Big Brother meets big data: Mandatory e-invoicing is on the march in Latin America By Brad Kuhn

June 3, 2013

Big Brother meets big data: Mandatory e-invoicing is on the march in Latin America
By Brad Kuhn

http://www.financialops.org/web/news/features/-/asset_publisher/X0Wf/content/Big-Brother-meets-big-data:-Mandatory-e-invoicing-is-on-the-march-in-Latin-America

New government electronic invoicing mandates are sweeping Latin America, with hefty fines and even criminal penalties for companies that fail to comply. Brazil has led the way, and Mexico is expected to expand a 2012 mandate that could affect 500,000 companies by year’s end.

Automation is increasingly becoming the norm as Latin American governments seek to recapture tax revenue too easily lost in paper transactions, according to a new white paper from The Institute of Financial Operations sponsored by Invoiceware International.

Given the complexity of compliance and the rapid pace of change, many companies, including Fortune 500 industry leaders, are outsourcing production support and change management to providers that make it their business to keep up-to-date on changing regulations and their effects on enterprise resource planning (ERP) computer systems.

“Compliance mandates are complex and require process configurations to the internal ERP system,” said Scott Lewin, president and CEO of Invoiceware International. “Companies often prefer to put the onus on the provider.”

Brazil is considered a leader in the e-invoicing movement, and it presents a good example of how the process works. Based on the Brazil model, a typical mandatory e-invoicing process might include:

  1. Advance approval of transactions. All invoices must be submitted for government approval through either a government clearinghouse or an authorized agent.
  2. Fully integrated solutions. Brazil requires real-time transaction data integrated with government systems and capable of generating approval keys in 20 to 30 seconds.
  3. Invoice approval linked to logistics. Trucks must have proof of government approval before they roll, in the form of a digitally authorized bill of lading.
  4. Strict data formatting. In Brazil, there’s Nota Fiscal Eletronica (NF-e) 2.0, the sole invoice document of record for tax-compliance purposes. In Mexico, it’s the Comprobante Fiscal Digital por Internet, or CFDI, which clearly outlines the XML Schema, integration touch points, process, archiving, and printing procedures.
  5. ERP implications. Government e-invoicing requirements vary by country. Brazil, Mexico, and Argentina differ from each other. In Brazil, organizations must ensure that they have not only installed and localized the taxes and fiscal information correctly, but they also must comply with Sistema Público de Escrituração Digital (SPED) reporting requirements.

One of the challenges firms face in implementing these mandates is finding a software solution to manage the end-to-end processes. The solution needs to handle multiple languages and currencies, ensure compliance with each country’s regulations, and link up with a company’s ERP system.

Once the mechanics of compliance have been worked out, however, many companies that have installed e-invoicing solutions find that the strategic and financial benefits of this highly structured, straight-through processing (STP) far outweigh the challenges. STP takes electronic data from invoices and automatically matches it to a backing document, such as a purchase order or goods receipt. Where the match is exact or within specified tolerances set by the business, the invoice is processed and made ready for payment without manual intervention. This improves the process and cuts time by:

  • Eliminating the need to scan and extract data from paper.
  • Reducing multiple document formats.
  • Cutting out the hassle of supplier recruitment and onboarding.
  • Removing manual data entry errors and document conflicts.

In addition to these operational improvements, it is the strategic benefits of straight-through processing that are the real game-changers: cash-management optimization, opportunities for supply chain financing, and potentially risk-free, double-digit returns. All three stem from the ability to capitalize on early payment discounts — a typical 2 percent discount for payment in 10 days can translate into an annualized return of 37 percent.

STP solutions provide the ability to offer a range of discounts that can lead to even higher returns. Buyers in Brazil can fully realize these opportunities because 100 percent of suppliers are enrolled — a rate four times the world average.

In Brazil, corporations with large volumes of free cash are establishing their own receivables investment funds (fundos de investimento em direitos creditórios, or FIDCs) to offer lower-cost capital to suppliers. This is win-win-win for the buyer, supplier, and FIDC:

  • Buyers want to extend working capital to their suppliers to address liquidity concerns.
  • Suppliers need access to capital at a lower cost and can use the buyer’s credit rating to obtain capital.
  • The FIDC needs to maintain a certain investment baseline of receivables to retain preferred tax treatment, so having a revolving line of investment-grade opportunities from within a buyer’s supply chain is critical.

U.S. companies can learn from Latin America to streamline their own AP processes and turn an operational cost into a profit center through e-invoicing and straight-through processing. Opportunity is awaiting strategic thinkers capable of looking beyond the initial cost and IT burden of installing the right software solutions.

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