Over the past few years, there have been plenty of articles written on business networks – primarily driven by SAP’s acquisition of Ariba and Concur – and electronic invoicing providers touting global spend and procurement-based networks to help drive down spend. These networks are worthy of conversation, but there is a new business-to-government network emerging – one that will have significant financial impact on multinational companies.
The Business-to-Government Network
There has been a wave of legislation passed by tax authorities over the last two years. Currently legislation ranges from countrywide mandates across 10 countries in Latin America and Turkey to government purchases in Spain and standardized value-added taxes (VAT) reports in France.
Government leaders, much like corporate executives, are turning to technology and automation to improve their bottom lines through tax collection. In the emerging markets and even established markets, this specifically means consumption taxes or VAT.
So what exactly are these governments doing? Ultimately, they are inserting themselves into the day-to-day business processes of organizations in these four ways:
- Customer Billing – In countries such as Brazil, Mexico, and Turkey, all business-to-business invoice transactions must flow through the government system for validation prior to being sent to the end customer. In many cases, especially in Latin America, you physically cannot ship your goods until you receive the approval codes back from the tax authorities’ servers. This mandatory electronic invoice is controlled by the government ensuring that all tax obligations are being registered with the government in real-time – they will no longer be waiting on monthly VAT reports alone. Instead, they have immediate visibility into 100% of the VAT obligations on your sales.
- Supplier Invoicing – In Latin America, this is an established and growing mandate. Countries including Brazil, Mexico, and Chile are mandating that the electronic invoices carrying VAT tax obligation must be collected, validated, and linked with the associated government approval codes to VAT remittance reports. Why you ask? Deductions, of course. In VAT countries, multinationals are responsible for remitting their portion of VAT to the tax agency. To determine a company’s ultimate VAT stake, subtract the VAT paid to suppliers from the VAT charged to customers.
- VAT Tax Reporting – By mandating that standardized, electronic invoices be linked to VAT tax reporting, the government is turning to big data and automation to perform audits. If you claim $8 million in VAT deductions, you better be sure that each line item is backed up by a legally registered XML. For those in the US, think about the tax deductions on your income taxes. Do you ever deduct contributions to charities such as Goodwill or the Salvation Army? Imagine if the government had the real-time value of all of those deductions in their servers. Showing up with a shoebox of receipts no longer matters when the government has a real-time, itemized electronic registry. And we all know that with government audits the onus will be on the company to prove the government wrong.
- Employee Reporting – This is the newest trend and Latin America is taking the lead. Mexico was the first to mandate electronic payroll (known as Nómina Electrónica), and Brazil is in the process of rolling out eSocial which is a group of 40+ transactions encapsulating payroll and labor events. Imagine telling the government every time a person took sick leave or made a change to their employment contract. With social programs taking up such a large percentage of the budgets of many governments, these employment tracking programs ensure that governments can reduce fraud in areas such as payroll, disability, and unemployment payments.
Over the coming weeks we will discuss the impact these tax changes have on financial and supply chain processes as well as the impact on global SAP ERP implementations. Remember, VAT tax exposure in these mandated markets can be upward of 20% of your regional balance sheet, meaning this is a board room issue for multinationals. It’s important to understand how to integrate and support these new and constantly changing requirements into business processes. The trend is clear: the network and requirements are accelerating. How are your teams addressing business-to-government compliance?
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.