RegionsLatin AmericaLATAM countries as leaders in development of clearance model

LATAM countries as leaders in development of clearance model

Klaudia Krzysztowska explains why the LATAM countries are leading the way in tax with the e-invoicing clearance model, and why the rest of the world is following suit.

E-invoicing is used by the vast majority of taxpayers in Latin America, for example in Mexico and Brazil, which were the first in the region to implement the process. E-invoicing already affects almost 100% of taxpayers and their transactions in these countries, with only a few exceptions. However, there is more to the pioneering efforts of Mexico, Brazil and Chile in relation to electronic invoicing.

What is significant for LATAM is the implementation of compulsory e-invoicing in a clearance model in the overwhelming majority of the region’s countries. For instance, European countries, with exception of Italy and Turkey, base their tax control processes on a post-audit model. In Asia, new e-invoicing regulations are being introduced systematically. But why is the LATAM clearance model proving so successful?

Background to the tax legislation amendments in Latin America

The primary accelerators for the changes in tax legislation are the VAT gap and tax fraud. All around Latin America, governments are establishing new anti-corruption laws. That is why more and more countries implement stricter tax control mechanisms in many forms (for example, in Mexico, with the National Anti-Corruption System, Operation “Car Wash” in Brazil, and the Transparency and Access to Information Law in Colombia). Regarding the e-invoicing process, one of increasing tax revenue methods is to implement real-time control, commonly known as a clearance model.

What is the clearance model?

An invoice is the most significant document for tax purposes. In order to be compliant with the tax provisions, governments establish different tax control methods for taxpayers, traditional and electronic invoicing. Currently there are two leading models of e-invoicing control, clearance and post-audit.

The clearance model is one of the features distinguishing e-invoicing in Latin America. It can be described as a system where e-invoices are transmitted to the tax authority in real-time. In this model, the tax authorities get the opportunity to monitor the procedure earlier than in the post-audit model. In the clearance model, the tax administration is actively engaged in the process, and its approval is required for the transaction documents to be valid. The fundamental concept of this model is that the issuer is obliged to transmit the e-invoice (or other tax-relevant data) to the tax authority in order to verify it.

Examples of clearance model methods in LATAM

The clearance model can be handled in various forms, which may include forwarding the invoice to the tax authority platform and obtaining an authorization code. In Argentina, for example, the tax authority Federal Public Revenue Administration (AFIP – Administración Federal de Ingresos Públicos) must receive an e-invoice and can then insert a special authorization code in the document.

A different clearance model is implemented in Brazil, where the invoice is required to be issued before the goods are shipped or service is provided. The Brazilian tax legislation requires taxpayers to send their e-invoice to the Ministry of Finance (SEFAZ – Secretaria da Fazenda do Estado), pass the test within its platform, and obtain a certificate to incorporate in the e-invoice. A similar system exists in Chile (one of the first countries to introduce e-invoicing), where it is obligatory to obtain Folio Authorization Codes and incorporate them into the e-invoice.

In Colombia, which implemented the first regulations on e-invoicing in 1995 and is now continuously developing the system, there is fiscal control consisting of the obligation of the e-invoice issuer to obtain a consecutive numbering system and a special code from the tax authority (DIAN – Dirección de Impuestos y Aduanas Nacionales), which is then incorporated in the e-invoice.

Another form of validating e-invoices in LATAM is used in Mexico, where the taxpayer needs to get an electronic stamp from the authorized certification provider (PAC – Proveedor Autorizado de Certificación) to validate the e-invoice within the framework of tax obligation. The e-invoice with the unique code is then transmitted to the Tax Administration Service (SAT – Servicio de Administración Tributaria), before being returned to the issuer.

Undeniable benefits

Undoubtedly, the LATAM region has among the strictest obligations on reporting tax documents. On the other hand, it is worth noting that provisions regulating e-invoicing in LATAM countries are still developing. For example, upcoming changes in Colombia will extend obligatory e-invoicing to cover every business by the end of 2020 in a phased manner depending on the economic sector. Nevertheless, implementation of the clearance model in order to reduce the tax evasion rate makes sense only when obligatory e-invoicing is imposed. That is the main reason why e-invoicing has succeeded in LATAM countries and provided such benefits to the economy.

While talking about benefits, there is no question that this model has more advantages, both for the taxpayers and governments, than the post-audit model. The proof of this may be the fact that the countries in Europe operating post-audit models already want to follow the lead of the LATAM region. There is no doubt that, comparing to the post-audit model, clearance provides better control of tax compliance, reduces the costs of reporting, automates the process of control and makes it simpler. By these means, it also leads to reduced levels of tax evasion and the increase of tax revenue. The abovementioned clearance pioneers, such as Chile, Mexico, Colombia and Brazil, have noted a reduced VAT gap, a lower tax evasion rate, and increased tax revenue.

Even if the regulations on e-invoicing in LATAM are among the strictest in the world, the clearance model still inspires other countries and we can predict that the clearance model will be leading not only in Latin American countries in the near future. What is important, giving that those processes demand different requirements, and that following them can be time consuming and challenging, it may be worth considering using the services of the professional third party-providers that can comply with different countries’ provisions.

Klaudia Krzysztowska is a legal compliance analyst at Comarch E-Invoicing. Klaudia is a Law and Spanish Philology graduate. Within her function Klaudia is responsible for legal research of electronic invoicing global provisions, focusing especially on Spanish- and Portuguese-speaking countries. Her responsibility is to monitor legal amendments in e-invoicing.

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