the use of computer systems.

Taxpayers must have a clear outline of the main tax obligations to understand what the law expects of them. This will include information on the importance of obtaining and keeping receipts/invoices, the implications of non-compliance, and the benefits of compliance.

The applicable legislation will be explained in an accessible and understandable manner. This will include the laws related to tax collection, enforcement, and the application of public key infrastructure. The aim is to ensure that taxpayers are fully aware of the legal framework within which they operate, promoting compliance and reducing the risk of inadvertent non-compliance.

Training on the use of computer systems will be provided, focusing on the systems that taxpayers will interact with as part of the fiscalization process. This will include the Electronic Fiscal Devices (EFDs), the back-office component, and various software components and applications. The training will ensure that taxpayers are comfortable with these systems and are able to use them effectively.

Internal Training Plan

The Internal Training Plan should target tax administration workers as the primary recipients. The plan has to aim to explain applicable laws, taxpayer and consumer rights and obligations, and the operation of compliance procedures and automated systems.

The external training plan presents applicable laws thoroughly to provide tax administration workers with a complete understanding of the legal framework within which they operate. This will cover laws related to tax collection, enforcement, and the use of public key infrastructure. The aim is to ensure that tax administration workers are fully aware of the legal requirements and implications of their work.

The rights and obligations of taxpayers and consumers will be clearly outlined. This will include information on the importance of obtaining and keeping receipts/invoices, the implications of non-compliance, and the benefits of compliance. The training will empower tax administration workers to effectively communicate these rights and obligations to taxpayers and consumers, promoting compliance and reducing the risk of non-compliance.

In-depth training on fiscalization solution capabilities should be provided, seamlessly teaching the government employees to use every functionality of the tool to maximum extent.  The training will ensure that tax administration workers are comfortable with these systems and are able to use them effectively in their day-to-day work.

Final Words

Improvements in digital technology and the widespread acceptance of that technology have made fiscalization a practical option for both tax administrations and taxpayers. Fiscalization works best when it is part of a comprehensive risk management process, helping tax authorities focus on strategies that encourage voluntary compliance and prevent noncompliance before it happens.

By increasing the visibility of business activities and ensuring accurate reporting of transactions, fiscalization helps create a fairer business environment. It makes tax compliance easier for those who want to follow the rules and harder for those who try to avoid their obligations. This seamless approach to managing tax obligations—from business activities to reporting—enables tax authorities to better manage compliance and allows businesses to concentrate on their operations.

However, while choosing to implement fiscalization may seem straightforward, doing it effectively can be challenging. Successful fiscalization requires careful planning and execution to ensure it integrates smoothly with existing compliance processes and supports both voluntary compliance and effective enforcement. This approach not only simplifies tax management but also helps create a more equitable and transparent tax system.