Electronic Invoicing in LATAM

Electronic invoicing (also called e-invoicing or einvoicing) is a form of electronic billing. E-invoicing methods are used by trading partners, such as customers and their suppliers, to present and monitor transactional documents between one another and ensure the terms of their trading agreements are being met. These documents include invoices, purchase orders, debit notes, credit notes, payment terms, payment instructions and remittance slips.

The perception of the electronic invoicing is that it is simply the exchange of what used to be a paper invoice in some sort of electronic format. However, electronic invoicing in 2021 is far more than the simple digitalization of an invoice. It has to be apprehended in the context of an extended B2B process that includes multiple data entries, validation of delivery, invoicing per se, then long delays that can create a working capital crunch and a need for financing, and finally various tax payments, before a potential second, third iteration and more.

Introduction

As in its general use, the main purpose of electronic invoicing is to make Account Payable and Account Receivable processes more efficient. It is essentially a business-to-business process that is settled between companies. As such, various standards exist. At a global level, none of them prevail and most of them are not interoperable with one another:

• EDIFACT
• UBL (Universal Business Language)
• Finvoice (Finland)
• EHF (Elektronisk handelsformat) (Norway)
• E-Invoice (Estonia)
• FacturaE (Spain)
• FactureX (France)
• FatturaPA (Italy)
• CFDI (Mexico)
• ISDOC (Czech republic)
• E-faktura (Poland)
• OIOUBL (Denmark)
• PEPPOL BIS (various countries)
• Svefaktura (Sweden)
• UBL-OHNL (Netherlands)
• ZUGFeRD, XRechnung (Germany)
• Nota Fiscal Eletr?nica (Brazil)
• Facturación Electr?nica (Ecuador)
• DTE (Chile)

However, in recent years, for multiple reasons, and in particular the need to reduce tax evasion, several countries in the world implemented mandatory, centralized and government-owned repositories to force all invoices to be controlled, validated and, in some cases, "stamped" by the government. According to a study by the Tech de Monterrey, the obligation to issue CFDI, which came into force in 2015, led to a growth in Income Tax (ISR) collection in Mexico of up to 6,6% for companies and 21.3% for individuals. Another notable project would be e-factoring, which is currently improving the finances of small and medium-sized enterprises, for example in Chile where the factoring market.A complete analysis of the societal value of electronic invoicing was produced by the Interamerican Development Bank.

The case of Mexico

Electronic invoicing in Mexico

Situation

Today in Mexico, all economic entities, including individuals, must log all costs and revenues to the administration central data repository. The consequence is that the Mexican tax administration archives about six billion invoices per month. Invoices are retained for five years, and are accessible within the tax administration portal for all that time. Whenever the invoice is paid, the tax administration must be notified. If the invoice is changed or cancelled, the tax administration must also be notified.

Timeline

The implementation of electronic invoicing in Mexico goes back to 1997. That year, a group of companies decided to create an Electronic Invoicing Committee and, after performing all necessary tests, came up with a model that would serve to create the legal framework on which would govern electronic invoicing in the country. Since then, the Mexican government through its Tax Authority (SAT) has been one of the pioneers in the implementation and development of electronic invoicing at a global level, serving as an example to countries around the world that are in full phase of implementation of its own system.

Mexico was the second country on the American continent in developing a mandatory, comprehensive and government-specified model of electronic invoicing, behind Chile. By all measures, Mexico, along with countries such as Brazil or Chile, is the world leader in electronic invoicing.

Mexico was also the first country to introduce the figure of an Authorized Certification Provider (PAC), whose function is to validate the tax documents, prior to archiving to the Tax Authority. The Mexican government constantly evolves its electronic invoicing scheme to improve it and get a model efficient for both the taxpayer and the tax authority. The objective of these changes is, on the one hand, to improve user experience for both taxpayers parties while using the electronic invoice and, on the other, to correct some of the inefficiencies that became apparent over the years .

