Can E-Invoicing Improve Tax Compliance?

12 March 2020

How electronic invoicing makes it easier to enforce tax compliance.

More businesses are shunning paper invoices for e-invoices. And now, tax authorities across the globe are starting to accept e-invoices for tax payments. In fact, some governments are vigorously encouraging businesses to adopt e-invoicing. Singapore is a perfect example.

More businesses are shunning paper invoices for e-invoices. And now, tax authorities across the globe are starting to accept e-invoices for tax payments. In fact, some governments are vigorously encouraging businesses to adopt e-invoicing. Singapore is a perfect example.

Sure, tax audit requirements for tax invoices may differ from country to country. However, adhering to local tax compliance is an integral part of trading.

Before we look at how e-invoicing will affect invoice tax compliance let’s deal with the basics first.

Understanding Invoice Compliance

The appeal of e-invoicing is undeniable.

For starters, electronic invoices reduce direct processing costs by up to 90%. It also increases transaction visibility, yields more savings, improves efficiency, and much more.

Further, e-invoicing makes AP automation an essential step in invoice tax compliance.

Through AP automation, tax authorities can have more visibility into an organization’s trading. That way, the government can regulate and audit tax remittance more efficiently.

The point we’re making is that, indeed, electronic invoicing makes it easier to enforce tax compliance.

Tax Compliance Models

As stated, many countries, including The United Kingdom, Canada, Serbia, New Zealand, and Australia, are already warming up to e-invoicing.

Essentially, this means creating systems to ensure tax compliance. These include:

Post Audit Model

Post audit, also known as post-transaction, involves auditors checking whether the records are properly maintained for every purchase or sale.

Tax authorities that use this model rely on the invoice as the primary audit document.

Businesses in countries that use the post-audit model to avoid compliance violations must keep a well-maintained invoice recording and archiving.

A good e-invoicing solution with strong compliance can help with invoice archiving, assisting businesses to adhere to the post-audit tax compliance model.

Clearance Model

This model involves auditing transactions in real-time.

The auditors or tax authorities receive the electronic invoice before the actual invoice is sent to the buyer.

The authorities will then authorize the invoice and verify the invoice has not been tampered with.

Because electronic invoicing supports e-signatures, it can help in authenticating invoices. By extension, this means that tax authorities can leverage e-invoicing to enforce tax compliance in countries that use the clearance system.

Since the tax clearance model involves the immediate release of information, auditors can conduct certain tax checks when the transaction takes place, enabling quick reaction if there are any anomalies.

The tax clearance system is prevalent in Latin American countries. It is still relatively new in the European Union, with only Italy using it. Outside the EU, only Turkey used the tax clearance model.

The Mexican Model

As we’ve already established, e-invoicing can help improve tax compliance. But, how are countries doing it?

Here’s an overview of how Mexico is using electronic invoicing to close the tax gap.

In Mexico, suppliers no longer raise invoices—which is the traditional way of doing things.

Instead, government-appointed agents issue e-invoices based on the data provided by the supplier. All transactions are cleared through the government, which collects the tax as money changes hands.

Further, the government can exclude suppliers from creating invoices. If a supplier cannot pay their tax taxes or hasn’t fulfilled other tax obligations, they can be blacklisted and prevented from raising invoices.

Essentially, this means that they’re out of business until they meet their legal duties. That way, the Mexican government can prevent companies from bypassing rules and can collect taxes more efficiently.

The results are impressive. The Mexican government now handles over 10 billion electronic invoices every year and increased tax collection by over 34 percent.

Beyond the Borders

Countries that have implemented and mandated e-invoicing reporting improved tax collection. Peru and Korea are perfect examples.

in controlled clearance models where tax authorities have full visibility and control over transactions, businesses are leveraging similar electronic invoicing schemes to facilitate more efficient trade.

With the same level of control, trading partners can create an interchange between their clearance systems. That way, they don’t have to worry about tax and customs documentation manipulation for fraudulent purposes.

The Future is Digi-tax

Through e-invoicing, tax authorities and governments don’t have to struggle to know the amount of taxes owed to them.

With such convenience, it is only a matter of time before e-invoicing is mandatory across the globe.

As a progressive business owner or executive, you don’t want to wait until the government forces you to transition to e-invoicing. After all, the benefits of electronic invoicing are reason enough to make you want to shift to e-invoices as soon as possible.

Besides, e-invoicing will help you re-engineer and digitize your procure-to-pay process, something you will have to do at some point if you want to remain competitive in the digital business world.

Unimaze Can Help you Transition to e-Invoicing

The journey to adopting and implementing electronic invoicing begins by partnering with an experienced and reliable e-invoicing solution.

Unimaze is a PEPPOL accredited Access Point provider. We can help you transition to e-invoicing, helping you streamline your AP process, including tax compliance.

Let us help you get started with e-invoicing today.

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