Revenue authorities worldwide are increasingly leveraging technology to enhance tax revenue collection, with a particular emphasis on VAT (Value Added Tax). The primary goals of tax technology are to increase VAT collection, address the challenges of the informal economy, and identify and prevent tax fraud. To achieve these goals, revenue authorities are reassessing their approaches and evaluating the shift from audit-based VAT collection controls to proactive, technology-driven tools, including e-invoicing and simplified VAT reporting systems.

Understanding Fiscalization

Fiscalization involves regulations and supporting technologies designed to prevent retailer fraud. It is being implemented in various countries to control the grey economy by enforcing mandatory transaction reporting to authorities. For over 40 years, fiscalization has been a key regulatory and technological approach to addressing VAT challenges in retail sales. This approach has expanded to include Business-to-business (B2B) VAT invoicing through the introduction of B2B invoice pre-clearance and online registration by revenue authorities. These new generation solutions help countries introduce e-invoicing, simplify VAT reporting, and monitor taxpayer compliance.

Every government follows the same fiscalization philosophy:

• Tax-related data of every transaction should be stored securely to prevent post-transaction data manipulation.
• Reporting to tax authorities about stored tax-related data should be possible at any time without data manipulation.

Fiscalization laws/regulations typically require the issuance of an appropriate fiscal receipt to the buyer, with the option to deliver the receipt electronically. These laws are often linked to other laws, such as those related to accounting, taxation, consumer protection, data protection, and privacy.

Traditional Fiscalization Approach

Traditional fiscalization solutions rely on the use of traditional cash registers equipped with fiscal devices – special hardware components that store data about fiscal transactions. With the advent of innovative technologies, these fiscal devices have gained data transmission capabilities, enabling revenue authorities to receive information without manual intervention and gain more timely insights into taxpayer activities. However, hardware-based fiscal devices have several drawbacks:

• High Costs: Expensive hardware and deployment and maintenance costs burden the taxpayers.
• Efficiency Issues: Aging designs struggle with modern demands.
• Closed Ecosystems: Complex certification and maintenance processes limit market entry and increase long-term costs.

E-Invoicing and Continuous Transaction Controls

E-Invoicing exemplifies further adoption of modern technologies employed by businesses to improve tax compliance and support Revenue Authorities in their efforts to enhance tax collection. While initially e-invoicing was introduced as a technology permitting business entities to exchange invoices, credit, and debit notes in electronic format, its adoption by revenue authorities ensures that relevant information on business transactions is reported to them in a timely manner using digital means. Therefore, e-Invoicing mandated by Revenue Authorities is a system where B2B invoices and other business transaction-related documents are submitted electronically to and authenticated by the Revenue Authority.

Ultimately, e-Invoicing is an essential step towards the adoption of Continuous Transaction Controls (CTCs), a set of solutions and practices that use data submitted in real-time or near real-time to assess business compliance, gain better insights into the movement of goods, and detect tax fraud cases. The modern e-Invoicing platform of a revenue authority should support various integration and information exchange approaches, such as:

• The ability to verify submitted invoices in real-time (pre-clearance of the invoice).
• The ability to capture information directly when taxpayers use the APIs of the solution.
• The ability to capture information via intermediaries, like providers of Peppol access points.
• The ability to capture information collected by Electronic Fiscal Devices and Sales Data Controllers.

E-invoicing technology and fiscalization technology have been developed in parallel, and countries that have been early adopters of fiscalization frequently maintain the separation of these two technologies due to practical reasons, such as the complexity of changes in legacy hardware used by large numbers of taxpayers. However, in most cases, e-Invoicing and fiscalization operate with similar information, and both tasks can be addressed by a well-architected system that captures both invoices and documents related to the B2B invoicing process (credit notes, debit notes, etc.), as well as receipts (or simplified invoices).

Thus, typically, e-Invoicing operates with more information than a fiscalization platform and addresses taxpayer compliance beyond retail sales activities.

Evolving Stakeholder Demands

Fiscalization involves four major stakeholder groups, each with specific demands toward fiscalization solutions. Effective fiscalization solutions should address these demands efficiently to gain support for new compliance technology and must address the needs of key stakeholder groups:

1. Revenue Authorities: Demand secure, efficient VAT collection, real-time data access, and tools to influence taxpayer behavior.
2. Taxpayers: Seek modern, cost-effective technology that integrates seamlessly with business operations and enhances customer service.
3. Buyers: Prefer electronic receipts and uninterrupted service processes, with reliable digital receipts for warranties and refunds.
4. Solution Providers: Require clear regulations, online transactions with authorities, and stable, adaptable technology.

Virtual Fiscalization

NRD Companies’ Virtual Fiscal Device Management System (VFDMS®) solution exemplifies the shift to virtual fiscalization. This software-based approach relies on software-based tools, allowing any compatible, certified, and authorized software solution (e.g., point of sale, invoicing, sales transaction management tools) to submit information to a virtual fiscalization component hosted by the revenue authority or a trusted third-party provider. This new generation solution helps countries introduce e-invoicing, simplify VAT reporting, and monitor taxpayer compliance effectively.

Depending on implementation and regulations, virtual fiscalization can operate in real-time mode, where transactions are valid only after central system registration, or offline mode, where transactions are collected and posted in batches.

Virtual fiscalization can coexist with traditional hardware-based approaches, allowing a gradual transition to innovative solutions. It can also support industry-specific fiscalization requirements, such as special reporting for hospitality, restaurants, and cafes.

Virtual Fiscalization in Zimbabwe

Virtual fiscalization in Zimbabwe represents a pivotal step towards modernizing tax compliance frameworks amidst the country’s evolving economic landscape. Embracing software-based solutions like NRD Companies’ VFDMS®, Zimbabwe Revenue Authority (ZIMRA) is poised to enhance VAT collection processes, mitigate retail fraud, and enhance transparency in business transactions. By moving away from traditional hardware-dependent methods, Zimbabwe anticipates reducing compliance costs for taxpayers while enabling real-time monitoring and reporting capabilities essential for effective tax administration. This transition underscores Zimbabwe’s commitment to modernizing fiscal policies, fostering economic growth, and aligning with global tax compliance standards in an increasingly digital economy.

The shift towards virtual fiscalization marks a transformative period for tax compliance and revenue collection worldwide. By integrating advanced software-based solutions such as NRD Companies’ VFDMS®, countries can significantly enhance VAT collection, reduce the informal economy, and combat tax fraud. This evolution from traditional hardware-dependent methods to modern digital systems not only lowers compliance costs for taxpayers but also enables real-time monitoring and reporting, ensuring greater transparency and efficiency in tax administration. As evidenced by Zimbabwe’s adoption of virtual fiscalization, embracing these new generation solutions facilitates the introduction of e-invoicing, simplifies VAT reporting, and strengthens overall fiscal policies. Ultimately, the widespread adoption of virtual fiscalization is a critical step in aligning with global tax compliance standards and fostering economic growth in an increasingly digital economy.