A survey of Saudi businesses subject to Value-Added Tax (VAT) that came into force in the Kingdom earlier this year, has a sizable number of respondents voicing concern about being targets of potential VAT-related scams.
The finding was part of an array of insights gleaned from the survey conducted by leading global professional services firm EY. A report of EY’s findings, titled ‘Achieving VAT compliance in the Kingdom of Saudi Arabia — the first 60 days’, also provides interesting insights on measures that fellow-GCC members must consider adopting ahead of the rollout of VAT in their respective jurisdictions. The Sultanate of Oman is expected to implement VAT likely from January 1, 2019.
“While 45 per cent of businesses felt that they would not be subject to the risk of VAT fraud, 55 per cent were either unsure or felt that there is a risk of exposure to fraud,” said EY in its report.
It also stressed for tax authorities and business owners alike to be “alert to the common features of VAT fraud aimed at under reporting of income and over reporting of input VAT deductions”.
According to EY, common VAT frauds encountered globally fall into five broad categories. Most notable are instances classified as ‘Inflated Refund Claims’. This typically involves a business acquiring invoices for purchases it has never made, thereby enabling it to claim more refunds from the tax department or reduce the amount of VAT payable to the authorities.
Also of concern are instances where businesses seek to conceal their amount of sales in the domestic market in order to evade the obligation to charge VAT on these sales. Such businesses indulging in ‘Underreported Sales’ may “make sales to buyers at cheap prices on the understanding that VAT on these transactions will be underreported or no VAT is charged on the transaction with the tacit acquiescence of the buyer,” says the audit and accounting firm.
Yet another category of VAT-related scams concerns traders who set up false enterprises and register them for VAT, thereby “creating fictitious versions of themselves”, according to EY.
These ‘Fictitious Traders’, the professional services firm explains, tend to make fake purchases and sales, thereby seeking to defraud the authorities by registering nonexistent business transactions.
“The objective of such schemes is to create fraudulent VAT refund claims. In addition to setting up fake enterprises, they create fake export invoices. The modus operandi of such fictitious traders is to try to make fast profits and to disappear quickly,” the report noted.
Falling in a distinctive category are frauds pertaining to ‘Domestic Sales Disguised as Exports’. In this category, businesses sell goods and services in the domestic market but claim to have sold them overseas.
“For this purpose, they produce fake export invoices and documentation. The real invoices relating to the goods sold on the domestic market are concealed and are not entered in the accounting records, and the VAT-inclusive amounts are entered as zero-rated export sales,” the report said.
In the final category are businesses that, once registered for VAT, procure goods for sale at VAT-inclusive prices. These traders then go missing without paying the VAT, said EY.
“Tax authorities worldwide are using advanced technology tools to prevent and detect these types of tax fraud. The tax authorities in the GCC region are benefiting from these modern technology tools that address electronic sales suppression and false invoicing. Businesses also need to be able to identify VAT fraud and know how to report suspicious activity relating to its customers and
vendors,” the audit firm added in conclusion.