In this episode of VAT Talks we discuss VAT with Raul Zambrano (Director of Technical Assistance and Technology of the Inter-American Center of Tax Administrations at CIAT) and Vinicius Pimentel de Freitas (Tax Auditor of the State of Rio Grande do Sul (Brazil) and Coordinator of the Brazilian Electronic Invoice programs). Both are experts regarding the various implementations of e-invoicing/real-time reporting in Latin America.
Raul and Vinicius first of all emphasise that e-invoicing systems in Latin America “require sending information directly to the tax administration”. In other parts of the world this definition does not necessarily apply (see for example Australia). Besides all e-invoicing systems in Latin America involve sending information to the tax authority, they all widely vary in terms of implementation which results in the fact that “there are not two models that are completely the same”. Vinicius rightly points out that the same thing is currently happening in Europe and that the way of implementation is “at the end of the day […] a decision made by the society”.
The conversation continues with discussing the Mexican model, it’s advantages and disadvantages. Afterwards, we dive deeper into the advantages for businesses of a real-time reporting system. This is, according to Vinicius “most of all legal security”. Raul adds that small tax-payers can benefit from “the reduction of compliance costs” and that it provides the “possibility to file automatic tax returns and refunds” among other things. Scroll down to read the complete deep dive into e-invoicing in Latin-America.
Could you tell a bit more about yourself and your professional background?
[Raul]: “I am an engineer from Ecuador. I work in the department of information technology at CIAT in Panama City where I have been living for twelve years now. Previously, I worked in around 20 tax administrations in the American continent but also in Africa, such as in Venezuela, Guatemala, Argentina, Barbados, Guyana, Panama, Paraguay, Honduras and Brazil. Currently, I am responsible for a large project on technical assistance and everything related to technology, like the support for the implementation of e-invoicing in Latin America.”
Latin American countries have been pioneers in e-invoicing/real-time reporting. Could you elaborate a bit on how this all started?
[Raul]: “Before diving deeper into this topic, it’s important to get a clear definition of what e-invoicing means in the Latin American case: the e-invoicing solutions implemented in Latin America require sending information directly to the tax administration. Chile was the first country to implement this technology in 2003. Soon other countries followed Chile, like Brazil, Argentina and Mexico. Right now, there are 10 or 12 established e-invoicing systems in Latin America. In Chile, Brazil and Mexico the e-invoicing system now covers close to 100% of the transactions. Also the rest of Latin American countries reach high percentages, mostly around 90% of all the transactions. Furthermore, at the moment, there are a couple of countries that are in the end stage of their pilot programme. Probably in a couple of years it will be difficult to find a country in Latin America without an e-invoicing system implemented.”
What are the differences between the different e-invoicing systems in Latin America?
[Raul]: “First of all, we should clarify at the beginning that there are no two models that are completely the same. Part of the explanation for this diversity is that the tax systems of Latin American countries are also not exactly the same. This has obviously some consequences on the e-invoicing systems themselves.
Regarding the differences in operational models, in some countries the tax authorities have complete access to the system and to the information. On the other hand, some countries decided to hire private companies on behalf of the tax administration in order to guarantee the availability of the system on a national level. This has pros and cons. For example, countries who directly manage their system may suffer from more technological issues themselves than those relying on external companies, but taxpayers would eventually have to pay for those services.”
[Vinicius]: “The same question can be posed concerning Europe. Here you see the Italian model that may be considered as a development of the Brazilian system. In Italy, the buyer gets the invoice only through the tax administration and not directly through the seller. There is no country in Latin America that has exactly this model. France was thinking about implementing the same system as Italy, but I am convinced that the market pressure of solution providers may have shifted the interest towards a form of Mexican model, which is also called Y model in the French case. In fact, at the end of the day this is a society decision. Nevertheless, there are some disadvantages in the Y model compared to the Italian one. It would be like paying someone to do work that should actually not be carrying out this work in my opinion.”
[Raul]: “I think there is also a more philosophical question involved here. In the Y model, the tax administration is forced to disclose information to a third party. This information could be personal or business relevant, like pricing information that could be valuable for competing companies. The question is if you want to share that information with a third party which is not the government. On the other hand, smaller economies might find it difficult to develop strong facilities without the help of other actors. In this case, there might be some room for private operators. Of course, it is advisable to sign clear contracts to prevent the third party from abusing the system.”
[Vinicius]: “If we look at the advantages of a Y model, as Raul said, smaller economies cannot afford to pay several millions for an independent solution and to maintain it. For example, the state budget of an island with 50,000 inhabitants cannot support this kind of investment. In this case, a Y solution could be the right path.
On the other hand, it can be considered as strange to require citizens to pay a third party to send their invoice to the tax administration. This could be difficult to justify to society. If you look at the so-called “English Asian” countries, like Singapore, Australia, and New Zealand, the common culture does not accept tax administrations to collect information about all businesses. This is 180 degrees opposed to Italy for instance where the tax administration has all the information about businesses. This definition of society has a huge impact on the national model of e-invoicing. If you look at the United States for example, the American National Program has e-invoicing, among other things. This is a business paying coalition which requires businesses to issue e-invoices in order to get paid. There is no participation of the tax administration in that at all. This kind of cultural dichotomy dictates the choice of one path over the other.”
