Most businesses may not realize that Italy’s plan to introduce mandatory e-invoicing for nationwide B2B transactions by January 1, 2019 (at the latest) builds on a decade of regulatory innovation in countries like Brazil, Chile, and Mexico. To create a business strategy that addresses this trend to real-time tax controls, it’s important to understand the background of this phenomenon and why it is spreading across the globe.
Since the 1990s, the global regulation of IT has predominantly been influenced by the United States and the European Union. The U.S. model has mostly favored market-driven standards and business self-regulation, while the EU has typically preferred precautionary public regulation. These two diametric approaches have been used as the trickle-down models that have provided the regulatory inspiration for many of the world’s emerging and developed economies. That was until, in the past few years, several Latin American countries introduced a technological compliance revolution.
Reversing the global regulatory pecking order
Today, hundreds of senior EU tax policy advisers regularly fly to Latin America. Their mission? To learn how countries in this region have combated a problem that their governments have unsuccessfully attempted to tackle for decades: closing the value-added tax (VAT) gap. Latin America, like Europe and most countries around the world, is heavily dependent on VAT for public revenue. Worldwide, some 20%-35% of the revenue governments collect comes from VAT or similar indirect taxes. But globally, up to a third of the revenue that should be collected through VAT is lost to fraud, evasion, or error.
Closing the VAT gap
The Latin American countries that have adopted this model have narrowed their VAT gaps through the implementation of real-time VAT control. In this model, the local tax administration places itself at the heart of a transaction between a supplier and a buyer. These systems, known as “clearance” models, allow tax administrations to monitor end-to-end business transactions as they happen.
EU countries with significant VAT gaps – such as Portugal, Spain, Italy, and Hungary – have enviously looked towards this hugely successful model and have implemented their own variations. Italy has built on its online service for the electronic receipt of public procurement invoices, while Hungary is extending the concept of electronic VAT returns to become near real time based on individual invoices. Frustratingly, no one EU or Latin American clearance model is easily comparable.
Towards a strategy: mapping requirement categories
For a multinational company, the following high-level functional categories need to be addressed for each country:
- Regulatory mapping – You’ll need to be able to issue invoices in the mandatory structured data formats required for the exchange of data with the tax administration platform.
- Regulatory transaction orchestration and process alignment – Your e-business transaction platform will need to be able to communicate in a two-way flow with the tax administration platform.
- Authentication and security – Most real-time or near-time tax administration platforms require a combination of country-specific transmission and security methods to ensure the integrity and authenticity of e-documents.
- Tax determination – When every line of every invoice is available for deep analysis, it becomes imperative to ensure that tax determination decisions are 100% correct.
- Archiving – The “cleared” e-document will need to be securely stored and available for audit for many years.
Planning for change
Ensuring compliance on the first day a clearance model is introduced is not enough. You’ll have to ensure that you have a robust change-management process. That means taking organizational measures to ensure that any change to the law or technical specifications is monitored, interpreted, and implemented within your system in a timely manner.
Connecting to multiple local vendors: the pressure’s on
Local vendors with local knowledge can provide a level of comfort to your regional team, but global IT and business leaders may find it challenging to combine local vendors into a globally consistent corporate system and process. The crucial thing here is to have a clear global strategy. To determine if you want to work with multiple local compliance vendors or a global solution, you should consider things like:
- Routing logic to the right clearance platform per jurisdiction in your enterprise systems
- Service scope variations among local vendors
- How to manage multiple contracts and SLAs
- Consistency in how you’re billed for compliance services across countries
- Timely engagement around security, audit, and personal data protection issues
- Technical support variation
- Regional variations such as language and time zones
For information on how you can prepare your business for the future of real-time tax control, visit Sovos online.