Latin American VAT Gap Drives Technology Adoption

Tax evasion is a costly problem that has impacted virtually every Latin American country. According to the Economic Commission for Latin America and the Caribbean (ECLAC), which looked at studies of evasion rates, tax non-compliance cost countries an estimated US $340 billion in 2015. To combat this issue, governments across Latin America and around the globe are turning to technology-driven tax reporting and enforcement measures.

Looking more closely, the ECLAC reported that the average VAT evasion rate in Latin America is 27.8 percent, with Uruguay having the lowest rate and Ecuador and Paraguay experiencing rates that exceed 30 percent, according to the Economic Survey of Latin America and the Caribbean 2016.

Given that these Latin American countries have been leaving considerable amounts of money on the table, they have faced significant obstacles to development and balanced economic growth. Something had to change.  

Innovations in technology spurred reform efforts throughout Latin America, enabling the electronic exchange of information and real-time tracking of sales of goods and services, providing greater visibility into businesses’ tax obligations.

Over the past decade, pioneering Latin American countries have been implementing new VAT compliance regulations. These defined processes for exchanging information and reporting financial data are designed to close the VAT gap, eliminate the sale of black market goods and ensure accuracy of accounting information. For example, Argentina, Brazil, Chile, Peru, Colombia and Mexico have led the charge to introduce eInvoicing and eReceipts mandates.

These initiatives are working. Brazil, for example, increased its tax revenue by $58 billion in a single year after mandating electronic invoicing.

Gaining insights into this level of detail on a real-time basis benefits both taxpayers and government tax authorities:

• Taxpayers – Even though introducing new electronic requirements results in having to overhaul internal processes, the change ensures greater compliance with tax obligations, while making audits easier and more streamlined. More accurate compliance translates into fewer fines and penalties.
  
  In addition, the adoption of eInvoicing compliance technology reduces businesses’ operating and administration costs by:
  • Cutting the costs of printing, storing and distributing invoices.
  • Reducing invoicing times and the administrative burden on the staff involved.
  • Facilitating document processing, filing and searches for filed invoices, thus improving internal processes.
  • Providing a detailed record trail in the event of an audit.

• Governments – Electronic processes are the most effective compliance tool, enabling tax authorities to analyze and cross-check information to reconcile sales and purchases, and quickly identify irregularities and inconsistencies. This more granular, real-time visibility reduces the likelihood of fraud, improves fiscal oversight and helps stem tax evasion, resulting in optimal VAT collection.