There is major shift in the way governments around the world are and will regulate tax collection – particularly from multinationals. Emerging markets are taking the lead in implementing these initiatives as they generate the majority of their incomes from value added (consumption) taxes (VAT). Since VAT collections represent nearly 60% of tax revenue in countries ranging from Mexico to Indonesia, fraud and evasion cost these governments trillions of dollars a year, and now many countries are stepping forward to proactively combat this issue.
Through mandated e-invoicing and financial reporting, these countries are automating VAT collection processes. By requiring standardized XML e-invoicing for all business-to-business transactions, governments gain visibility into all suppliers’ VAT obligations; by automatically matching these XML invoices to financial and accounting reports, governments ensure that they are receiving accurate tax payments. No longer do governments have to rely on companies to report tax deductions accurately through ancient ad hoc, paper reporting; they can now verify tax calculations automatically at the beginning of the business process. This is a fundamental shift with profound impact on corporations worldwide.
Latin America – The Proving Ground and the Leader in Adopting End-to-End Visibility
While Chile was the first country to introduce legalized electronic invoicing, Brazil was the first country to mandate the concept in 2008. Since then, the practice has spread rapidly across the region and continues to expand into more business processes. In fact, in the last two years alone, mandates have spread from three to 10 countries, and now affect all sales and in-country purchases for large enterprises. This tidal wave of regulation is expected to continue throughout VAT-based societies worldwide as more and more governments see increased tax revenues from enforcement.
Consider the success in Latin America:
- Brazil, the first country to implement such requirements and the model for other governments, has seen a $58 billion increase in tax revenue as a result of plugging leaks in invoicing and reporting.
- Mexico increased tax collections 34% in the first wave of its e-invoicing rollout, before mandates on reporting even went into effect.
- Colombia recently conducted a feasibility study into e-invoicing, and found that if it could reduce 50% of its tax evasion, it could increase revenue by $8 billion. Needless to say, e-invoicing mandates here are imminent.
The movement is spreading to other parts of the world. Just recently we have seen announcements in:
- Indonesia - Beginning July 1, 2016, all Indonesian companies are required to use electronic invoices. The Indonesian Minister of Finance Bambang P.S. Brodjonegoro expects a successful electronic invoice implementation to raise the VAT revenue. Indonesia currently has a weak tax revenue system, mainly due to fictitious invoices that cause a large tax restitution volume, with a negative impact to the total Indonesian VAT revenue.
- China - the e-invoice pilot program launched in China in 2013. Two years later, the picture of the e-invoicing pilot is becoming clearer. It is obvious now that e-invoicing in China embraces a considerable market, both geographically and business-wise. For example by the end of Q1 2015, the total amount of B2C e-invoices issued in Beijing reached $64 million. Current rumblings suggest that new pilot programs will start in 2016 that focus on B2B invoices in major cities. Currently, China follows the model of “Fapio” which is a controlled and tracked form of paper; however, the government systems are working to transition to an e-Fapio concept in the future to save overall costs to all business sector.
In other VAT countries, we are seeing portions of legislation take hold where governments see an opportunity to insert mandates without raising pushback from their citizens. Europe for example is mandating all public sector invoicing transition to electronic formats over the next few years. And other countries are mandating pieces of legislation rather than full mandates. Examples include:
- France has moved to electronic uploads of their General Ledgers
- Spain currently has legislation within their government to mandate eVAT reporting for companies over $6 million Euro a year
- Italy is incentivizing the use of electronic invoicing nationally through announced incentives including early VAT compensation and lightening of reporting requirements
Regardless of where your company operates, the reality is that governments all over the world are turning to automation to ensure they collect their revenue – taxes. How will you prepare for the upcoming requirements? Download the Definitive Guide to Ensuring Compliance Across Latin America to learn more.
For more on Latin America compliance and for the latest updates and trends in business-to-government compliance visit Invoiceware International’s blog.
Steve Sprague is the Vice President of Product Strategy for Invoiceware International. He is responsible for both product management and e-Invoicing regulatory updates. Over the last 16 years, he has designed solutions for SAP ERP that deliver out-of-the-box compliance for Latin America and European Union e-invoicing and fiscal reporting requirements.