Tax Risk Coefficient (K-Factor) for E-Invoices

Categories: Blog, Featured Posts, KnowledgeUpdate: 23/11/2025

✅ ARTICLE 1 — Tax Risk Coefficient (K-Factor) for E-Invoices: Meaning, Calculation & How to Respond to Risk Alerts
1. What Is the E-Invoice Risk Coefficient (K-Factor)?
The K-Factor is an indicator used by the Tax Authority to evaluate the risk level of a business when issuing e-invoices.
It is calculated based on the relationship between sales, purchases, and inventory within the reporting period.

📌 Formula for K-Factor:
K = Total value of goods sold on invoices ÷ (Inventory value + Purchase value)
This ratio allows tax authorities to assess whether the business has abnormal discrepancies in its purchasing and selling activities.

2. What K-Factor Level Is Considered “Risky”?
Each industry has its own acceptable K threshold.
When the K-Factor exceeds the industry threshold, the business is classified as high risk.
General trend:

Commercial sector → lowest threshold
Manufacturing → medium
Service sector → higher threshold

If K exceeds the threshold, the tax system automatically issues a risk alert.

3. Why the K-Factor Matters
When a business exceeds the K threshold:

✔ The system automatically sends a warning email
✔ The business may be required to explain discrepancies
✔ The Tax Authority may monitor invoice usage more closely
✔ In severe cases, the business may be temporarily suspended from issuing invoices

The K-Factor helps prevent:

Invoice fraud
Artificially inflated sales
Fake input invoices
Incorrect VAT declarations

4. How to Explain a High K-Factor
📌 Case 1: Risk due to incorrect declarations
Businesses must:

File supplementary VAT declarations
Remove non-deductible VAT/TNDN expenses
Correct invoices entered incorrectly
Reconcile input – output data

📌 Case 2: Risk due to objective industry characteristics
If the business exceeds the K threshold due to operational nature, it must provide an official written explanation with reasons, such as:

Outsourcing operations → high labor costs, low material purchases
Purchases without invoices (e.g., Form 01/TNDN situations)
Import-only businesses with few local invoices
Seasonal goods with sudden increases in sales
Mismatched entries on VAT declarations

A clear explanation helps avoid penalties and ensures continued invoice usage.

5. When Should Businesses Monitor the K-Factor Closely?
You should regularly monitor the K-Factor if your business is:

Newly established
Experiencing rapid revenue growth
Having months where sales far exceed purchases
Operating in import/export, outsourcing, or seasonal industries

Managing the K-Factor proactively helps avoid unnecessary tax risks.

📌 Conclusion
Understanding and monitoring the K-Factor is essential to avoid e-invoice suspension and tax penalties.
Businesses should adopt proper bookkeeping practices, reconcile data regularly, and submit timely explanations when needed.

✅ ARTICLE 2 — Tax Risk Management System: How It Works & Why It Matters
The Tax Risk Management System is an automated framework used by the Tax Authority to classify businesses based on compliance behavior.

1. What the System Evaluates

The system typically analyzes:
K-Factor (sales vs purchases vs inventory)
VAT declaration behavior
Invoice issuance frequency
Industry benchmarks
Financial fluctuations
History of violations

Each factor contributes to a risk score, which determines whether the business is low, medium, or high risk.

2. How Businesses Are Classified
Low Risk

✔ Good compliance history
✔ Stable input – output ratio
✔ No unusual declarations

Medium Risk

✔ Minor discrepancies
✔ Occasional late filings
✔ Inconsistent purchases or stock levels

High Risk

⚠️ Frequent amendments
⚠️ Abnormal sales/purchase ratios
⚠️ Invoice usage spikes
⚠️ Prior sanctions

High-risk businesses are subject to close monitoring.

3. Why the Tax Risk System Matters
It helps both the government and businesses:

Detect invoice fraud early
Prevent tax losses
Improve transparency
Ensure fair competition
Reduce the risk of penalties

4. Measures to Improve Risk Ratings
Businesses can reduce risk by:

✔ Maintaining clean accounting records
✔ Ensuring accurate VAT declarations
✔ Monitoring inventory flow
✔ Using consistent invoice patterns
✔ Explaining anomalies promptly

✅ ARTICLE 3 — How to Avoid E-Invoice Risk Alerts
To avoid risk alerts, businesses should implement the following:

1. Maintain Consistent Input–Output Ratios

Keep records aligned with actual business operations.
Avoid months where input invoices are too low compared to output.

2. Reconcile Inventory Regularly
Compare:

Physical stock
Accounting inventory
VAT declarations

Any mismatch can trigger a risk alert.

3. Declare VAT Correctly and On Time
Late submissions or frequent supplement declarations can raise risk scores.

4. Avoid Sudden Spikes in Invoice Issuance
If sales increase significantly:

✔ Provide proper documentation
✔ Ensure inventory and purchases support the numbers

5. Keep Complete Supporting Documents
Missing documents = high risk.
Examples:

Contracts
Delivery notes
Payment evidence
Import documents

✅ ARTICLE 4 — How to Write a Professional Explanation Letter for the Tax Authority
When the Tax Authority requests clarification, businesses should prepare a professional explanation letter.

1. Structure of an Effective Letter
1.1. Introduction