The last two editions of our InsideTax publication have focused on tackling tax leakages in the 21st century. Without doubt, the need for revenue authorities to develop awareness of possible sources of tax leakages in this era and evaluate tenable approaches at combating the problem cannot be over-emphasized. Specifically, in the last edition, we considered a common tax evasion scheme – sales suppression – vis-à-vis the various ways in which it can manifest, consequences and technology-based counter measures prescribed by the Organisation for Economic Cooperation and Development (OECD)1.

In this edition, we will conclude the series by evaluating false invoicing as a tax evasion scheme, relevance in Nigeria and possible adaptation of counter-measures prescribed by the OECD to the Nigerian situation.

False invoicing is perpetrated by deliberate fabrication or inflation of purchase invoices in order to unjustly claim expenses which were not genuinely incurred for tax purposes. In this regard, a taxpayer presents invoice for a transaction where none was issued by a vendor or inflates the invoice issued by a vendor. While sales suppression schemes seek to under-report revenue, false invoicing seeks to over-report deductions. The common end goal is reduction of profit and consequent tax liability. In addition, false invoicing may also reduce eventual value added tax (VAT) payable by a taxpayer where fictitious input VAT has been used to offset a reasonable portion of the output VAT.

The withholding tax (WHT) mechanism may be viewed as a deterrent to false invoicing. This is because a perpetrator may have to weigh the consequence of having to account for WHT on false invoice amount on one hand vis-à-vis savings to be made from tax on profit, on the other hand. However, the concept of "outright purchase and sales of goods in the ordinary course of business", for which WHT is not applicable easily weakens this deterrent.

According to the OECD, the popularly acclaimed method of combating false invoicing is the adoption of electronic invoicing (e-invoicing) system1. Essentially, businesses are required to issue invoices to customers electronically and retain records of the invoices in electronic format. The electronic invoicing system provides additional features to ensure integrity of data and identity of creator. In this regard, digital signatures are created for invoices generated in order to guarantee authenticity of the invoices and confirm that they have not been altered after creation.

To ensure utmost effectiveness of e-invoicing in addressing false invoicing, sales invoices are required to be registered or otherwise provided to the tax authority. As such, false or inflated invoices can be identified by automatic matching of the data for the purchaser and seller.

More than twenty one (21) countries around the world have implemented e-invoicing. Such countries include Argentina, Bolivia, Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Italy, the People's Republic of China, Peru, Rwanda and Uruguay where significant impact of the solution has been recorded.

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1. OECD (2017), Technology Tools to Tackle Tax Evasion and Tax Fraud -

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