In July, we attended the 1st International Electronic Tax and Invoice Forum in Cancun, Mexico. Organised by AMEXIPAC, the association for Mexican e-Invoicing service providers, and SAT, Mexico’s national tax administration, the event celebrated 10 years of electronic invoicing in the country.
A mix of Mexican and international delegates attended the conference, including the US government’s Internal Revenue Service. As Co-Chair of the European e-Invoicing Service Providers Association (EESPA), Tungsten moderated a panel of the IMF, the World Bank, and the Inter-American Center of Tax Administration, who all stressed the importance of institution and capacity-building in emerging economies to facilitate tax efficiency and further the digital agenda. This sentiment was echoed by Aristóteles Núñez Sánchez, Head of SAT.
Although Mexico first adopted e-Invoicing a decade ago, it has experienced a pronounced growth during the past three years, largely due to a mandate enforced by President Peña Nieto’s government to capture the proper level of tax revenues. Currently a massive 400m electronic invoices are submitted every month in Mexico.
Suppliers in Mexico must send digitally signed electronic invoices in the prescribed format to the tax authority. They are then swiftly verified, returned to the supplier and sent to the buyer. This fiscal clearance model accelerates full e-Invoicing adoption and captures more taxes.
Exploiting the full potential
While Mexico’s mandate has been successful with regards to tax collection, it hasn’t yet fully exploited the opportunity to deliver process optimisation and cost reductions to enterprises of all sizes, along with further benefits such as invoice finance and procurement analytics. Indeed, I heard a conference delegate say that although society is benefiting on the fiscal front, the process has so far added some additional costs, with many enterprises not yet seeing the savings that they could. The opportunities for the service provider communities to cooperate in this area are clear.
Some critics of the Mexican model express concern about the Big Brother nature of the procedures, where tax authorities get granular information on huge swathes of economic transactions. Countries that collect VAT in Europe and elsewhere usually have systems for periodic taxpayer reporting, for example monthly or quarterly aggregated reports. Indeed, European countries and the USA tend to value the contractual privacy of the invoice and the commercial efficiencies of e-Invoicing, rather than support a wholesale re-engineering of the tax system.
On the other hand, it’s clear that many countries are attracted by these clearance systems, particularly countries where the original paper-based process is subject to close supervision in the form of government-issued invoice forms and controls over printers. Turkey, Russia, Kenya, South Africa and most Latin American countries are cited as places where such systems are being implemented or planned. Portugal is the first EU country to introduce a similar model and other EU nations anxious to close the fiscal gap are likely to follow suit. Tax authorities generally look favourably on the acquisition of real-time information, like payroll reporting, and may view such a step as part of the natural evolution of the digital economy.
Bridging the cultural gap
With new technology, the clearance model can enable full e-Invoicing adoption among organisations, including SMEs, and make real-time information processing more feasible. we wonder whether it is possible to bridge the cultural gap between clearance and post-event reporting countries?
We’re reminded of an analogy that might sow the seeds of a solution. Twenty years ago, most systemically important payment systems were re-engineered to Real-Time Gross Settlement (RTGS), where individual inter-bank payments were submitted for real-time settlement across the books of central banks at the time of payment initiation. This avoids the accumulation of huge inter-bank risk positions before the end-of-day settlement.
Banks and their customers, however, were concerned about the underlying payment detail travelling into the central bank. Various message topologies were designed to create an extract or sub-set of data sufficient for the RTGS process, while preserving the confidentiality of the underlying payment. In other words, only the bare detail is transferred to the central bank for settlement, leaving the rest of the information to pass between the commercial parties and their bankers.
Could a similar concept be applied to e-Invoicing and tax reporting? An electronic invoice could contain two sets of fields: one would be the essential sub-set of data for the tax authorities, and the other would contain the commercial content. Only the first set would be submitted in real time to the tax authority (although full disclosure would continue, where tax audits occur). These fields would mirror the data that already goes into post-event reporting. Service providers could perform the extract process and continue to offer value-added services, such as spend analytics. The system would deliver the economic benefits of compulsory e-Invoicing adoption and real-time information reporting without upsetting the commercial privacy of contracts and the quantum of data being collected. This could be a way forward for a globally standardised process.
Food for thought?