Latin American governments crack down on tax evasion; Internet and e-invoicing bring in billions in new revenue
For as long as anyone can remember, Latin America has been a region where it was easy to avoid paying taxes, particularly for businesses. Making sales off the books and double bookkeeping were common practice and some governments openly admitted that they collected less than half of business taxes owed. It was one of the reasons why roads, education and health care were sub-standard.
That’s beginning to change, and with a suddenness few expected. Businesses that have, for years, routinely evaded taxes are being stuck with stiff fines and sometimes shut down as the tax man pays visits to large department stores as well as mom and pop tiendas.
In several countries, governments are also cracking down on another tax evasion tactic, the sale of smuggled merchandise, from perfume, to clothes to liquor. In Ecuador, the national customs service has shuttered more than 200 businesses dealing in contraband. Business owners who cannot produce invoices for all goods in their stores face jail time.
The major tool being used throughout Latin America in the recent crackdown is the Internet. Almost overnight in some countries, tax collections have increased by billions of dollars.
About a decade ago, Chile pioneered e-invoices, though they were optional and mainly used between businesses, as in much of Europe. (In English-speaking countries, tax authorities tend to rely on bank records, not invoices, as proof of a transaction.) Brazil, Mexico and Argentina built on the Chilean model, putting the tax authorities centre stage and making e-invoices compulsory for different groups of taxpayers. Much of the region has plans to do likewise in the next few years. Mexico’s new rules go the furthest: it is the only country to impose e-invoicing on individuals as well as firms.
The main motivation for e-invoicing is to stamp out tax evasion, says Fernando Martínez Coss of Mexico’s Tax Administration Service (the SAT), noting that between 2007 and 2009, the SAT lost $3.4 billion, largely due to what it euphemistically calls “apocryphal invoicing”. Brazil had similar motives, as well as wanting to streamline the collection of a tangle of local sales taxes, among other levies, according to Newton Oller, a Brazilian official who is pioneering new forms of invoicing.
Both systems took off largely because the tax authorities chose a single standard early on. They have also imposed digital signatures to ensure authenticity. In most countries, the technology is so quick it registers the invoices as fast as a credit-card transaction. There is a nerdy race to generate the highest volumes (see chart). “Brazilians admit we’re winning the invoicing but they say they’ll beat us in the World Cup,” Mr Martínez chuckles.
There are many fringe benefits. In Mexico, the SAT estimates that paper invoices used to cost around $12.50 apiece, including printing, delivery, checking and five years of storage. There were more than 150 rules governing their drafting and processing. It took forests of trees to make them and cities of warehouses to store them. Provided businesses have the right technology, e-invoicing is cheaper, easier and better for the environment.
The tax authorities cannot get enough of the new technology. Four Brazilian states have begun forcing some retailers to produce e-invoices, as well as wholesalers. Since April 1st Mexico’s SAT has required 4.2m tiny businesses to report their revenue and costs every two months, using e-invoices. It hopes this will draw them into the formal economy.
Ecuador, a leader in employing new technoglogy, has seen tax collections almost double since 2007. The government says it plans to unveil a system of digital money by the end of the year allowing customers to make purchases by cell phone or tablet, or “electronic wallet,” a process that will make tax evasion even more difficult.
That has caused lots of grumbles. Owners of the smallest firms often do not have the computer systems or skills to comply, and fear the tax authorities are out to get them using new technology. Larger firms are vexed that changes are imposed with short notice and the punishments for non-compliance can be similar to those for wilful fraud. Multinationals find too much complexity across the region. The SAT, for instance, has certified 75 companies to provide the invoicing software. Other tax authorities offer their own.
E-invoices can be a boon, though. Companies that offer them can win custom from those who need a verifiable record of their transactions. Hence, on a highway leading out of Mexico City where many lorry drivers stop to eat tacos, small restaurants now offer e-invoices so that customers can claim expenses. And in Santo Domingo square, one printing stall has a new sign boasting of its authorised e-invoicing facilities. The former forgers nearby regard it with loathing.
Credit: Portions of this article courtesy of The Economist; www.economist.com; Photo caption: Even owners of small tiendas are paying more taxes.