In 2003, Chile became one of the first countries in the world to implement electronic invoicing, and several other countries have since followed suit. Latin America has long been a global leader in electronic invoicing, the practice of submitting and formalizing every business invoice through the government. Of the world’s 36 billion electronic invoices issued in 2017, 15 billion came from Latin America.
Electronic invoicing (e-invoicing) has many advantages; among them increased transparency and control over taxable income. In a region characterized by informal economies, e-invoices allow governments to track and tax business transactions more appropriately. At least three countries are on their way to making e-invoices mandatory for every company within the next few years.
E-invoicing also helps small businesses tackle the tax process more efficiently, eliminating the need to hire additional accountants and complicated tax-management software. While processing invoices through the government might seem strange, or even invasive, to business owners in the US, Latin American business owners have been open to the process and its benefits. Several countries now require e-invoicing for every transaction, so many small businesses have had to adapt quickly to comply. However, the time and capital they save as a result is worth it.
The benefits of e-invoicing for Latin American governments and business owners
E-invoicing requirements have triggered a number of positive impacts on local economies across Latin America. For instance, Mexico implemented e-invoicing for all businesses starting in 2012 and made it mandatory in 2014. Between 2012 and 2017, Mexico increased the tax revenue rate for the government from 37.4% to 57.7%.
Beyond improving tax collection rates, e-invoicing has allowed Latin America to become a global leader in factoring, specifically invoice-backed factoring. Factoring allows businesses to access liquidity by selling their invoices at a discount to lenders. While traditional factoring based on a few invoices often demands very high interest rates (although still much lower than unsecured credit), mandatory e-invoices mean factoring companies have the potential to access more data to back their loans . The possibility of more data means less risk and lower interest rates for small businesses.
Latin America’s advancements in these two fields have rubbed off on other countries over the past few years. South Korea adopted mandatory electronic invoicing in 2011, Denmark in 2005, and Italy and Finland will require e-invoices for every B2B transaction by the end of this year.
The use of e-invoicing is on the rise
One of Europe’s leading fintech companies, OakNorth, automates the analysis of data from documents like e-invoices to provide loans to SMEs. Using a combination of machine learning and detailed financial data, OakNorth is able to provide between $500K-$25M loans in a matter of days, rather than weeks or months. This is a significant improvement in the SME lending industry where SMEs currently face a credit gap of $2.1-$2.6 trillion globally. A few companies in Latin America have already taken advantage of similar circumstances since many SMEs do not have access to formal financial institutions, like banks, that could provide them with loans to grow.
Argentina and Brazil claim to be the first in the region to make invoice digitization mandatory in 2007 and 2008, respectively, even though Chile is considered the pioneer of implementing the technology in Latin America. Chile passed a law in 2014 that required all companies to provide e-invoices with the idea of slowly integrating all companies by the end of 2019. Before that, many businesses used e-invoicing, but it was not enforced.
Mexico finished their integration process by the end of 2018, becoming a regional leader in e-invoicing, with almost 100% of businesses submitting invoices digitally. Nearly every country in the region has made e-invoices available, but not yet mandatory. Brazil, Mexico, Chile, and Argentina are often showcased regionally – and even globally – as examples of the opportunities that come with widespread e-invoicing usage.
Colombia was the most recent country to oblige all businesses to provide e-invoices; the law regulating it came into force on January 1st, 2019. Ecuador has a national rollout plan to make e-invoices fully mandatory by 2023 by integrating new businesses every six months. Today, Peru requires e-invoices for over 100,000 large companies and plans to include SMEs by 2020. Uruguay, Paraguay, Bolivia, Guatemala, Panama, Honduras, and Costa Rica all have plans in place to integrate e-invoicing into their tax regulations as well.
A blueprint for the rest of the world
Despite its numerous informal economies and low banking rates, Latin America is a noteworthy leader of electronic invoicing, and the region has been for several years. Not only does this digitalization help tax authorities keep track of transactions, but it also helps business owners save time and money. They can manage all of their finances online and store data that can be used to back factoring and lending operations.
While the US and parts of Europe still depend on legacy technologies based on self-reporting and paper invoices, Latin America’s e-invoicing systems have soared ahead, quashing tax evasion and creating a route for SMEs to leap forward in the digital age.