A tax invoice issued illegally – ostensibly for a service or a sale performed – is called a “fictitious invoice”. The purchase of a fictitious invoice and reporting it as input, means reducing the amount of Value Added Tax (V.A.T.) that a dealer has to pay, and also reducing the payments to Income Tax and to the National Insurance Institute (NII), for it means an increase of the registered expenditure and a reduction the taxable income.
The offsetting or distribution of fictitious tax invoices are criminal tax offences. According to the estimation of the Israel Tax Authority, the size of the damage directly caused to the country’s treasury amounts to tens of billions of Shekels each year. Senior officials in the Israel Tax Authority have declared this phenomenon a “National calamity” because this phenomenon severely damages the country’s tax revenue.
The Israel Tax Authority and other law-enforcement authorities (Unit 433 of the Israel Police, the National Insurance Institute) battle against the phenomenon of fictitious tax invoices and enforce the law very strictly against those who commit such offences, both against dealers that have deducted input tax based on fictitious tax invoices and also against those who distribute such invoices. The Israel Tax Authority conducts widespread investigations against this phenomenon, using a variety of tools that are at its disposal.
Such tax offences receive a lot of attention because of the harm to the country’s revenue, the need to minimize the phenomenon and the punishment imposed on those carrying out the offences; this is expressed, in the courts, by lengthy periods of imprisonment.
The normal framework
The Value Added Tax Law
117(b) – if a person performs one of the deeds listed below with the objective of avoiding or escaping payment of tax, his sentence is 5 (five) years’ imprisonment or double the fine determined in section 61a(4) of the Criminal Code, 5737 – 1977 (in this section – “the Criminal Code”):
(3) Issued a tax invoice or a document that purported to be a tax invoice, without performing or undertaking to perform the transaction for which he issued the invoice of the aforementioned document.
(8) Used deceit or trickery, or allowed another to use them, or did something else.
Income tax
If a person, intentionally, with the objective of evading tax, or helping another person to avoid tax, committed one of the offenses listed below, his sentence will be 7 (seven) years imprisonment or a fine as stated in section 61a(4) of the Criminal Code and twice the sum of the income that he concealed or helped to conceal, or both those punishments combined; and they are:
(2) Submitted a report under the above-mentioned ordinance or gave false details.
(4) Prepared, upheld or allowed a person to prepare or to uphold false account books or other written records, or forged or allowed another to forge account books or records.
(5) Used any deceit, sleight or trickery, or allowed another to use them.
What is a fictitious invoice?
A tax invoice is a document that constitutes documentation for recording in a dealer’s accounts system; through a tax invoice the sum of the invoice may be offset, both for purposes of V.A.T. (input tax) and also for the purposes of income tax (recognized expenditure), in the framework of an assessee’s taxable income, and/or as part of determining the sum of V.A.T. that must be transferred to the Director of V.A.T. for transactions performed in the period being reported.
In the case of a fictitious invoice, the owners of the businesses that file the reports, reduce their tax liability artificially, so that they will be able to pay less V.A.T., income tax and National Insurance, by performing tax offenses. In some of the cases these are real, legitimate businesses, while others are fictitious businesses.
The field of taxation is fertile ground for criminal activity, in white collar crime that embroils tax offenses in which criminal elements and crime families are involved.
Types of fictitious tax invoices.
- Fictitious tax invoice: a tax invoice issued without any product or service being provided in return. An invoice issued not in return for a transaction between the parties. Its objective, as stated previously, is to pad a business’s expenses, both for the purpose of deducting the input tax specified in the invoice, and, also, for the purpose of padding the business’s expenses in order to pay reduced income tax, based on fictitious expenses.
- A tax invoice that does not actually reflect the transaction: a tax invoice issued, where the sums stated are higher than the actual sum of the transaction. There are cases in which dealers include, as part of their business’s expenses, invoices of this nature with the intention of reducing their tax liability (V.A.T., income tax and National Insurance).
- A foreign tax invoice: a tax invoice issued by a party that did not sell the product or perform the service. In such a case, there are a number of parties involved: the party that sold the product or performed the service, the party who received the invoice and the party who actually issued the invoice. A tax invoice must be issued to the payer by the party that sold him the product or who performed the service.
Ignorance of the law does not exempt the business, and/or the company and its owners from civil and criminal liability. The burden of evidence and of proof is imposed on them. It is a very heavy burden which causes the dealer considerable inconvenience in arguing against his legal obligation to check whether an invoice is fictitious.
The sanctions relating to offenses of fictitious tax invoices allow the Tax Authority to act on a number of levels:
Disqualification of account books – as part of issuing a tax assessment (V.A.T., income tax) the business’s books will be disqualified and it is more than likely that a best judgement assessment will be issued which will bring about the very highest tax payments.
Fines and interest – the assessments issued for a dealer by best judgement assessment will include interest payments, linkage differentials and fines of very considerable sums that will be derived from the volume of the transactions reported.
Charging double tax – Article 50 of the V.A.T. Law allows the Israel Tax Authority to impose double tax (V.A.T.) for the input V.A.T. that was demanded in those fictitious invoices.
Long terms of imprisonment – the courts impose very severe punishments on those who commit tax offenses with fictitious tax invoices.
Imposition of individual liability on the executives of a business or a company – This is a very heavy liability; company executives can find themselves involved in tax offenses and money laundering, whether consciously or unconsciously. In a case of this kind, they will be investigated under caution, and, usually, the accountant of the business or company will be investigated under caution, and serious indictments will be served against them.
Israel’s taxation laws are very complex and require a deep understanding and acquaintance both of the various parties involved in administering the investigations and the Israel Tax Authority’s claims system. Therefore, there the most appropriate legal representation by means of an experienced lawyer, who is an expert in the field of taxation, is dramatically important. Our firm will assist, counsel and represent owners of businesses and companies in tax offense cases in the following areas:
- Assistance, counsel and legal representation of suspects during investigation by the Israel Tax Authority and the Israel Police.
- Legal counsel during the various legal proceedings that will be opened against a suspect, or a person accused of tax offenses, against the investigating and enforcement entities and in the courts for various proceedings.
- Administering negotiations and representation in hearings prior to the serving of an indictment, with professional efforts to reduce the indictment, to reduce the punishment with the aim of cancelling the indictment or achieving an acquittal in court.
- Legal representation of dealers and assessees in appeal processes for legal proceedings, and/or as part of appeals to the Israel Tax Authority.
Professional legal counseling in the early stages of a process might turn into a game-changer, holding intensive discussions the Director of Value Added Tax or the Tax Assessor, with real arguments and reasoning, backed up with relevant documentation might definitely cancel the outcome.
