How Efficient Electronic Invoicing in Suppressing the Shadow Economy

HOW EFFICIENT ELECTRONIC INVOICING WILL BE IN SUPPRESSING THE SHADOW ECONOMY IN THE SAUDI MARKET
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How Efficient Electronic Invoicing will be in Suppressing the Shadow Economy in the Saudi Market
Introduction
Shadow economy goes by many names; gray economy, underground economy, black economy, black economy, etc. Alsubaie (2020, 4) defines shadow economy as ‘all unregistered productive market transactions that would, if recorded, typically increase the official gross domestic product (GDP).’ However, this definition does not entail criminal activities which are economically transacted, i.e., sale and distribution of drugs, human trafficking, etc. thus, more comprehensive definition of shadow economy according to Medina & Schneider (2018, 2), shadow economy includes all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons. Shadow economy is hard to quantify as it entails legal and illegal economic activities. The main reasons for its existence are to evade tax, social security contributions, regulatory requirements, corruption, and weak law enforcement coupled with political instability.
The average size of the shadow economy of 158 countries over 1991 to 2015 is 31.9 percent (Medina & Schneider, 2017, 2). Most countries are still grappling with shadow economies, including Saudi Arabia. The countries that have exceptionally low percentages of their economies under shadow economy are Austria and Switzerland, with 8.9% and 7.2%, respectively (Medina & Schneider, 2017, 2). Saudi Arabia has also been grappling with a shadow economy. According to Medina, Saudi Arabia’s shadow economy has averaged between 13.34 and 19.5 from 1998 to 2015 (Medina & Schneider, 201, 2).
Governments and policymakers grapple with the effects of the shadow economy and how to bring it to book. Reducing shadow economy means more taxes, easier strategic plans, less crime, etc. Since it is impossible to root out shadow economy, policymakers try to understand its size to plan accordingly. Understanding the size of the shadow economy is important because it controls a significant size of the GDP. It uses the country’s legal tender and employs a significant portion of the population while contributing almost nothing to the government in taxes.
Kingdom of Saudi Arabia Economy
The Kingdom of Saudi Arabia’s economy is the largest in middle and north Africa. According to the World Bank (2018), it had a $782 billion GDP in 2018. If the underground economy estimates relative to GDP have been hovering over 10% of the GDP, over $78 billion has been in shadow economy in the country. These figures signify huge losses of money lost in income tax revenue and fund illegal activities in the country. If left unchecked, these monies could fund terrorists while the government loses on income tax revenue.
The Saudi Arabian economy is largely driven by exports. The Kingdom of Saudi Arabia is the largest petroleum oil exporter in the world. The economy is still largely depended on the export though the government has been divesting its investments in other industries to create a more resilient economy. As of 2018, oil income accounted for about 87% of government budget revenue and 42% of the GDP (Alsubaie, 2020).
Over the last few decades, the country has evolved from a developing country to a near fully developed country. While this growth is largely attributed to oil export, its economic diversification has also led to the growth of new industries. As of 2018, the private sector has grown to 40% of the country’s GDP, and investments in fixed capital have increased by 23% since 1978 (Alsubaie, 2020). The private sector has been growing because of the government’s plan and investment in 5-year plans over the last several decades. However, while the government has been investing in other sectors to insulate the economy from the global oil prices threats, its economy is still largely dependent on oil, and global oil prices pose a substantive risk.
E-invoicing in Select Other Countries
Most countries are moving to implement e-invoicing systems around the world. There is a strong incentive to stop fraud and increase the tax revenue bracket by ensuring all transactions are open and traders pay their dues to the government. In Europe, the European Union members have started moving into implement e-invoicing systems. Nearly all EU members already have some form of e-invoicing system to crack down on fraud and reduce tax evasion CITATION Mar20 \l 1033 (Price, 2020). In some countries, the practice is prevalent such that they have introduced mandatory e-invoicing. One such country is Greece, which, despite efforts to fully roll out the system, has grappled with delays and the unforeseen effects of the pandemic, which has delayed implementing a countrywide e-invoicing system.
Greece announced in 2018 that it would implement a system that issued invoices mandatorily and electronically and the transactional data be relayed to the Ministry of Finance (Taxisnet) in real-time CITATION Joh19 \l 1033 (Goulias, 2019). The tax authorities will have information on VAT, withholding tax, and stamp duty of each business and entrepreneur, making it difficult to avoid paying taxes. The system was meant to fight tax evasion and fraud and reduce fake issuance of invoices. While the initial plan was to roll out the system in 2020, the pandemic has delayed that goal CITATION Joh19 \l 1033 (Goulias, 2019). Greece has repeatedly postponed the roll-out date, but the government is committed to implementing a robust and reliable system like Italy.
Italy has been using the e-invoicing system for a few years since it was deployed in June 2014. All ministries, tax agencies, and national security agencies must issue their invoices through the system. The recipients and issuers must preserve the documents for at least five years CITATION Mar20 \l 1033 (Price, 2020). As of January 2019, the Italian Revenue Agency collects details of all e-invoices before they are sent to the customers enabling them to accurately calculate the tax due on payment of each invoice CITATION Mar20 \l 1033 (Price, 2020). Other countries in the EU are racing to emulate the Italian model, and they have started rolling out their systems. Since Italy implemented the system, its tax revenue has increased significantly and has reduced tax evasion.
Electronic Invoicing
The existence of shadow economies all around the world means that billions of dollars are technically lost every year. Aside from the loss of revenue that governments suffer, there is also the prevalence of low-quality and harmful products in the market. For example, in Saudi Arabia, the shadow economy has greatly influenced food production. Rodolfo (2014) notes that food production in Saudi Arabia has been greatly influenced by the shadow economy, with a significant number of people illegally producing and selling food. There is no pressure to follow correct procedures for such businesses, and Rodolfo (2014) notes that many operate without licenses and do not observe sanitary conditions. Therefore, there is a likelihood that the customers will suffer from a health standpoint with the economy suffering from a revenue standpoint. One would argue that such monies still end up in circulation, which is indeed true. However, these monies are not taxed, and the government of Saudi Arabia ends up losing.
Questions of how the global shadow economies can be eradicated have led to the idea of adopting electronic invoicing. With the adoption of such a technology, businesses will no longer do paper invoices but will only do electronic or digital invoices. Deloitte (2021, 2) defines e-invoicing as “the process to automate the digital exchange of invoice information directly between a buyer’s and supplier’s accounting systems.” The above means that sellers will no longer be sending paper-based invoices but will have to use their accounting systems to send invoices to their buyers’ accounting systems. In doing so, governments can be able to track payments or any transactions that have been conducted between such businesses.
Types of E-invoices
It is crucial to note that there are two types of e-invoices. These include the structured e-invoice and the unstructur...