Why Clearance E-invoicing Is Both Inevitable and Positive for Businesses

Christiaan van der Valk
June 3, 2019

Clearance-model e-invoicing will sweep the globe because it works – at least for tax administrations. With the VAT gap opening to more than half a trillion dollars worldwide, governments around the world are likely to follow the Latin American model of tax authorities inserting themselves into transactions.

A new report from Bruno Koch at industry observer Billentis explains why the e-invoicing clearance model is set to overtake the less invasive reporting model as countries move from paper-based invoicing to mandating electronic invoicing. Fundamentally, the clearance model, in which the tax authority must approve an invoice before a seller and buyer complete a transaction, is simply more effective in reducing the VAT gap than the reporting model, which relies on a post-audit method, or audits after transactions happen.

Clearance e-invoicing works

The report cites the success of modern e-invoicing mandates, which include clearance models:

  • Brazil has seen a $58 billion increase in tax revenue as a result of plugging gaps in invoicing and reporting.
  • Chile and Mexico reduced the VAT gap up to 50 percent.
  • Colombia found that it could reduce 50 percent of the country’s tax evasion by applying these forms of models.

Within the next six years, Koch predicts, the clearance model will dominate global e-invoicing, with the market for e-invoicing and business enablement for this technology-driven tax enforcement model growing from nearly $4.8 billion in 2019 to $20 billion by 2025. The trick is that the growth will be sporadic country-by-country, with no uniform timelines nor standards for mandates around the world.

“Unfortunately, most clearance models grow from the bottom-up over several years,” Koch writes. “Moreover, the main aim is only to combat tax evasion. Most business processes are affected by this development. The final scenario is not communicated by the tax authorities, as they seem not to have a clear vision or five-year strategy. In practice, one business document after the other is gradually being digitised with data exchange via clearance models.”

Compliance as part of the supply chain system

In order to maintain compliance with developing mandates, he says, multinationals will have to include e-invoicing in their supply chains. That’s not just good advice; it’s a legal requirement. A lot of companies have managed to merge their financial systems with physical supply chain controls already, but tax compliance often remains in a functional silo.

billentis e-invoicing report image 1

“The overlap between the three topics is steadily increasing,” Koch writes. “Due to their evolution over time, processes and messages among both trading parties and tax authorities are still executed in parallel. Harmonised digitalisation is only possible if suppliers, buyers and tax authorities collaborate to design and implement an appropriate model.”

billentis e-invoicing report image 2

Third-party systems for e-invoicing compliance

The best way to incorporate e-invoicing into the supply chain is by using a third-party service, Koch suggests. He calls the invoice “the queen of documents,” as it is, in most countries, the most important document for proving compliance and recuperating VAT payments. VAT compliance is “essential,” he says, which means incorporating e-invoice clearance into the supply chain is a requirement–and one that companies must be prepared to take on country-by-country with changes that come with short time periods for response.

Only a third party can keep up with changes in country mandates and incorporate them into merged supply chain systems. Trying to handle compliance one country at a time with separate operations and separate teams is excessively difficult and resource-consuming. It’s also risky, opening a company up to potentially expensive audits as well as to dented cash flow from cancelled or interrupted transactions and damaged relationships with suppliers and customers.   

Business advantages of properly adopting the clearance e-invoicing model

And, in fact, while the clearance model might seem cumbersome at first, companies that respond to it with the right strategy and systems can actually save money. The Billentis report concludes that “e-invoices that are issued using clearance models reduce tax compliance costs by 37-39 percent for corporate businesses, and 8-56 percent for private businesses compared to paper invoices.”

The report cites other advantages of clearance e-invoicing:

  • “Compared to the post audit systems, it ensures in real-time that fiscal documents are tax compliant. This significantly reduces the risk of fines, which could be imposed several years after the business transaction has taken place.
  • “Automation of tax relevant processes often replaces manual and periodic reporting forms; VAT declaration & deduction are no longer required, and collection and refund can be done automatically.
  • “Scan and capture are eliminated, or reduced substantially.”

Clearance e-invoicing, already the norm in Latin America, is coming to the rest of the world. Companies that prepare for it property by implementing the right system and merging compliance into the supply chain can not only stay out of trouble, they can actually realize benefits they don’t have now.

Take Action

Find out how Sovos has been keeping companies on top of clearance e-invoicing for more than a decade.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Christiaan van der Valk

Christiaan Van Der Valk is vice president, strategy. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice and commercial issues. Formerly co-founder and president of Trustweaver (acquired by Sovos), Christiaan also holds long-standing leadership roles at the International Chamber of Commerce (ICC) and the European E-invoicing Service Providers Association (EESPA). Over the past 20 years, he has presented at and authored key papers for international meetings at the Organisation for Economic Cooperation and Development (OECD), the Asia Europe Meeting, World Trade Organization and several other UN agencies. Christiaan earned his Master of Laws degree from Erasmus Universiteit Rotterdam.
Share This Post

Sales & Use Tax United States
August 22, 2019
Benefits of Sales Tax Automation Software and Deployment Options

You operate a lean tax compliance and reporting team. Maybe your company has reduced staff over the past 5-10 years while continuing to grow its business through organic means as well as merger and acquisition.  But now your staff of 10 is down to four or five. What was once a manageable manual process of […]

Tax Information Reporting United States
August 19, 2019
Negative Reporting – What If I Have No Records to Report?

If you have no new unclaimed property records for a particular state this filing year, does that mean you are off the hook? Well, not necessarily.   Most states want you to file with them each year. If you’ve reported in the past, they want to hear from you even in the years when you […]

Tax Information Reporting United States
August 19, 2019
To Aggregate or Not to Aggregate – There Is No Question – Not

Article written By Bill Dadmun, Records and Receipts Manager, State of Virginia   How many of you use the aggregate function when reporting?  Does it make your life easier?  Listen to this scenario and tell me if it sounds familiar.   You get a call from someone that is due $49.95 from a credit balance.  […]

Tax Information Reporting United States
August 19, 2019
Reciprocal Filing – Why You Should Proceed with Extreme Caution

This isn’t the first time I’ve blogged about the dangers of reciprocal filing, but I feel like it is a topic worth covering again for those who may have missed it. Reciprocal or exchange filing means reporting records to a state even though the last known addresses for the records are not in that state. […]

Tax Information Reporting United States
August 19, 2019
Demystifying Codes for Unclaimed Property Compliance

Have you ever been confused about which property code to use for a certain type of property? We have all been there. NAUPA, the National Association of Unclaimed Property Administrators, has a list of standard codes that you can view here starting at the bottom of page 23.   Each code is made up of two alpha […]