Thinking Outside the Box: Is E-Invoicing the Only Alternative to Tackling the VAT Gap?

May 30, 2025 09:53 AM

For many jurisdictions, VAT and similar consumption taxes account for 20–35% of total government revenue. But according to EU estimates, up to a third of potential VAT revenue can be lost to fraud, evasion, or simple misreporting. That’s a significant hit to public budgets, and an unfair disadvantage to honest businesses.

When governments consider ways to close the VAT gap, the go-to solution is often an e-invoicing mandate. Clearance models, real-time reporting, and structured invoice exchanges provide tax authorities with greater visibility into VAT data, making underreporting much harder.

But some governments have taken more unconventional approaches to ensure transactions don’t slip through the cracks. Here are a few creative alternatives worth noting:

1. Receipts double as lottery tickets (B2C)

Taiwan started this approach in 1951, and it’s still going strong today. Consumers are automatically entered into a government-run lottery simply by receiving a compliant receipt when making a purchase. Draws are held every two months, with prizes ranging from TWD 200 to TWD 10,000,000 (about EUR 5 to EUR 300,000). Got a Taiwanese receipt in your pocket? You might want to check its numbers on the Taiwanese government site!

Other countries such as Czech Republic, Lithuania, Portugal, and Romania have implemented similar receipt lottery schemes.

The core idea is simple: incentivize consumers to demand a receipt, thereby ensuring the transaction is logged and VAT is reported – a win for transparency and possibly for the individual consumer.

2. Tax rebates from receipts (B2C)

In São Paulo, Brazil, the Nota Fiscal Paulista program turns consumers into active participants in tax enforcement. When making a purchase, shoppers can provide their tax ID to become eligible for a rebate on the VAT they’ve paid (and also enter a monthly lottery).

Receipts are digitized and stored in a secure consumer portal where shoppers can look them up. The result? More demand for receipts, greater invoice traceability, and increased reported sales volumes. In the first four years after its launch in 2007, reported retail increased by an estimated 23%, with more than 13 million consumers registered online (read more).

3. Separating the supplier from the VAT (B2B)

Some jurisdictions have adopted split payment mechanisms, where the VAT on a transaction is not paid to the supplier but deposited directly into a “locked” supplier bank account – or straight to the government. For the buyer, this means the invoice is paid in two instalments: one for the VAT and one for the net amount.

Split payments schemes have been implemented in countries such as Poland and Turkey. These reduce the risk of VAT underreporting – both intentional (e.g., the supplier disappearing with the VAT) and unintentional – and give tax authorities greater control over collected VAT. However, they can also increase administrative burdens for the buyers, who may have to manage multi-currency payments and lose the ability to offset VAT collected against VAT paid.

4. Nudging your taxpayers (B2B & B2C)

Sometimes, subtlety works. The UK's tax authority has pioneered behavioral nudging. Instead of relying solely on enforcement, it sends letters to taxpayers to influence behavior using simple psychological techniques.

Examples include letters to taxpayers suspected of underreporting income from cryptocurrency, online sales, or overseas assets. These letters prompt recipients to review their filings to check if they’ve reported all that they should and often include helpful tips on how to do so.

The tone of the letters depends on the case: some recommend that you take action, while others inform you that an audit may be upcoming. Letters are sent to both businesses and private taxpayers, using available data such as rental records or external sources like the Pandora Papers.

5. Hardware-based fiscal solutions (B2C)

Several countries require certified hardware or software to ensure transactions are correctly logged and reported. The concept is straightforward: point-of-sale devices must automatically transmit transaction data to the tax authorities or securely store it to prevent tampering.

Examples include:

Belgium – “Black box" modules are mandatory in the restaurant sector.
Sweden – Certified cash registers with secure memory modules are required.
Greece – Online-linked devices transmit data in real time, allowing consumers to access receipts online at a government portal as well as in paper form.

Many countries in Africa also use similar systems. A good overview is available from the OECD.

6. Tax stamps for illegal drugs (B2C)

It may sound strange, but some US states (including Nebraska and Utah) have experimented with anonymous tax stamps for illicit drugs. The idea is that drug dealers must anonymously purchase stickers from a tax office and affix them to their products. The cost of the stamp may vary based on the drug’s weight and type.

If someone is caught with unstamped drugs, they face tax penalties in addition to criminal charges, for example, double the unpaid tax (example).

While most programs have been disbanded due to legal challenges and low adoption, they demonstrate how creative policy thinking can stretch the boundaries of compliance and enforcement.

New ideas worth exploring?

While the existing approaches provide a solid foundation, there’s room for even more creative thinking. One idea: a VAT compliance score for companies, which buyers could check when onboarding new suppliers. This would incentivize better reporting practices without requiring constant audits. Though defining the score and incentivizing its use would need to be explored.

Governments could also experiment with micro-incentives for digital payments, especially in cash-heavy sectors. For instance, companies that consistently declare digital sales could receive small tax credits or preference in government procurement programs.

Final thoughts

These diverse examples demonstrate the broad range of creative policy thinking in the realm of taxation and compliance. From certified point-of-sale (POS) systems to the unusual (yet clever) tax stamps on illegal drugs, it’s clear that governments are continuously exploring new ways to enhance tax compliance. While some of these methods may face challenges or limited adoption, they highlight the importance of innovative approaches in addressing complex fiscal issues.

E-invoicing mandates have proven highly effective – particularly for B2B transactions – and remain the most streamlined method for reducing VAT fraud and errors. However, the alternative schemes listed above demonstrate there’s more than one way to increase compliance. Their effectiveness and applicability in B2B contexts may vary, but the potential is there.

For now, my prediction is that e-invoicing mandates will continue to flourish – but it’s worth keeping an eye on creative alternatives, too.