A tax invoice issued illegally – for a service or sale made under false pretenses – is called a ” fictitious invoice .” Buying a fictitious invoice and reporting it as input means reducing the amount of VAT that the trader must pay, and reducing payments to the Income Tax and the National Insurance Institute, as it means increasing recorded expenses and reducing taxable income. Offsetting or distributing fictitious tax invoices are criminal tax offenses. According to estimates by the Tax Authority, the scope of the damage caused to the state treasury directly reaches tens of billions of shekels per year. This phenomenon has been declared by senior Tax Authority officials as a “state blow”, this is because this phenomenon severely harms the state’s tax revenues. The Tax Authority and other enforcement authorities (Israel Police, Lahav 433, the National Insurance Institute) are fighting the phenomenon of fictitious tax invoices and are greatly tightening enforcement against perpetrators of the offense, both against traders who deducted input tax from a fictitious tax invoice and against the distributors of the invoices. The Tax Authority Conducts extensive investigations against this phenomenon using the variety of tools at its disposal. Tax offenses as mentioned receive a lot of attention due to the harm they cause to state revenues. In order to eradicate the phenomenon, the punishment against perpetrators of the offenses as expressed in the courts is imprisonment for extended periods.
The normative framework:
VAT Law
117 (b) If a person commits any of the acts listed below with the aim of evading or evading the payment of tax, he shall be liableto imprisonment for 5 years or double the fine prescribed in Section 61(a)(4) of the Penal Law, 5737-1977 (in this section – the Penal Law):
(3) issued a tax invoice or a document purporting to be a tax invoice, without having made or undertaken to make a transaction for which he issued the said invoice or document;
(8) used any fraud or trickery or permitted another to use them or committed any other act.
Income tax
- A person who intentionally, with the intention of evading tax or helping another person to evade tax, commits one of the offenses listed below is liable to seven years’ imprisonment or a fine as stated in Section 61(a)(4) of the Penal Law and twice the amount of the income that he concealed, intended to conceal or helped conceal, or both penalties; and these are:
(2) made a false statement or entry in a report under the ordinance;
(4) Prepared or maintained, or permitted a person to prepare or maintain, false books of account or other false records, or falsified or permitted the falsification of books of account or records;
(5) Use any fraud, deceit or trickery, or permit the use thereof;
What is a fictitious tax invoice?
A tax invoice is a document that constitutes documentation for registration in a business’s accounting system. Through the tax invoice, the amount of the invoice can be offset for both VAT (input tax) and income tax (declared expense) purposes, as part of determining the taxable income of the taxpayer and/or as part of determining the amount of VAT that must be transferred to the VAT administrator on transactions carried out during the reporting period. In the case of fictitious tax invoices, the reporting business owners artificially reduce their tax liability, so that this will allow them to pay less VAT, income tax, and national insurance contributions, while committing tax offenses. In some cases, these are legitimate and existing business owners, and in others, these are essentially fictitious businesses. The field of taxation serves as fertile ground for white-collar criminal activity that combines tax offenses in which criminal elements and crime families are often involved.
Types of fictitious tax invoices:
1. Fictitious tax invoice: A tax invoice issued without a product or service being provided. An invoice issued not in connection with a transaction between the parties. Its purpose, as stated, is to inflate business expenses, both for the purpose of deducting the input tax stated on the invoice and for the purpose of inflating business expenses for the purpose of paying reduced income tax based on the fictitious expense.
2. A tax invoice that does not reflect the actual transaction: A tax invoice issued when the amounts stated therein are higher than the actual transaction amount. There are cases in which business owners include invoices of this type as part of their business expenses with the intention of reducing tax liability (VAT, income tax, and national insurance contributions).
3. Foreign tax invoice: A tax invoice issued by someone who did not sell the product or perform the service. In this type of case, there are several parties involved, the seller of the product or the provider of the service, the recipient of the invoice, and the actual issuer of the invoice. A tax invoice must be issued to the payer by the person who sold the product or performed the service.
Ignorance of the law does not exempt the business and/or company and its owners from civil and criminal liability. The burden of proof is on them, a very heavy burden that places considerable burden on the business to argue against its legal obligation to check whether the invoice is fictitious.
The sanctions related to the offense of fictitious tax invoices allow the Tax Authority to act on several levels:
- Disqualification of accounting books – As part of the tax assessment (VAT, income tax), the business books will be disqualified and, in all likelihood, an assessment will be issued according to the best judgment, which will result in extremely high tax payments.
- Charging fines and interest – The assessments issued to the trader, based on the best judgment, will include interest payments, linkage, and fines in very substantial amounts that will be deducted from the amount of the reported transactions.
- Double taxation – Section 50 of the VAT Law allows the Tax Authority to impose double taxation (VAT) in respect of the input VAT required on those fictitious tax invoices.
- Actual prison sentences for long periods – the courts are very strict in punishing those who commit tax offenses in connection with fictitious tax invoices.
- Imposing personal liability on managers in a business or company – this is a heavy responsibility, the company’s managers can find themselves involved in tax offenses and money laundering, whether knowingly or not. In this type of case, they will be investigated with a warning, usually the accountant of the business or company will also be investigated with a warning and serious charges will be filed against them.
Tax law in Israel is very complex and requires a deep understanding and familiarity with both the various parties involved in conducting investigations and the Tax Authority’s claims system. Therefore, the quality of the most appropriate legal representation through an expert and experienced tax lawyer is of dramatic importance. Our firm accompanies, advises and represents business owners and companies in tax offense cases in the following areas:
- Assistance, accompaniment and legal representation of suspects during investigations with the Tax Authority and the police.
- Legal representation in the various legal proceedings initiated against a suspect or accused of tax offenses, before the investigative and enforcement authorities, as well as before the courts at their various levels.
- Negotiating and representing in hearing proceedings prior to filing an indictment, while professionally striving for leniency in the indictment, for a reduction in punishment, while striving to have the indictment dismissed or to obtain an acquittal in court.
- Legal representation of businesses and taxpayers in appeal proceedings before legal courts and/or within the framework of appeals to the Tax Authority.
Professional legal advice in the early stages of the procedure may inevitably change the picture, and holding vigorous discussions with the VAT administrator or tax assessor, while presenting real arguments and reasons with relevant references, may inevitably overturn the ruling.
