Business to Government Compliance: Latin America Turns to Automation for Tax Collection

There is major shift in the way governments in Latin America regulate businesses – particularly multinationals – that is distinct from anything else seen in global compliance. Unlike the United States and most European countries, which rely heavily on income taxes, Latin American governments and many other emerging markets generate the majority of their incomes from value added (consumption) taxes (VAT). Since VAT collections represent nearly 60 percent of tax revenue in these countries, fraud and evasion cost trillions of dollars, and now many countries in Latin America are stepping forward to proactively combat this issue.

Through mandated e-invoicing and financial reporting, these countries are automating tax collection processes. By requiring standardized XML e-invoicing for all business-to-business transactions, governments gain visibility into all suppliers’ VAT obligations; by automatically matching these XML invoices to financial and accounting reports, governments ensure that they are receiving accurate tax payments. No longer do governments have to rely on companies to report tax deductions accurately; they can now verify tax calculations automatically. This is significantly different from European Union e-invoicing mandates, which only apply to business-to-government transactions.

Since Brazil first implemented e-invoicing in 2008, the practice has spread rapidly across the region and continues to expand into more business processes. In fact, in the last two years alone, mandates have spread from three to 10 countries, and now affect accounting, supply chain management, procurement and human resources. This tidal wave of regulation is expected to continue throughout emerging markets and VAT-based societies worldwide as more and more governments see increased tax revenues from enforcement. Consider this:

• Brazil, the first country to implement such requirements and the model for other governments, has seen a $58 billion USD increase in tax revenue as a result of plugging leaks in invoicing and reporting.
• Mexico increased tax collections 34 percent in the first wave of its e-invoicing rollout, before mandates on reporting even went into effect.
• Colombia recently conducted a feasibility study into e-invoicing, and found that if it could reduce 50% if its tax evasion, it could increase revenue by $8 billion USD. Needless to say, e-invoicing mandates here are imminent.

These regulations present significant cash flow and supply chain challenges for multinationals operating in mandated countries. Over the next few weeks, we’ll examine in detail how these business-to-government regulations affect sales, procurement, human resources and cash flow.