The CFDI standard

The acronym CFDI stands for Comprobante Fiscal Digitalizado en el Internet (Digital Tax Receipt over the Internet), a billing scheme whose mandatory in Mexico became effective on January 1, 2014. As of today, it is mandatory for all Mexican companies. The CFDI model is not new, but dates back to January 2011 when it replaced the previous scheme CFD (Digital Tax Receipt) that was retired as of December 31, 2013.

The main difference between these two schemes was the incorporation of the figure of the PAC which is in charge of validating the invoices before they are sent to the tax authority.

List of the 11 required XML schema as specified by the SAT

Evolution of the CFDI standard

Interesting features of the CFDI standard

Double entry. As shown in the list of 11 required XML schema as specified by the SAT, the SAT XML record includes both the tax ID (RFC) of the buyer and the supplier. As the amount specified in the invoice is the only valid before the SAT, the double entry system in essence nullifies any attempt at tax fraud, since both entities have to report the same amounts or face detection and severe consequences.

<cfdi:Emisor Rfc=" AAA010101XXX">

<cfdi:Receptor Rfc="XXXJ60090XXXX">

The hash. As the invoice is emitted, an encoded hash is generated and stored, assigning it a unique reference that gives validity to the invoice. That way, the information contained in a CFDI cannot be manipulated or modified without being detected. The CFDI issuer cannot deny having generated it. The CFDI recipient cannot deny having received it. Each CFDI has a registered unique identifier granted by a PAC which makes it unique and binding to its recipient and to the tax administration. This number is called the UUID. The UUID number becomes extremely important in subsequent steps as it is the one that enables the various derived data models.

<cfdi:CfdiRelacionado UUID="EDXXXXXXX-EXXX-4FF2-XXX-XXXXXXXX"/>

Validation. The CFDI model simplifies the process of issuance of tax receipts to the taxpayer, since it is a third party that is in charge to validate the documents and report them to the SAT. The PAC reviews the invoice and validates it if it meets all requirements. The identity of the issuer of the hash and of the PAC can be verified by reading the hash. The validation performed by the PAC becomes binding.

The PACs. The PAC certifies and records the hash stamped on the invoices, before the issuer sends the invoice to the SAT and its customer. In 2010, Edicom became the first PAC authorized by the SAT, in charge of validating and managing electronic invoices, withholdings and payroll. In essence, a PAC assumes the tasks that the SAT portal should, but with additional features and improved user experience.

It is absolutely possible to hash invoices directly in the SAT portal for free. So why would tax payers accept to sum up the PAC fee? They have high levels of information security and data encryption, as well as processes that guarantee absolute traceability and availability of the processed information through robust and redundant infrastructure, which the SAT portal needs not have. They provide CFDI services to taxpayers, such as archiving, search, classifications, etc. They team up with tax specialists, accountants and technologists. They bring together the mass of specialists in regulatory and technical issues and they often add as an advocacy group when the SAT misbehaves.

Among the obligations that every PAC must guarantee:

• They must keep confidential the information of the CFDI
• Return to the taxpayer the previously validated CFDI, with assigned folio and with the digital stamp of the SAT.
• Send to SAT immediately a copy of the CFDI once they have been certified.
• Have at the disposal of the SAT at all times, the possibility of it making remote or local access to the databases where the information and copies of the CFDI that have been certified in the last three months are protected.
• Provide the issuing taxpayer with a tool to consult the details of their certified CFDI, which complies with the specifications established by the SAT.
• Keep the certified CFDIs, for a term of three months, in an electronic, optical or any other technology medium, even when the legal relationship under which the CFDI was certified does not subsist.
• Manage, control and safeguard, through its CFDI certification system, the digital seal certificates provided by the SAT to perform their function.
• Communicate in writing via email to their clients in the event that they temporarily suspend their services.

The PCRDD. The figure of the PCRDD (Provider of Certification of Receipt of Digital Documents) was first introduced in the Resolution Fiscal Miscellany for 2015. That year, the SAT appointed Edicom the first PCRDD. The PCRDD is an external provider responsible for validating digital documents, certifying them and sending them in a safe way to the SAT. One of the differences with PACs is the obligation to validate not only the syntax but also the content. The main objective of this status above PAC is to offer more advanced solutions for companies and, eventually, simplify electronic communication procedures of taxpayers with the tax administration that currently require a tedious manual process.

