More countries are transitioning from electronic VAT filings to real-time VAT reporting, automated audits, eInvoicing and eReceipts. Learn terminology key to understanding real-time tax reporting.
Latin America (LATAM) is deemed the most complex tax compliance environment in the world. Over the last decade, it has become synonymous with real-time value-added-tax (VAT) compliance and reporting.
In theory, government required tax withholding should be a simple process, but in practice it becomes very complicated for a number of factors. From the involvement of varying levels of government to frequently changing rules, to different forms of withholding tax, rates and processes, the systems for collecting taxes can challenge the savviest tax professionals. To better enforce tax compliance, LATAM governments turned to cloud-based technology to collect data and automate manual processes, adding even more complexities to the already challenging tax compliance process.
Many Latin American countries began laying the foundation for a move to real-time VAT reporting more than a decade ago, starting with electronic tax filing, progressing to electronic filing of more detailed accounting records to finally requiring electronic submission of transactional data. This move to real-time VAT reporting positions these governments to have more visibility into individual business transactions and therefore better enforce tax compliance.
Following Latin America’s lead, Europe is also transitioning from electronic VAT filings to real-time VAT reporting, automated audits, eInvoicing and eReceipts. The European Union’s (EU) VAT gap – the difference between taxes owed and taxes actually collected – is significant, impacting struggling economies, transportation and infrastructure projects, as well as the ability to pay down debts or enact welfare programs. By accelerating the adoption of innovative, technology-driven regulations, reporting and auditing initiatives, European countries can maximize tax collections, like their counterparts in Latin America.
As such regulations become more common, there is terminology key to understanding real-time tax reporting, the following primer details some of these terms.
- eFiling: Use of a standardized electronic form for filing periodic tax returns, with other income data (e.g., payroll, financial) filed electronically and matched annually to identify any discrepancies compared to information filed previously.
- eAccounting: Companies submit accounting or other source data to support filings (e.g., invoices, trial balances) in a defined electronic format and in a defined timetable. Requirements include the general ledger, chart of accounts, master file data for customers and suppliers, and details of invoices, orders, payments, payroll, inventory, fixed assets and adjustments. eAccounting allows government agencies to perform electronic auditing through the use of big data to ensure supporting materials match previous filings.
- eLedger: Companies submit additional accounting and source data, including electronic registration of transaction related sales and purchasing data from a broad spectrum of trading partners for the purpose of triangulation and electronic VAT auditing. Governments access additional data (e.g., bank statements) and begin to match data across tax types, and potentially across taxpayers and jurisdictions, in real time. Data is aggregated and registered in the government’s central database, and the master data is used to trigger, substantiate and prosecute audits, validate deductions, and assess penalties for non-compliance, late registration and invoicing discrepancies.
- eInvoicing: Tax authorities impose a defined electronic standard format (i.e., XML) that all companies must adhere to in order to legally operate and bill customers both domestic and foreign. This electronic format is digitally signed by the emitter, the tax authority and the receiver through digital certificates and the corresponding time stamp. XML are used as the sole and only invoice transaction of record for tax compliance and audit defense.
- eReceipts: Electronic registration of final consumer invoice transactions carrying VAT obligations. Leveraging eReceipts, tax authorities have immediate visibility into transactions from the point of sale.
Increasing globalization and significant tax gaps make it imperative for governments to improve tax reporting accuracy and gain visibility into business transactions and taxes owed. Companies across the globe should get ahead of real-time compliance via centralization and automation for effective tax determination and information reporting.
To see how countries throughout LATAM are implementing these real-time, transaction-level requirements, including more common terms and definitions, download The Definitive Guide to Latin American Compliance.