Latin America's showing the world the benefits of e-invoicing
In recent years, Latin American governments have come up with a proactive solution to tax evasion by embracing electronic invoicing. In fact, many Latin American countries have made e-invoicing mandatory for businesses because it’s such a powerful way to bring the shadow economy into the light and combat fraudulent activities.
With e-invoicing, every business invoice is issued and passed through the government. But that doesn’t mean that the government must approve invoices, only that the government gets a copy of all business activity.
In Chile, one of the first countries to implement mandatory e-invoicing back in 2003, more than 97% of billing is now filed electronically. In countries like Brazil, suppliers cannot even ship goods without an official e-invoice that passes through the government servers. According to a study by Billentis, Latin America will see an annual growth rate of 32% in the use of e-invoices in the 2017 to 2024 period, with Mexico leading the way in adoption.
Mandatory e-invoicing in Chile, Brazil and Mexico is paving the way for other governments in the region to follow suit. Other nations, such as Argentina, Ecuador and Peru, are now expanding their e-invoicing regulations, after having some time to first study the other successful models in the region and to compare adoption rates.
From a U.S. perspective, it may seem weird or even risky at first. But e-invoicing not only reduces tax fraud, but also makes life easier for small businesses. Businesses can file their taxes in minutes without the need for costly and time-consuming tax preparation services. Many in Latin America believe that the trade-off is more than worth it.
As a result of mandatory e-invoicing, Latin America has also become a global leader in the factoring industry. The factoring industry, approximately $3 trillion per year worldwide, allows suppliers to meet their working capital needs by selling their invoices, or accounts receivable, to lenders for cash. Factoring companies are specialized firms that calculate their offers based on a supplier’s reputation, credit and the invoice validity.
After purchasing the invoices, the factoring companies receive payment for the original invoice balance at a later date directly from the customer. Factoring allows suppliers, especially SMEs, an alternative to high-cost financing options, to obtain mission-critical cash liquidity. For example, an unsecured line of credit in Chile might be 40%+ interest per year, whereas factoring might only be 12%-24% interest per year because the lender uses the invoice as collateral.
E-invoicing is a leading driver of the factoring boom in Latin America because it helps decrease financing approval and processing times for businesses. With faster application times, factors are able to serve more SMEs at a quicker rate, including those typically deemed too small for traditional factors.
Mexico was the second Latin American country after Chile to aggressively adopt mandatory e-invoicing for both individuals and businesses in an effort to stamp out tax evasion. As Fernando Martínez Coss of Mexico’s Tax Administration Service (the SAT) noted, “between 2007 and 2009, the SAT lost $3.4 billion, largely due to what it euphemistically calls “apocryphal invoicing.” Despite implementing regulations much later than Chile and Mexico, Brazil also turned to mandatory e-invoicing in 2006 to streamline the collection of taxes, quickly becoming a world leader in the space.
In Peru, where factoring is referred to as “negotiable billing,” e-invoice implementation is underway, and so far, all of the necessary conditions for its success are in place. Colombia too has in place an electronic billing normative, which was executed in 1996. However, more recently Colombia is using Chile as inspiration for a new electronic billing model that is expected to reach wide adoption by over 800,000 businesses in the country. Meanwhile, other countries in the region, like Costa Rica and Argentina, have had e-invoicing options in place for a number of years now but continue to push for its massification not only for tax purposes but also to promote the added value e-invoicing provides for businesses of all sizes.
As a result of such early adoption, mandatory electronic billing efforts have paid off in Latin America. The technology has not only helped the region’s banks and other financial institutions develop better financing services for their clients, but it has also led to the creation of a number of innovative e-invoicing startups.