The Federation of Bosnia and Herzegovina is finally moving on a commendable journey toward modernizing its tax system through online fiscalization and closing the Bosnian fiscal divide. This initiative, presented in the form of a draft bill on November 12th, 2024, has reached the entities’ Parliament and will be up for a first debate on November 27th as promised by the Government. The bill in its current form integrates business-to-business (B2B) and business-to-consumer (B2C) transactions into a real-time tax reporting framework and definitely represents a significant step forward in combating the grey economy.
By mandating the digital recording of transactions, the government aims to take care of fiscal discipline that is currently problematic, bolster transparency, and secure much-needed revenue to support ambitious reforms like raising the minimum wage to 1,200 BAM (600 Euros). However, the absence of an important offline functionality in the B2C segment could jeopardize these goals, allowing fraud schemes to persist and potentially undermining the entire fiscalization effort.
5 Key Takeaways
- Advancing Transparency with Online Fiscalization: The Federation of Bosnia and Herzegovina’s draft bill introduces online fiscalization to curb tax evasion, integrate B2B and B2C transactions into real-time reporting, and eliminate end-of-day reporting manipulations. This marks a critical step toward a transparent and modernized tax system, aligning with broader economic reforms.
- Offline Functionality Gaps Jeopardize the System: The absence of robust offline functionality for B2C transactions leaves significant loopholes for tax evasion, particularly during internet outages. These gaps enable fraud schemes such as falsified receipts, undermining compliance, and fiscal discipline.
- Potential Risks to Economic Sustainability: The initiative’s success is tied to projected VAT revenue increases that will fund minimum wage hikes and social programs. Without addressing vulnerabilities, fraud could diminish these revenues, forcing economic instability and a reduction in public trust.
- Recommendations for Resilient Fiscalization: Implementing offline fiscal systems capable of generating verifiable receipt numbers (VBRs) during connectivity issues is essential. This ensures continuous transaction integrity, protects against fraud, and maintains compliance in both connected and remote areas.
- Critical Amendments Needed for Robust Compliance: To sustain the initiative, the legislation must explicitly prohibit issuing invoices without a VBR under any circumstances, enforce alternative solutions during system failures, and mandate offline fiscal services for remote areas. These measures will secure revenue streams and bolster public trust in the system.
Bosnian Fiscal Divide: Transparent Tax System
The introduction of online fiscalization is a crucial measure to curtail tax evasion and address systemic loopholes that have plagued the local economy. By requiring fiscal invoices to be recorded in real time, the government seeks to eliminate end-of-day reporting manipulations, thus creating a transparent tax environment. This system is expected to enhance statistical accuracy, providing policymakers with immediate insights into economic activities across municipalities and industries.
This step toward modernization also lays the groundwork for broader fiscal reforms. The government has earmarked the anticipated financial gains from online fiscalization to support laws on contributions and wage increases, aligning with its vision of fairer labor conditions. This strategy could help stimulate economic growth, improve public services, and create a fairer tax system.
Yet, for all its promise, the legislation remains incomplete. By neglecting offline functionality in B2C transactions, it exposes the system to vulnerabilities that could undo much of the progress the initiative aims to achieve.
The Danger of an Offline Gap
Current fiscal legislation proposal permits the issuance of receipts without electronic signatures under certain circumstances, leaving room for tax evasion through schemes reminiscent of the infamous, Bosnian “dugi klik” (Long click) fraud. This loophole allows dishonest businesses to manipulate fiscal records, issuing falsified receipts to customers while underreporting sales to tax authorities. Such practices undermine trust in the tax system, discourage compliance among honest taxpayers, and reduce overall tax revenues.
If the system fails to capture transactions during internet outages or technical disruptions, the potential for fraud multiplies. In regions without reliable internet access, businesses can exploit these gaps indefinitely, further compounding the risk. As the government depends on increased VAT revenue to fill budget deficits and fund social programs, these loopholes could derail the fiscalization effort and jeopardize long-term sustainability.
Bosnian Fiscal Divide: Real Consequences
Without addressing offline functionality, the government risks alienating compliant taxpayers. When honest businesses see others evading taxes with impunity, the incentive to comply diminishes. Over time, this erosion of trust could lead to a decline in the number of taxpayers, shrinking the VAT base and leaving the state unable to fund essential programs.
The plan to raise the minimum wage to 1,200 BAM hinges on the projected financial benefits of online fiscalization. Should these benefits fail to materialize due to systemic fraud, the economic burden will shift elsewhere. This scenario could force the government to either cut social programs or increase taxes, both of which would have dire consequences for economic stability and public trust.
Bosnian Fiscal Divide: Closing the Gap
The success of the fiscalization initiative depends on adopting a system resilient to fraud and technical challenges. Implementing a strong offline functionality, that will serve as a backup when Internet is not available, is an absolute necessity. Alternative solutions must equip businesses to maintain transaction integrity even when internet access or central processing systems fail.
Offline functionality could involve deploying fiscal devices capable of generating verifiable receipt codes in real-time, regardless of connectivity. These receipts would be securely stored locally and transmitted to tax authorities as soon as the connection is restored. Such a system would prevent any manipulation of transactions during outages while maintaining uninterrupted compliance.
Additionally, the legislation should mandate stricter oversight of businesses operating in areas without internet access. Offline fiscal systems must ensure that these businesses adhere to the same transparency standards as online systems, recording and verifying all transactions.
Strengthening Compliance Through Alternative Solutions
The draft legislation’s allowance for businesses to issue fiscal invoices without a verifiable receipt number (VBR) during internet outages is one of the most pressing concerns. This gap enables fraudulent practices by allowing businesses to issue untraceable receipts, undermining the integrity of the entire fiscal system.
To address this, the bill must be altered to explicitly state:
“A taxpayer must not issue an invoice without a VBR. In the event of a temporary interruption in a continuous internet connection, the taxpayer must use an alternative solution that enables the application of a VBR, ensuring the invoice is immediately verifiable.”
This provision mandates the use of alternative systems to generate verifiable receipt codes in real-time, even during connectivity issues. Such a requirement maintains continuity in fiscal compliance while protecting tax revenues.
Continuity in Service Despite System Failures
The draft legislation’s reliance on manual record-keeping during fiscal service interruptions presents another vulnerability. Handwritten logs are prone to errors, manipulation, and delayed reporting, creating opportunities for non-compliance.
An amendment is needed to enforce the use of backup fiscal systems during service interruptions:
“In the event of a fiscal service outage, the taxpayer must use an alternative fiscal service provided by the tax administration to ensure the continuity of electronic invoice records.”
By implementing this measure, businesses would maintain uninterrupted compliance, and tax authorities could continue to receive accurate data, minimizing the risks associated with manual reporting.
Offline Functionality for Remote Areas
Finally, the bill currently allows businesses without internet access to issue invoices without electronic verification, provided they obtain certification from the communications authority. While this provision acknowledges infrastructural challenges, it falls short of preventing fraud in such areas.
To mitigate this risk, the legislation must require businesses in these regions to adopt offline fiscal systems capable of issuing verifiable receipts:
“If a taxpayer operates in a business space located in an area where it is impossible to establish an internet connection for data exchange with the tax administration, the taxpayer must use an offline fiscal service that applies a VBR and issues invoices that are immediately verifiable.”
This adjustment ensures that all transactions, regardless of location, meet the same standards of transparency and accountability, reducing the potential for tax evasion.
