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    Hungary Moves To Online Invoicing To Combat Shadow Economy

    Marcus Carlson Profile
    Marcus Carlson - 2020-07-01T21:00:00.000Z
    Hungary

    Let’s start with a bitter truth. Goods and services undisclosed to tax authorities add up to 33.33% of the entire world economy according to estimates compiled by The Economist. Black and grey economies lead to poorer national economies and a lack of funds for development, healthcare, public safety, or education of the public. 

    Hungary is currently embarking on an initiative to tackle the shadow economy with technology designed to prevent invoicing fraud and theft. The government has installed payment terminals to facilitate e-payments in recent years too. 

    Take a look at the series of changes in payments and accounting that Hungary has introduced by moving from paper invoicing to online invoicing:

    • Installation of a compulsory online link to the tax office in 2014
    • Ekaer e-tracking system for goods transport was introduced in 2015 to ensure businesses furnish transport information for VAT requirements
    • Electronic invoicing became mandatory in April 2018 for all companies registered for Value Added Tax to fight against VAT fraud. Moreover, failure to notify the required details leads to a fine of €1,700 per bill
    • Must disclose taxable income on transactions with VAT equal or higher than €290
    • Instant Payment Scheme was launched in March to reduce cash in circulation
    • Companies liable for tax must use XML version 2.0 for making reports of RTIR bills after June 19st, 2020. The VAT threshold of €300 is no longer applicable
    • B2C transactions must comply with electronic billing from January 1st, 2021 onwards

    While Italy postponed e-billing adoption to October 1st, 2021, Hungary has extended the due date for adopting electronic invoicing to July 1st in the wake of the pandemic. 

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    Explaining The Phenomenon 

    The Oxford dictionary defines the shadow economy as illicit financial transactions that are prevalent alongside the licit financial transactions of a country. It’s explained as unreported financial activity according to the 2012 Information Note published by the OECD. Black market transactions that involve drugs and money laundering activities are obvious examples of this economy. 

    Here are some more common examples of the shadow economy:

    • Persons that report exaggerated tax-deductible-expenses by colluding with others or fabricating accounting data
    • Companies not registered for VAT or income tax
    • Using fictitious bills to reduce taxable income or to inflate tax deductibles
    • Under-declaring taxable income to lower total taxes
    • Creating or using fraudulent identities to avail refunds or evade taxation
    • Making phoenix companies that dissolve prior to the taxation period 
    • Failing to register employees with the tax authorities

    Also called the ‘underground’ economy, ‘black’, ‘hidden’ or ‘cash’ economy, these finances aren’t a part of GDP calculation. Beyond making it more difficult to gage the total extent of the shadow economy, these activities expand a country’s tax gap. 

    Take a closer look at its effect on an economy below. 

    • Demeans the tax system and the trust laid in it via voluntary compliance by responsible parties
    • Increases the social security costs, which in turn spikes the cost of running a business
    • Creates an atmosphere of exploitation of labor whereby workers are underpaid
    • Fuels other illicit activities including money laundering 
    • Generates imbalances among competitive businesses where some pay taxes and others don’t

    How Online Invoicing Can Help Combat This Phenomenon

    Electronic billing via invoicing software for small businesses is legally compulsory in many places. When e-payments are required in a country, the hidden economy declines. It can therefore help to reduce fraudulent transactions and theft with technologies such as invoice matching.

    Here are some examples of how e-invoicing holds the solution to the shadow economy. 

    More Card Payments In Azerbaijan 

    In an effort to reduce cash payments to 40% from 75%, Azerbaijan embarked on several initiatives designed to promote cashless payments. This includes transforming student and public transportation spending. Moreover, to incentivize consumers and businesses, another part of the approach is awarding VAT refunds and lottery tickets to participating consumers and businesses.

    Digitization In Sweden

    Starting with popularizing card payments to net banking in the late 20th century, Sweden uses the least cash when compared with all the countries in the world. Consumers make over 80% of their purchases using e-payment methods. 

    Limiting Black Money In Romania 

    Without adopting e-invoices for tax payments, Romania would have a hidden economy that’s €17 billion bigger than it was in 2008 given 50% Romanians unbanked as of 2004. 

    Conclusion

    When left unchecked and unmonitored, the shadow economy can quickly erode the GDP and tax base of a country. Reducing cash payments is among the best ways to combat it. Moreover, it doesn’t pose many challenges for electronic Invoicing as evidenced in the case of Hungary, where digitization and mandatory e-payments are now the new norms. Accordingly, adopting online invoicing and e-payments in tandem can help bring the shadow economy into the light.