With this initiative, it is therefore possible to distribute the burden on third parties who act as "Electronic windows", unifying in one single solution all the procedures to be carried out with the tax administration. Thus, the service availability, but it is also given to companies the possibility of having most advanced technological solutions, customizable or integrated with the company’s systems.

Imposed data model. The issuance of electronic invoices requires the generation of a specific XML, whose construction and emission are subject to a series of steps and obligations to which every company or individual must adhere. Even the description of the product or service has to follow the classification defined by the government. This means that the Mexican government defined what an invoice should be. Here is an example of a electronic invoice in its pdf format. It is important to note that neither the buyer nor the issuer have any say or leeway in the data model included. The data model is imposed by the government.

Payment method. The CFDI standard also includes the form of payment of the goods, which is fundamental for the SAT to track cash flows.

Payment date. The CFDI standard includes the expected payment date. This information becomes fundamental for the different business models induced from the electronic invoicing. First, it allows financing institutions to know when the invoice will be due. Second, it allows risk managers at the very same institution to analyze payments delays and potentially limit or cancel their credit lines.

Payment confirmation. The Complemento de Pago is an add-on to the invoice that the supplier must issue when payments come, whether payment is made in installments or deferred, or when it is paid in a single payment.· In addition, the issuer of the invoice must issue the payment confirmation no later than the 10th calendar day of the following month in which the payment was received. A payment confirmation can be issued for each payment received or one for all payments received in a month, as long as they are made by the same recipient.

RFC. It is necessary for the issuer to have a Registry Federal Taxpayers (RFC), obtaining it by registering with the Tax Authority Mexican (SAT).

FIEL. Advanced electronic signature is essential to carry out any procedure related to the SAT. These are files (private key and key public) used to sign documents electronically. Its function is to unquestionably identify the issuer of the message, with the same validity as a handwritten signature. It allows to fully identify the issuer of the electronic invoicing, guaranteeing integrity, authenticity, uniqueness and non-repudiation of the invoice.

Validation API. This API is part of the services offered by the SAT to allow anyone with a UUID number to check whether the invoice exists and is still valid.

Extraction API. This API allows to massively extract all invoices of a company, assuming the company gives its authorization.

Tolerated scrapping. Scrapping on the portal through Python robots or other types of technologies is tolerated by the SAT, thus allowing an extraction and transformation of financial data without the hassle of an API call.

Retention of invoices. The nature of documents with fiscal and legal validity granted to invoices requires certain conservation criteria to respect by the issuer and the recipient of these, which specified, among others, in the establishment of a period minimum time (5 years in Mexico) for its conservation. This forces companies to allocate resources and time to store, classify and manage a large number of invoices.

The case of Other Latin American countries

Comparative table

The case of Brazil

Electronic invoicing in Brazil

Along with Mexico, Brazil is the most prolific electronic invoice issuer Latin America, and the greatest world power in issuing electronic tax documents through its different electronic invoicing models. These models involve the adoption of differentiated systems for billing companies and end consumers for products and services, while operating with different tax authorities. Brazil has one of the most firmly established systems worldwide.

Electronic invoicing (Nota Fiscal Electrónica, in Portuguese, known as NFe) is required for all companies producing goods or services. Product related invoices have to be emitted in a dedicated portal, SPED, controlled by the tax authority (SEFAZ). Services companies may be exempt from local electronic invoicing requirements depending on the state and city in which they operate. Technically, enterprises without consistent access to electricity or internet are exempted. Standard XML-based form defined for goods; requirements for services are created at the city level, which means about 3,000 different standards.

Like in Mexico, there is a five-year storage requirement for audit purposes. CTe (transportation and delivery document) must be linked to NFe since Dec 2013; purchases needs to collect, validate and archive CTes

Invoices are required to match exactly with accounting and other reports filed which must be submitted to the tax authority’s digital bookkeeping system (SPED). This is also similar with the Mexican situation and had a significant impact on tax collection.

