Total Control: Three Ways Global Tax Administrations Are Cracking Down on VAT Liability (Part II: Brazil)

In this article, we turn our focus to the second and most widely used system – ex-ante and real-time invoice validation. In our previous blog, we began discussing how certain tax administrations are implementing new processes to ensure VAT compliance. These tax authorities, of course, want the money they are owed as soon as possible and before taxpayers have time to edit their returns to minimize their tax liabilities. To do so, governments across the globe are leveraging technology to gain visibility into corporate tax liability before returns are even filed. Instead of focusing on monitoring tax returns for the payment of VAT, revenue agencies are capturing information straight from the invoices that businesses issue every day. In this article, we’ll turn our focus to the second and most widely used system, ex-ante and real-time invoice validation.

Ex-Ante and Real-Time Invoice Validation: Defined

The ex-ante/real-time invoice validation system is most commonly used in countries that require electronic invoices for both B2B and B2C transactions. Using this process, businesses inform tax administrations of transactions as they are in process using protocols defined by the law. Once transactions are validated, proof of that validation is integrated into an electronic invoice to be provided to the client. In the case of B2B transactions, the validation process may require the recipient of an invoice to acknowledge reception. When e-invoices need to be printed, as in the case of B2C transactions (eReceipts), validation by the tax administration is integrated into the paper representation of the e-invoice. Under this method, tax administrations have complete access to the VAT credits and debits generated by sellers and purchasers.

Brazil Sets the Bar for Ex-Ante and Real-Time Invoice Validation

Countries in Latin America, where tax evasion has been a pervasive problem, have been early and eager adopters of this model. Mexico, Argentina, Uruguay, Peru and Chile, among others, mandate most taxpayers to use e-invoices that must be validated by the tax administration in real time. The most sophisticated and demanding of these systems is found in Brazil. In Brazil, electronic notification, validation or authorization is required from the tax administration not only for each sale made by taxpayers, but also for inventory movement or transportation of taxable goods — even when no sale has occurred. In addition, general ledgers must be digitally maintained and electronically accessible to federal and state-level tax administrations at all times. Brazil’s process is working well: It has seen a $58 billion increase in tax revenue as a result of plugging leaks in invoicing and reporting. 
 In most countries using ex-ante and real-time invoice validation, enforcement is very strict, to the point of prohibiting any other means of invoicing except for very small taxpayers under simplified regimes. In the case of B2B transactions, invoices issued outside of the system do not generate any credit for the purchaser (VAT paid to the supplier is not deductible) and also do not have any validity for private purposes. Cash transactions with final consumers pose a challenge to tax authorities under this system, but new measures discourage the possibility of not reporting those transactions. Tax authorities are awarding prizes to final consumers using the numbers of their e-receipts or reducing the VAT rate for transactions paid using traceable means of payment like credit cards, electronic transfers or checks. Other countries are turning to more severe sanctions – as high as 150 percent of the transaction amount in Brazil – for transactions carried out without the proper electronic invoice. Using ex-ante and real-time invoice validation, by the time a taxpayer is ready to file a periodic VAT return, the tax administration has a very clear picture of which numbers should populate each box. For taxpayers who mainly make B2B transactions (manufacturers, wholesalers, etc.), the tax administration knows exactly what the tax return will look like, eliminating the propensity of fraud or errors. Tax authorities are aware that a reliable real-time e-invoicing system depends on the security, timing and accuracy of the data flowing in and out of the taxpayer’s systems. These goals are achieved through two different means:

1. By regular changes to the technical requirements imposed on the taxpayers and/or the scope of the data that they should submit.
2. By establishing a sanction system where non-compliance is simply not an option.

As we mentioned before, in Brazil for instance, fines can be as large as 150 percent of the transaction amount. They also hit the taxpayer’s customers, as they will be denied any credit for the VAT paid if the invoices given are not compliant with the latest requirements of the tax authorities. For taxpayers who want to avoid those negative effects, the problem here is not only installing an invoicing system, but also keeping up with the regular changes mandated by the tax authorities. Most of the time, these changes are made via highly technical documents that may modify the structure of the XML files that should be submitted for validation, the communication protocols required by the tax authorities, or the whole layout of many components of the e-Invoice data. See the scope of the Nota Tecnica 2016.002 that lays down the changes for version 4.0 of the Nota Fiscal of Brazil, or the recent changes introduced by the Mexican authorities to their electronic invoices (CFDI) via the Rule 3.1.34, just to name a few. With such high stakes, using in-house systems or the manual tools provided by some tax authorities to generate e-invoices is not in the best interest of most businesses. Companies doing business in countries with real-time validation need a partner with the technical and tax expertise to deploy, automate and update all the systems and processes necessary to comply with the e-invoice mandates.