Latin America has long been at the forefront of business-to-government compliance requirements, and nations across the globe have taken note of how countries in this region have successfully cracked down on tax fraud. Now, the U.S. has introduced two new requirements – public sector e-invoicing and country-by-country reporting – with themes parallel to Latin America as it seeks to create efficiencies in government processes and cut down on tax evasion.
After a four year pilot program exploring the feasibility and benefits of e-invoicing in the public sector, the United States Treasury Department has announced that government agencies must begin processing all invoices electronically by 2018. As the largest single purchaser of goods and services in the country, the federal government’s shift to e-invoicing marks a significant milestone in the business-to-government landscape, one that follows the European e-invoicing model.
Dave Mader, controller and acting deputy director for management at The Office of Management and Budget, cited two primary reasons for the transition in a discussion with Federal News Radio. “One is there is a clear savings to the government from moving from paper to electronic. We have estimates over a couple of studies that show an annual savings of anywhere between $150 million and $260 million, which is significant savings. I think as important, or maybe more important, the benefit there is to vendors in moving this process to electronic, especially for small businesses who are very concerned about cash flow. Electronic [payments], obviously, give you the heightened accuracy, the prompt payment and the quick movement of payment of invoices from invoicing to cash in the bank.”
A benefit he failed to mention in this interview is the increased transparency in purchases and transactions that e-invoicing can lead to. Not only will the government benefit from hard cost and time savings in the move to e-invoicing, but better record keeping and automated processes will help to make sure that payments are increasingly trackable.
Though visibility into financial transactions may not be a primary purpose for the U.S.’s initial e-invoicing requirement like it is in Latin America, that visibility is exactly the focus of a second new initiative – country-by-country reporting. In conjunction with other member countries of the Group of Twenty and the Organisation for Economic Cooperation and Development, the U.S Treasury and IRS have introduced legislation requiring multinational enterprises to submit country-by-reporting in 2017. This new report requires companies and their foreign-controlled subsidiaries with revenues greater than $840 million to report revenue, operating income, taxes paid, capital, employees and assets by jurisdiction. The goal of this requirement is greater transparency, and therefore the ability to better enforce federal income tax laws. In particular, the government will be scrutinizing transfer pricing practices between business units in order to ensure these transactions are taxed appropriately and cut down on tax evasion.
Combined, these two new requirements demonstrate a shift in the U.S. government toward a Latin American mindset that with greater standardization and automation comes greater visibility, and therefore more accurate tax collections. This move also proves an increased globalization of data – under which governments will share and analyze corporate transactions.
Companies caught off guard by this increased scrutiny are in for a dramatic awakening, which is why it’s imperative to be proactive about compliance.