The case of Colombia

Electronic invoicing in Colombia

In Colombia, the electronic invoicing dates back to 1995, when it was granted equal sales document status as the invoice on paper. In 2013, the DIAN (Colombian tax administration) began to work on a project for massive widespread use of electronic invoicing, inspired by the systems in countries such as Chile, Brazil or Mexico, with the aim of facilitating interoperability among taxpayers and reducing tax evasion. In 2015, a massification process was initiated, introducing mandatory use for some issuers.

The new electronic invoicing model is defined in Decree 2242 of 2015, resolution 000019 of 2016, as part of a broader tax reform. The DIAN rolled out a pilot project in 2016 to detect any possible improvements in the billing model.

As in Mexico, third-party providers are authorized by the DIAN to be issuers of electronic invoices, as well as Technology Services Providers. As in Mexico:

• Standard XML based form being defined; each registered entity will be issued consecutive number folios (like Chile) instead of generating unique codes in real time.
• Receivables must be approved by DIAN before generating an invoice.
• Once approved, the invoice must be generated in 48 hours.
• When receiving an invoice, it must be validated with DIAN and the purchaser must communicate the status to supplies.
• Five years storage mandatory for audit purposes.
• Each registered issuer or purchaser will need to submit an XML invoice, credit/ debit note, and receipt of acceptance all connected through a unique identifier CUF.
• PDF invoice can be generated with a unique product or service code as a contingency measure
• electronic invoicing must have enterprise specific digital signature registered with DIAN.
• DIAN will certify the process during a 6 month testing environment enterprises are allowed to run.

The case of Chile

Electronic invoicing in Chile

Chile was the pioneer country in development of an electronic invoicing system in 2001 and has defined a robust electronic invoicing system through gradual implementation. Its basis served as a development template for other Latin American systems now fully up and running, such as Brazil and Mexico.

Despite being the precursor on paper, it was not until 2014 that widespread mandatory use by different categories of taxpayers came into force. In August 2017, the Internal Revenue Service (SII) launched a new application to create a VAT Return proposal. The SII will now set up your Purchases and Sales Books in the application and offer you an F29 proposal, which your company must then ratify, thus removing the obligation to submit the Purchases and Sales Books and forms DDJJ 3327 and 3328.

As of November 1, 2014, paper based invoicing process became prohibited for all companies with over 4.2 million dollars in annual revenue thus making electronic invoicing mandatory. The Chilean law mandates that:

• Customers must be able to receive electronic invoicing and must provide XML response back to the supplier via HTTP post within eight days.
• Overall 10 documents collectively known as DTE are to be achieved for six years for the purpose in supporting accounting.
• At the end of each month, three compliance reports must be uploaded to the government web site for a business summarizing the DTE transactions produced during the month and also include any Paper-DTE’s produced
• As in Mexico, Authorized Certification Providers (SII) designated by the tax authority are expected to provide hash and validate data. SIIs are also responsible validation of monthly compliance reports
• Enterprises need to certify their own processes for compliance – which can be done following one of two processes (1) work with a vendor platform that is already certified (2) certify own ERP platform and workflow.
• All entities involved in certification are part of the audit process – i.e., if an enterprise uses certified vendor platform, then vendor processes and data also need to be audited as part of end of year compliance (this is the reason why MNCs prefer ERP integrated solution

Conclusion

The technological developments of recent decades are changing the management practices of governments around the world. The implementation of digitization in public endeavors has made it possible to improve the services provided to the population. These developments, moreover, have touched upon public finances and tax collection, the essential basis for the maintenance of good public services. Used correctly, therefore, technology can create a virtuous circle for the benefit of society. Electronic invoicing is a Latin American innovation to the process of tax transparency, and it has been able to use the available technological developments to improve control of taxes and make the services of the tax administrations more efficient. Over time, and in conjunction with the enhancement of the technologies, this tool has been strengthened, as regards both its swift and easy availability to the public and as a safeguard of information. Moreover, it has not only improved the tax collection and compliance, but has made taxpayers’ accounting easier, more efficient and more accessible, mainly among small and medium-scale taxpayers.