Starting with Brazil in 2008, government-mandated e-invoicing has proven extremely effective in helping tax authorities gain visibility into corporate tax liability in order to close loopholes, eliminate fraud and maximize tax collections. The goal of e-invoicing requirements is to automate tax reporting so that governments no longer have to rely on businesses to self-report their liabilities at regular invoices.
This increased visibility provides them with a full understanding of exactly what those tax reports should say. In fact, in the most robust e-invoicing environments, tax authorities can eliminate some of these tax reports altogether; or they can turn them into a simple click, sign and send the check process, since the calculations can be pulled directly from invoices.
As governments around the globe are showing increasing propensity to adopt e-invoicing, three primary approaches have emerged in terms of how businesses are required to comply.
- Ex-Post Remittance/Validation: Using this approach, governments require companies to submit invoices, or specific invoice details, after a transaction concludes. Some tax authorities using this method require each individual invoice to be submitted in a specified format, while others require invoice summaries of specified information. Mexico pioneered this approach for invoices issued to final consumers that do not provide a tax ID (like retail sales) though it uses real-time e-invoicing for B2B and B2G transactions. Spain is the latest example of this approach, moving to the Immediate Information System for collecting invoice details starting in July 2017. [view blog part I]
- Ex-Ante and Real-Time Invoice Validation: Unlike the previous approach, which can occur after or as an invoice is sent to a buyer, ex-ante/real-time invoice validation occurs during the invoice process. Businesses alert tax authorities to transactions, and the tax authority then must validate the transaction before the invoice is sent to the buyer. In some cases, this validation is also required before goods can ship. Brazil offers the most complex ex-ante/real-time invoicing system, but this approach is also used prevalently throughout Latin America, such as in Mexico, Argentina, Uruguay, Peru and Chile. [view blog part II]
- Transitional Systems: Transitional systems encompass approaches to e-invoicing that aren’t mandated for all transactions. Most commonly, these requirements apply to specific industries or business sectors or certain transaction types. Transitional systems are particularly common throughout the E.U. right now, as tax authorities are gearing up to comply with a new directive requiring electronic invoicing for public procurement. While the deadline for compliance with this mandate isn’t likely to occur until late 2018, many countries aren’t waiting, and have already introduced public sector e-invoicing. Italy is going a step further by offering incentives to use e-invoicing for private sector transactions as well. [view blog part III]
What these three approaches have in common – beyond their core objective of maximizing tax revenues – is the need for businesses to adapt both their processes and systems to ensure accurate, timely compliance.
To learn more, download our Definitive Guide to Latin American Compliance for an understanding of the common challenges, pitfalls and best practices in e-invoicing.