Why the Latin American Approach Is the Hot Topic in Electronic Invoicing?
e-Invoicing, Trends and Technology, e-Invoice receiving, e-Invoice sending, Business network
In the recent years, Latin American countries have taken the global leadership role when it comes to electronic invoice adoption. But the e-invoicing story in Latin America is completely different from the one we have in Europe.
Do you know which is the leading country in electronic invoicing worldwide? According to the Billentis report, it is Mexico, where organizations are exchanging over 10 billion e-invoices on an annual basis. The reason for the high e-invoice adoption rate in Mexico and also in other Latin American countries, such as Chile, Brazil, Argentina and Peru, among others, is the real-time clearance model they have implemented.
The clearance model and mandatory e-invoicing have now become a hot topic in Europe after Italy made the decision to mandate e-invoicing for the entire economy to gain tighter control over VAT (value-added tax). Italy’s decision marked the arrival of the clearance model in Europe.
In this blog, I would like to explain why the Latin American approach to e-invoicing is different than the one we have seen in Europe. The most distinctive difference is this: In Latin American countries, the tax authorities regard the invoice as a fiscal document with some commercial characteristics to it, but in Europe, the invoice is considered to be first and foremost a commercial document, which has some fiscal instruments in it.
Why is the electronic invoicing clearance model currently gaining ground?
VAT makes up a remarkable share of the public sector revenue, and the tax department is responsible for collecting it. As invoices carry the VAT information, the tax department sets the base for invoicing rules. Against this backdrop, it is easy to understand why the clearance model is so tempting to public authorities: just take a look at the vast gap between the amount of VAT that is due and the amount that is actually collected. In Europe alone, it translates into hundreds of billions of euros every year.
Real-time tax reporting that comes along with the clearance model is a means to stop this VAT leakage and combat the black economy. Real-time reporting also potentially provides visibility to other aspects of the economy, such as import and export information.
What is so different about the clearance model?
The most obvious difference is the fact that many Latin American governments have made e-invoicing mandatory not only in B2G (business-to-government) but also in B2B (business-to-business) invoicing – so practically for all business regardless of size or industry. In order to have full effect, both the infrastructure and the e-invoice format are regulated. In practise, there is a rulebook in each country on how to form and send e-invoices to business partners – there is no room for interpretation.
Strictly regulated electronic invoicing is a prerequisite for implementing the real-time VAT controls that aim to stop tax evasion. In practice, all the invoices are reported to and authorized by the authorities before or during the exchange process. This way government gets the visibility about VAT obligations real-time or near real-time.
What is the driver in the post-audit model that dominates Europe?
The driver for e-invoicing in Europe has been the buyers. The push has come from the pursuit of efficiency, and the invoice carries above all the needed information between the supplier and the buyer. In this so called post-audit model, the public authorities regulate only the content of the invoice, not the way that it exchanged, in order to assure the authenticity and integrity of an invoice, and organizations are required to archive the invoices so that they can prove VAT compliance in random audits even years later.
Especially from the European perspective, mandatory process for real-time e-invoice validation might seem unappealing and is regarded to be overregulation although the experience from Latin America shows also business benefits.
Are there benefits in the clearance model for businesses?
Having a single standard and electronic invoicing process for both B2G and B2B trade makes it easy for a company to implement one, compliant process. This lightens the load particularly for suppliers and reduces the need for reporting and archiving for all.
In Chile, the clearance model requires also an electronic confirmation of received e-invoices from the buyer organization. This has enabled the creation of country-wide trade financing, which helps to free affordable liquidity for the small businesses.
What about disadvantages? How will the trend affect global B2B trade?
The major concern is that in their current form, the clearance structures create obstacles for global trade and business process efficiency. For example, in Latin America e-invoicing, invoice validation process and tax compliance regulations differ from one country to another - in some cases more, in some cases less. For companies that have international operations, it means increased complexity in compliance and more technical requirements to meet.
Currently the two approaches, the clearance model and the post-audit model, are in contradiction: in the tug of war there are the public authorities’ need to stop the VAT leaks and the business side’s pursuit for efficiency and globally harmonized markets. The compliance expert Trustweaver has already forecasted a death for the post-audit model, and it might just be that in just a couple of years time, the post-audit model will only remain in the Nordics.
Industry organizations such as EESPA, OpenPeppol, and the European Multi-Stakeholder Forum on E-Invoicing have the topic on their agenda. There is a dire need to create common understanding and a clear template and support for the clearance model in order to maintain the accomplished interoperability in the European electronic invoicing market.
Ahti was recently nominated as the service providers representative in the OpenPEPPOL Association Management Committee. He has been active in the e-invoicing industry since the year 2000. A large part of his work involves developing the e-invoicing ecosystem in Europe, for which he is also a member of the executive committee of the European E-invoicing Service Providers Association (EESPA).
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