About a decade ago, countries in Latin America, led primarily by Mexico, Brazil and Chile, stepped up their efforts to close the VAT gap by requiring companies to move away from paper-based invoicing processes and toward electronic methods of billing and completing payments. The idea was that a tax administration could more easily and effectively audit invoices stored in specific electronic formats and eliminate the errors and potential for fraud inherent in paper-based methods.
And it worked. In fact, e-invoicing proved so successful in Latin America that it is moving rapidly into Europe and starting to take hold in Asia. Following Latin American models, two basic types of e-invoicing have emerged:
Reporting is the periodic, near real-time or real-time electronic submission of business data to tax administration platforms without dependency on the tax administration’s approval for those data points and their continued business processing to be valid from a tax perspective.
Clearance is real-time or near-real-time control of business transaction data submitted electronically to tax administration platforms whose approval is required for those data points and their continued business processing to be valid from a tax perspective.
In other words, in the clearance model, the government has an active role at the point of transaction and actually validates the invoice before the transaction is complete. In the reporting model, the onus is on companies to prove the validity of an invoice only after, and not during, the transaction.
Clearance e-invoicing delivers results for governments
The reporting model, while still common in many parts of the world, is rapidly giving way to the clearance model across the globe. Why? As industry observer Billentis reports, clearance e-invoicing works. According to Bruno Koch of Billentis:
- Brazil has seen a $58 billion increase in tax revenue as a result of plugging gaps in invoicing and reporting.
- Chile and Mexico reduced their VAT gaps up to 50 percent.
- Colombia found it could reduce 50 percent of the country’s tax evasion by applying clearance 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.
While much of the practical responsibility of tax compliance in the clearance scenario falls on AR, the buyer often carries greater risks. Many countries with clearance rules aren’t explicit about the buyer’s obligations to “reverse clear” the invoice, but most such countries provide functionality–through a portal or application programming interface–which allows buyers to get into the tax administration’s cloud platform to confirm that the supplier received the required approval prior to issuing the invoice to the buyer.
How clearance e-invoicing can impact SAP tax compliance
Such buy-side clearance validation processes may, however, also create a false sense of security, as a positive response from the tax administration platform doesn’t mean all the buyer’s indirect tax obligations are met. Ultimately, the buyer is responsible for checking that the buyer’s invoice is tax compliant, which includes verifying that the invoice relates to a real supply. SAP customers that purchase goods can recoup input VAT after transactions are complete, but they need to prove their VAT deductions are compliant. If a company can’t substantiate a deduction, it might still get in trouble upon reclaiming input VAT, or, worse years later when it may have to pay back unjustified reclaims.
Buyers should be aware that rejecting an invoice in countries with clearance e-invoicing systems may lead to country-specific invoice correction processes. This could lead to a single AP system having to manage supplier-only cancellations, buyer-approved cancellations, credit notes and other correction processes depending on the applicable indirect tax law. Not being in control of these ever-changing country-specific complexities can also lead to delayed shipments and strained relationships with suppliers.
As a result, AP processes have a direct effect not only on cash flow but on supply chain efficiency. Ensuring both compliance and data purity in AP e-invoicing processes is, again, critical. Plus, each country that mandates e-invoicing has a different set of rules, penalties and deadlines. The complexity involved is significant on a global scale.
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