E-invoicing and CTC models in the Americas
26 October 2022
Written by: Eduardo Olabe
In this blog, we are introducing you to the e-invoicing and CTC landscape of South America and North America. Besides the continuous transaction controls’ overview, we will touch upon the business automation topic. Business automation has a very different level of maturity between the regions, with the most regulated one being least automated, despite all preconditions.
Everything started back in 2002 when Chile introduced a pilot program for issuing electronic invoices. The Chilean Tax Administration (SII) wanted to implement controls to reduce the VAT gap in the country in a move that laid foundations of the CTC models in Latin America.
Tax evasion has always been a hot topic in the region. Looking into the requirements, we can see that most of the countries in the region have introduced CTC models, making e-invoicing mandatory for most of the taxpayers. The continuous transaction control approach in those countries has a common denominator, as they follow the Clearance model.
In this model, taxpayers are required to send an invoice (or other transaction documents, such as invoice response, dispatch advise, payment receipt) in a structured format and digitally signed to the tax administration (TA) platform for invoice fiscal validation (clearance). Only e-invoices cleared with the TA obtain the legal validity and can be used between the trading parties.
Furthermore, Clearance model has additional flavours we’re reviewing in greater detail below.
The Pre-Clearance or Hard Clearance model has been adopted by Argentina, Brazil, Chile, Colombia, and Costa Rica among others. As a first step, the supplier creates an e-invoice (known as DTE, CPE, CFDI, or e-CF) in an XML format and sends it to the tax administration platform for clearance. Once the e-invoice passed TA validations, it generates a unique number (known as CAE, CAF, etc.) associated to the e-invoice and returns it back.
The supplier now adds that number (known as UUID) to the e-invoice and delivers it to the buyer. The buyer then has either an option or obligation to validate that e-invoice with TA. Additionally, the buyer may be obliged to return a receipt acknowledgment of invoice (e.g., in Chile or Colombia), a commercial approval or rejection message (e.g., in Colombia, Costa Rica or Chile), which is also becoming more and more common in Brazil.
Bolivia is about to implement the Pre-Clearance model, starting with large taxpayers. El Salvador is also implementing this model and will make the timeline available shortly. The only main difference is that the electronic invoice (DTE) will be based on a JSON format in El Salvador, unlike the other countries that either have developed domestic XML or adapted versions of UBL specifications.
Another variation is the Post-Clearance model or Soft Clearance. Here, an e-invoice can be exchanged between trading parties prior to obtaining clearance from the tax authority.
In Uruguay, the CFE (electronic tax document) must be sent to the TA, but without the supplier waiting for clearance response (authorization) prior to sending the CFE to the buyer. Both parties will get an “Invoice ID” number immediately for checking invoice status at the later stages. The Dominican Republic will adopt a similar approach making e-invoicing mandatory for some taxpayers, starting from 2023.
In other countries, such as Ecuador or Paraguay, the e-invoice can be delivered to the buyer as a first step. Then, during the next 24 hours and 72 hours respectively, the supplier must report the e-invoice to the TA.
Although in the Post-Clearance jurisdictions e-invoice submission can be performed after the invoice delivery or prior to obtaining the authorization, most taxpayers still initially clear the e-invoice with the TA to avoid creating a credit note or cancellation invoice in case of invoice rejection by the tax authority.
Lastly, we have the Delegated Clearance approach, which has among others been adopted in Mexico, Peru, Guatemala, and Panama. Under this model, the tax authority delegates the clearance task to accredited private services providers, known as PAC (Guatemala, Mexico and Panama) or OSE (Peru) to operate on its behalf.
Unlike the above two clearance models, which can be seen as alternatives to each other, the delegated approach can exist in both of those, as it merely defines who has the right to validate the fiscal validity of e-invoices: the government or private companies authorized by it. While in all countries with PAC, an e-invoice has to be transmitted to the accredited service providers for clearance before being delivered to the buyer, taxpayers in Peru can exchange the e-invoice with buyers directly and send it to OSE within 3 days.
While the rise of electronic generation and real-time reporting of invoice data to tax administrations across the region has been significant, the real business automation and efficient use of the digitalized data by the businesses have barely lifted here. Unlike Europe or other districts, where e-invoicing has been driven by businesses to gain efficiency and lower costs, businesses in Latin America had to comply with requirements set by their governments. Although invoices in that region are XML based, most businesses still use their PDF versions; moreover, over 90% of e-invoices are exchanged over e-mail, instead of more secure or automated methods.
Currently we are seeing some Latin America-based businesses looking for solutions that will not only help them comply, but also automate their workflows, improve the data quality and lower processing costs.
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Moving to this region, neither Canada nor USA have not implemented a CTC model yet. They have Post-Audit, where tax-relevant documents may be audited by tax authorities months or years after the transactions have occurred. As opposed to Latin America, e-invoicing in these two jurisdictions is driven by businesses that have automation, analytics and cost reduction as their focus areas.
With that said, there is a mainly private driven, countrywide project in the USA to create homogeneous specifications that would allow automation of the Order to Cash (O2C) and Purchase to Pay (P2P) processes – BPC E-Invoice Exchange Market Pilot. After several years of designing and specifications drafting, BPC (Business Payments Coalition) has now entered into an active testing phase with several large corporates participating, advocating for a wider adoption of this standard. One will as well find many similarities between BPC pilot and Peppol.
While we’re not expecting a specific mandate, we foresee a significant voluntary uptake of BPC specifications in the US. Companies can still enroll in the pilot, while Pagero can assist with all resources needed for their participation.
Canada is closely monitoring what is being developed in the US, being a member of Peppol at the same time. If Canada were to adopt countrywide e-invoicing or continuous transaction controls, it would rather be following Peppol or BPC standards and specifications, as both frameworks are much more business- and automation-friendly than the models adopted by the Latin American governments.