Rules First, Oversight Second: Can We Change the Mechanism of Tax Fraud Itself?

From here, the series discusses tax-reform proposals, not additional obligations created by e-invoicing. “Rules first” is an order of analytical questions, not a demand to postpone current compliance or preparation. Better delivery, proportionate reporting and research into tax changes can proceed independently and in parallel.

More visibility is not always the same as less vulnerability. Electronic invoices can make transactions easier to process and compare, but a tax system can still create opportunities to collect money, disappear and leave someone else with the loss. Before demanding another layer of reporting, we should ask whether the underlying rules unnecessarily create that opportunity.

I support e-invoicing and standardised business communication. My objection is to treating better observation as the only possible response to a badly designed incentive. Tax policy needs both: rules that reduce opportunities for abuse and proportionate oversight of the risks that remain. Neither an invoice network nor a structural reform deserves a promise that fraud will become impossible.

Identify the mechanism, not just the suspicious document

The Council’s explanation of missing-trader fraud describes a chain in which a trader charges VAT to the next buyer but does not remit it, while other businesses in the chain claim the relevant VAT deductions or refunds. Cross-border transactions can allow the sequence to repeat, giving carousel fraud its name.1 The useful policy insight is the mismatch between possession of tax money and effective recovery from the person responsible for it.

This is not a claim that every refund is suspicious. A legitimate business may be entitled to a refund because its deductible input VAT exceeds its output liability. Nor does a cross-border supply automatically imply abuse. The Commission explains that an intra-EU supply will normally be exempt while liability on the taxable intra-EU acquisition falls on the customer.9 The conditions and the transaction’s actual character matter.

Consider a hypothetical wholesaler selling industrial components to a manufacturer. Both are genuine businesses, but an intermediary inserted into their supply chain charges VAT and then fails to remit it. The invoice may be perfectly formatted. Its identifiers may match a registered company. Electronic transmission can document what was declared; it cannot, by itself, ensure that the declared tax reaches the budget.

Now consider changing the liability rule for that transaction, where the law permits it. If the customer rather than the intermediary accounts for the VAT, the intermediary no longer receives that VAT payment from the customer. The specific opportunity to retain that payment is removed at that point in the chain. That is a narrower and more defensible proposition than saying that fraud has been abolished.

Change incentives without confusing different taxes

There are at least two separate reform questions. One concerns who accounts for VAT and who temporarily holds the associated cash. Another concerns whether corporate taxation should depend on profit or a differentiated measure of business receipts. These questions can be analysed together, but they must not be merged into a slogan about a single new tax.

Under the Commission’s description of the VAT rules, the supplier is normally liable, with specified cases in which the customer is or may be liable.9 A wider reverse-charge proposal changes that allocation. It does not automatically replace VAT, make a purchase tax-free, or remove all obligations to establish the nature and destination of a supply.

A gross receipts proposal addresses a different incentive. If a tax depends on receipts rather than deductible expenditure, inflating an expense does not reduce that particular tax base. Washington’s tax administration describes its business and occupation tax as a gross receipts tax without deductions for ordinary business costs.2 That illustrates the mechanism, not proof that Slovakia should copy the system.

The corresponding risks shift. Concealing sales, misclassifying activities or moving receipts outside the taxable perimeter could become more attractive. Costs would still matter for commercial accounts, financing and any other taxes that continued to use them. Removing one reason for a false invoice would not remove every reason to create one.

An invoice is evidence of a claim

This distinction should shape digital architecture. A transmitted invoice is a structured assertion about a transaction. It can support reconciliation between seller and buyer, reveal inconsistent declarations and reduce transcription work. Whether goods arrived, a service was performed or a purchase served private consumption may require other evidence.

In the hypothetical component business, a delivery confirmation, stock movement and payment record could strengthen the account. They would still need interpretation. A returned shipment might explain a credit note. A late payment might reflect a dispute rather than evasion. The policy goal should be to make relevant evidence accessible when justified, not to assume that collecting everything resolves uncertainty.

My preferred public baseline for e-invoicing follows the same logic. Businesses should be able to discharge a public obligation through a direct public channel, with commercial services available for additional value. This is an architectural proposal, not a claim that the state must operate every technical component itself. Public procurement and a compulsory private contract for each taxpayer are different allocation choices.

The reporting dataset should then follow the control objective. If a proposed field is said to prevent a particular abuse, the authority should explain the detection mechanism, the expected response and why less detailed data would be insufficient. A large collection of commercially sensitive invoice lines is not self-justifying merely because algorithms can analyse it. Publish the rationale and expected effects, while keeping sensitive detection methods in an authorised review layer. Tax-policy changes belong to the competent rule-makers; the tax administration is not automatically empowered to enact them.

The strongest objection: observation still matters

The strongest counterargument to structural reform is that fraudsters adapt while honest firms pay the transition costs. A rule that closes a familiar route may create new boundary disputes, concentrate losses elsewhere or weaken useful cross-checks. Wider reverse charge, for example, raises questions about customer eligibility and the eventual collection point. Those questions cannot be answered by displaying fewer VAT payments between companies.

I agree with that objection as a test, not as a veto. The correct comparison is not a flawed current system against a flawless imagined replacement. It is the current system, including achievable improvements, against a fully specified alternative with its own avoidance routes, implementation costs and legal constraints. Both sides need the same evidential standard.

Even the headline measure of loss requires care. The Commission’s VAT-gap material describes uncollected VAT as including non-compliance, insolvency and administrative errors, and distinguishes the compliance gap from revenue forgone through policy choices.4 It would therefore be wrong to present the entire gap as carousel fraud or as money a single reform could recover.

Law is part of the design

A technically attractive liability arrangement is not a licence to implement it. The Commission identifies defined reverse-charge possibilities under the VAT Directive and separately explains that special derogations may be authorised under Article 395.9 10 An authorisation route is not an assurance that a universal national proposal will qualify.

The Council’s historical discussion of generalised reverse charge is useful precisely because it describes an exceptional, time-limited approach with safeguards.1 It should not be recycled as proof that an old proposal gives Slovakia permission today. A serious reform team needs a current provision-by-provision legal assessment before promising a live pilot.

Ask better questions before buying more control

The next practical step should be a published mechanism review. For each material abuse, identify the tax rule involved, the money or deduction at risk, the responsible party, the evidence needed and the point at which intervention can still prevent loss. Separate deliberate evasion from error and insolvency so that different problems receive different remedies.

Then compare the incremental reporting value of each option: clearer rules, narrower requests, faster lawful intervention and targeted liability changes. Ask which risks and necessary information remain under each tax mechanism, including displaced fraud and false positives. This tests the case for additional reporting; it does not replace interoperable invoice exchange, reconciliation or business delivery. Tax reform is neither a substitute for those functions nor a reason to defer applicable compliance. Structural-reform advocates must explain new risks; additional-reporting advocates must show what existing evidence cannot achieve.

I would judge success by lower verified losses, fewer unnecessary burdens and dependable taxpayer rights, not by the number of invoices collected. Rules first does not mean controls last. It means designing the obligation, the payment mechanism and the control together, so that technology supports a coherent system rather than making an avoidable weakness easier to observe.

For a business, none of these proposals changes today’s accounting or tax treatment. Continue preparation for the obligations that apply to you. Evaluate the value of invoice delivery separately from each new reporting field and from a change in tax base; rejection of one does not establish that the others are unnecessary.