Chile VAT Fraud: SII Uncovers Massive False E-Invoice Schemes

The Chilean Internal Revenue Service, commonly known as SII, notified the public of a lawsuit it filed with the Calama Guarantee Court against the legal representative of Metalmecánica Limitada, a vehicle and machinery rental company, for using false invoices and improperly increasing VAT tax credits. In addition to suing Metalmecánica's legal representative, SII also named another individual as the perpetrator of the tax crime. 

However, this is only one of two cases that concern false invoices and multimillion-dollar tax fraud. The second case involves more than 1,322 false e-invoices exchanged among several companies from January 2015 to September 2018.

E-Invoice Schemes Behind VAT Fraud

As a result of the SII's investigation of Metalmecánica, covering the period between 2020 and 2023, the Tax Authority determined that Ricardo Esteban Olivares Cortés, as the company’s legal representative, recorded and reported false invoices from 21 alleged suppliers who did not perform the transactions. These false invoices were declared to the Tax Authority, resulting in an improper increase of VAT tax credits and a tax loss of nearly USD 400 million.

Additionally, the SII stated that Manuel Alfonso Padilla Suazo supplied 41 false invoices that Metalmecánica used to increase VAT tax credits. However, the investigation further revealed that Padilla Suazo is also a shareholder in 27 companies, all of which show irregular tax activity, indicating a pattern of questionable tax behavior.

Moreover, the SII listed several characteristics that all issuers of false invoices shared. As noted by the SII, all issuers exhibit irregular or aggressive tax behavior, register very low initial capital, suggesting they cannot realistically provide the goods or services claimed, and lack the space to maintain the leased items. 

Furthermore, issued invoices frequently indicate cash payments or acknowledgment dates as the receipt date and contain VAT amounts higher than those reported by Metalmecánica for other suppliers. Also, false invoices often involve unrelated third parties, and many e-invoices were issued from the same IP address, pointing to coordinated or fraudulent practices.

In the second case, the Public Prosecutor's Office approved the extradition of Sebastián Vanella Muñoz, a businessman and former manager of La Piccola Italia, who is accused of issuing 829 false invoices to inflate tax credits and fraudulently obtaining undue VAT refunds. This action is part of a broader SII investigation of a network of taxable persons involved in serious tax crimes, including the registration and declaration of 1,322 false e-invoices. The result of false invoices and tax crimes is a loss of more than USD 700 million.

Conclusion

The scale and sophistication of these VAT and tax fraud schemes in Chile exposed the weaknesses and blind spots of the VAT system, which were exploited by coordinated networks of individuals and companies that harmed the state budget and ensured personal gain. However, cases show that SII's proactive approach, using detailed investigations and legal action to uncover patterns of irregular behavior, can ultimately protect the integrity of the tax system and ensure fair competition for compliant taxable persons.

Source: Chilean Internal Revenue Service - Metalmecánica, Chilean Internal Revenue Service - Constructora SLV SA