As we recently examined, governments throughout Latin America are leading the way in regulatory solutions to combat VAT tax fraud and ensure they are collecting maximum taxes from multinational companies. E-invoicing requirements have expanded rapidly throughout this region, and governments are introducing new mandates that affect increasingly more business processes as they automate tax collections. Over the next few weeks, we will examine some of the specific business processes affected, as these mandates present distinct challenges to multiple layers of business operations. This week, let’s look at sales.
Here’s how a typical customer sale looks outside of Latin America:
Customer purchases 500 widgets from Widgetmaker >> Widgetmaker invoices Customer for widgets >> Widgetmaker sends 500 widgets to Customer >> Customer pays Widgetmaker
It’s a simple, two party arrangement. Even if complexities occur, for example Customer only receives 450 of the widgets ordered, these two parties can make change orders, re-issue invoices, send refunds, etc., without significant issues.
It’s not so simple in Latin America. Let’s take a look at how each step after the initial purchase is affected by Latin American business-to-government compliance regulations.
Widgetmaker invoices Customer for widgets
In countries mandating e-invoicing, Widgetmaker first has to create an invoice in the correct format – XML (PDFs aren’t considered official documents) – and then transmit it to the government for approval. Typically, this is done via real-time, online portals. However, companies must also have contingencies in place in case of any network outages – the government must still receive its copy of the invoice on time to ensure accurate tax deductions. Only once the government has verified the invoice can it be issued to the customer.
Widgetmaker sends 500 widgets to Customer
Shipping and logistics are heavily affected by recent business-to-government legislation throughout Latin America. XML e-invoices act as a bill of lading in many countries, meaning that the government-approved invoice must be on the truck before the widgets can leave the warehouse. The receiving customers are trained to check this invoice and ensure it matches the shipment immediately upon arrival. In fact, customers may refuse shipments or turn trucks around that have missing or inaccurate invoices for fear of government fines!
Brazil is taking this process a step further with Brazil-ID – a new requirement that will use RFID systems to track shipments from the moment they leave the warehouse until they arrive at their final destination. This project aims to automate fraud detection by tracking goods throughout the entire sales cycle, reducing black market purchases and ensuring the government receives accurate tax payments.
Customer pays Widgetmaker
This step is business as usual … unless, there is a problem with the shipment or invoice. In many countries, customers only have a few days to dispute an invoice, and they have to do so through the official government portal. Only the XML invoice is considered valid from a tax reporting perspective, so any changes must be made here – not simply through a PDF. If this process is not followed, companies will be forced to pay taxes on the original XML invoice – sometimes for payments they never even received if goods were returned or discounts were needed.
As you can see, adding a third party into the fulfillment and billing processes as required by business-to-government electronic invoicing in Latin America presents challenges that can disrupt business operations and result in inaccurate tax reporting.