It’s predicted that 2025 is the year tax authorities worldwide will only accept invoices electronically*. In most cases it means governments will be using what’s known as the clearance model.
Defining the Clearance Model
There are two types of tax compliance reporting:
Trading partners have a free exchange of invoices. Partners are responsible for providing an accessible archive and reporting for up to 10 years after the initial document was created.
In countries with the VAT system, the invoice is the document that provides evidence for tax compliance. Tax audits may happen years after the actual business transaction has occurred.
The problem with the post audit model is tax evasion, which is one of the reasons countries in Asia, Latin America and Europe have moved to the clearance model.
Government tax administrations require that each invoice is reported to them either before or during the exchange. Companies are responsible for invoice integrity, authenticity and archiving, and key invoice data has to be provided in electronic formats.
In the Americas, Mexico is having extraordinary success with its clearance model, mandatory for B2G as well as B2B. Every tax paying entity earning more than $12,500 USD has to report their transactions through the government’s clearance model infrastructure. As a result, the tax authority
- handles over 10 billion electronic invoices every year
- has increased tax collection revenues by over 30%
- has closed the VAT gap* by 21% (as a percentage of Mexico’s annual budget)
As well, Mexico and Brazil are creating an interchange format between their clearance systems. It will eliminate customs documentation because all transactions are accounted for in their systems.
These are all good reasons why European governments are looking to benefit from the clearance model. Even though it might be more dominant globally after 2025, not all countries will implement it in the same format – producing variations dependant on country or tax region.
Countries Implementing the Clearance Model in Europe
- Portugal: invoice issuers report invoice records to tax authorities in electronic form
- Spain: requires both issuers and receivers to report invoices electronically within 4-8 days of a transaction
- Hungary: businesses will be required to report invoice data in real-time for VAT amounts of $350 USD and up
- Italy: electronic invoicing is required between suppliers and public agencies
Clearance Model Benefits
The idea of an electronic invoicing clearance model might not sound very attractive for companies, but there are some benefits such as:
- Compliance costs are reduced by up to 30 to 40% for corporations (compared to paper invoices)
- Fraud is reduced because mechanisms guarantee validity and authentication
- Fiscal documents become tax compliant in real time
- Processes such as periodic reporting forms, VAT declarations and deductions are no longer necessary
- Lower transaction costs due to processing volumes
It’s projected that the clearance model will cover many different kinds of fiscal documents, including salary statements, debit notes, credit notes, payment receipts, as well as invoices. Buyers may be required to become part of the system. In Mexico, tax authorities can blacklist suppliers who have not paid their taxes – effectively putting organizations out of business until they pay.
Industry organizations such as EESPA, OpenPeppol, and the European Multi-Stakeholder Forum on E-Invoicing have the topic on their agenda.
Why wait for legislation? It’s only a matter of time until electronic invoicing is mandatory – and the more expensive and disruptive it is to implement in a short time frame.
Go electronic and reduce paper, time and cost associated with customer and supplier invoices. Find out more how Palette processes, validates and delivers your e-invoices in any format that your business partners require, anywhere in the world.
**VAT Gap: The difference between the estimated VAT revenues that governments expect to receive and the amount of VAT actually collected. It estimates revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies and miscalculations.