[Raul]: “There are also other criteria to differentiate the models: a very interesting one is “what happens and when?”. There are two options in this case. The first one is the Chilean way: the document follows two different paths, one to the tax administration and one to the buyer in almost real time. The other possibility is to send the document first to the tax authority which gives an approval and afterwards to the buyer. In this model, the tax authority is in the middle of the transactions and this could put some extra pressure on the TA. However, we should underline that also in a Y model, contractors may decide to wait for the approval of the tax authority before finalizing the transaction, making it very similar to the “approval model”. This happens because the response time of the tax authority is usually within a second. By placing the tax authority at the middle of the transaction, some further possibilities may arise, for example showing to the buyer in almost real time that the seller is a valid, registered tax-payer.
Another category of difference between the models is the national format that is chosen by a specific country. For instance, Ecuador uses an XML standard while Colombia and Peru opted for the OASIS standard with some modifications. To have a common standard for every activity in a country has many benefits for businesses and taxpayers, although it has some disadvantages for multinational companies which have to adapt to several standards in different countries. The last important difference is the type of transactions that require the use of the e-invoicing system: in some countries, it may be restricted to B2G while in others it is extended to B2B and/or B2C. This requires of course a different way of implementation.”
[Vinicius]: “Another huge difference between the Mexican and Brazilian model is that the first one is not only e-invoicing as in Mexico the e-invoice is called a Digital Voucher (Comprobante Digital in Spanish). In this system, many different kinds of data can be transmitted within the same infrastructure. Another huge difference between the Latin American models is the range of competencies of the tax authority. For instance, in Chile, Ecuador, and Panama the TA is only responsible for internal taxation. On the other hand, in Brasil, Mexico, and Colombia the tax authority is also responsible for customs and international commerce. These kinds of differences are legal and political and lead to different implementations of an e-invoicing system.”
[Raul]: “In my opinion, another difference will become relevant in the upcoming years. Mexico and Costa Rica are developing a national standard for codes for goods and services while several other countries are thinking about it. Such a decision will also have an impact on the functioning of the e-invoicing model.”
What do you think about the development of e-invoicing systems in Europe and do you foresee a form of European harmonization in the future?
[Vinicius]: “First, we see that the market is pushing for standardisation. Secondly, in Europe there is the ICC initiative that’s about CTC practices. Businesses see many benefits in a CTC system. This may lead to the development of a CTC standardisation in Europe. Nevertheless, I think that some countries will follow this path more than others. Furthermore, those countries which have already implemented their own standard might be reluctant to agree on a common model which is different from the one that they have already implemented. We have actually already seen that with SAF-T: every country developed its own model. Standardisation is very complicated in this case. Furthermore, if you talk about transnational commerce, only a very tiny percentage of companies are involved in it. In my opinion, the implementation of an international standard for this tiny group of businesses might not be successful.
Nevertheless, companies doing international business are essential for a national economy, this could put some pressure for an international standard. This conflict of interests has in my opinion only one way out: the deconstruction of the concept of documents. The concept of invoice comes from the concept of “document”. From this basic concept comes everything we have developed both in the commercial sector and tax legislation. If you deconstruct the concept of documents and think about what we actually need you will realise that companies need to sell goods or services and be paid for it. Tax authorities need to know what has been sold. Therefore, I think that we need to have a structure where whoever has the right to know something gets the information. We need to build something that’s completely different from the concept of “document” that was developed in the 50’s. I think that we will not succeed if we proceed in wanting an XML document for example because they are crystalised.”
What are the benefits for businesses from a CTC standard?
[Vinicius]: “Most of all legal security. If I have the approval of the tax authority on an invoice, I can be quite sure that I won’t be challenged on that transaction. If I am a buyer, I am quite sure that I can ask for a VAT return without being challenged by the tax authority. This certainty also gives a certain stability.”
[Raul]: “There are also other benefits for small tax-payers: the reduction of compliance costs. Furthermore, CTC gives them the ability to interoperate with suppliers and customers. This improves their account payable and receivable process. On the tax service side, businesses have the possibility to file for an automatic tax return and refunds in a fast way compared to a paper-based process.”
There can also be other advantages, for instance an e-invoicing system may allow monitoring the economic activity. What are the countries that are doing this?
[Vinicius]: “There are indeed applications of the previously mentioned systems that can also help other areas of the public administration. For instance, the ministry of transportation may make use of the system to define new investments following the flow of the e-invoices. Furthermore, the national fuel agency may define where to build petrol stations or to reduce the number of them analysing the flow of invoices. Nevertheless, this kind of use is against some national laws, this is the case in for example Portugal.”
[Raul]: “Monitoring the economic activity through an e-invoicing system is already happening in Spain or Ecuador for example. Furthemore, there are more and more initiatives all around the world to even further develop the applications of e-invoicing. Once you have that level of information, a lot of things can be done. There is an initiative in Brazil that aims at improving the way to measure the sectorial domestic product by taking into account the electronic documentation.”
[Vinicius]: “A question that does arise is “how do you actually measure economic activities?” In my opinion, there is no such thing as a company’s economic activity. You can talk about the economic activity of a single transaction and you build on from this single transaction to the company and the country. Therefore, e-invoicing offers much better results to monitor economic activity than anything else.”
What would you say to the reader to make them more enthusiastic about CTCs?
[Raul]: “Take a look at the VAT tax return in Chile and see how the TA can use the information to establish an agreement to reduce disputes. This is a good opportunity to really reduce the compliance costs of tax payers.”
[Vinicius]: “With CTC you leave the subjective field and go to the objective field. You don’t have the personal interpretation of an auditor. You have a system interpretation of a system. This gives more legal certainty and reduces the space for corruption.”
We would like to thank Raul and Vinicius again for their time and for giving their perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via firstname.lastname@example.org