Centralised vs Decentralised Invoice Clearance: What’s the Difference?
In today’s global crackdown on VAT fraud and inaccurate tax collection, invoice clearance methods are becoming more and more of a hot topic. Tax authorities are working hard to ensure invoices are valid and compliant, meeting specific structure and data input requirements, before they are sent to the buyer. Effective approaches to invoice clearance can help with all of these factors.
But what exactly is invoice clearance and what’s the difference between centralised and decentralised models? Read on to find out more.
What is Invoice (or E-Invoice) Clearance?
Invoice clearance refers to the process of checking the correctness of an invoice before it is sent to the buyer. While a clearance model cannot officially detect errors or fraud, it can help to assure the quality of an invoice by ensuring that all of the required information is included and by guaranteeing its validity. The aim is to make sure (in real time) that fiscal documents are tax compliant, reducing the risk of fines.
Clearance model e-invoicing has been popular in Latin America for some time but is now sweeping the globe as governments try to close the VAT gap which is currently sitting at around EUR 93 billion in EU states alone.
As a solution, tax authorities are inserting themselves into the transaction process to double down on compliance.
However, while some countries are opting for a centralised model (a single platform established by the Tax Administration), others have decentralised models in place (outsourcing the clearance process to third parties). In this article, we’ll be finding out more about each clearance model with examples of how they work in action.
What is Centralised Clearance for E-Invoicing?
Centralised clearance is a form of real-time reporting in which electronic invoices are cleared on a singular platform deployed by the Tax Administration. It’s an effective way for governments to interject in both B2G and B2B transactions, replacing the direct exchange of documents between suppliers and buyers – instead requiring invoices to first be approved by a central authority.
Taxpayers are required to send their invoices in a standardised format to the Tax Authority for approval or ‘clearance’. Only once the invoice has been cleared by the tax authority, which ensures that it is valid from a tax compliance perspective, can the invoice be sent to the buyer.
In other words, the government plays an active role at the point of transaction and is responsible for validating the invoice before the transaction is complete.
Italy introduced a centralized clearance model as part of its real-time reporting system for its e-invoicing mandate in 2019. Named Sistema di Interscambio (SDI), the centralised model requires all taxpayers to send their invoices in a standard format, called FatturaPA, to the tax authority.
Their real-time reporting model has proven to be successful, with figures from the Italian Ministry of Finance indicating that there has been a VAT gap reduction of almost EUR 10 billion in just a couple of years. However, on the downside, the need to send invoices off for approval to the Tax Authority can be disruptive to Accounts Payable operations.
What is Decentralised Invoice Clearance?
In contrast to using one centralised platform, the decentralised invoice clearance model sees the Tax Administration outsourcing the clearance process to third-party accredited service providers. This particular type of model is popular among Latin American countries such as Mexico, Chile, and Guatemala where the service providers are called “Authorised Certification Service Providers”, also known as PACs.
The PACs are responsible for controlling, validating, and clearing invoices. Upon clearance, the service providers submit invoice data to the central platform of the Tax Administration. In Mexico, every third-party provider has to go through an accreditation process with SAT (the tax authority) to become a PAC, which includes the need to offer a free tool for businesses to submit invoices.
There are a number of pros and cons of using a decentralised model. Benefits include the reduced risk of system failure on the central platform, less disruption to AP operations (as PACs submit invoices to the Tax Authority on their behalf), and reducing the pressure on government agencies who will only need to monitor third parties instead of handling a high volume of invoices themselves.
Mexico, a pioneer of VAT digitalisation, was the first country to implement a decentralised clearance system in 2010, as part of its bid to digitally transform invoicing processes. When establishing the framework for e-invoicing, the government introduced a validation process via trusted third-party providers. Mexico managed to reduce its VAT gap by 50%.
On the downside, delegating invoice clearance to third parties leaves the process vulnerable to corruption. Mexico’s experience is one example of this. Despite the requirement for third parties to go through SAT accreditation, SAT employees have regularly been involved in corruption and money laundering cases. However, it has to be said that an anti-corruption campaign was launched in 2020 which has increased the exposure of corruption within SAT by 96%.
Managing e-invoice clearance and reporting processes with Tungsten Network
As real-time reporting and e-invoicing requirements continue to be implemented globally, clearance models will increasingly act as an effective way to validate invoices and reduce tax compliance costs. In fact, e-invoices that are issued using clearance models have been found to reduce tax compliance costs by 37-39% for corporate businesses and up to 56% for private businesses.
Over 70 countries have now implemented, or have plans to implement e-invoicing and e-reporting mandates and this number is only going to increase. However, as each country is adopting different frameworks and models for e-invoice processing, it can be hard for multinational businesses to keep up.
As such, working with a third-party e-invoicing expert such as Tungsten Network can help you to navigate changes and stay on top of shifting compliance rules.
At Tungsten Network, we have the world’s largest compliant business transaction network which helps global businesses on their journey to world-class performance in AP and P2P.
Find out how Tungsten Network could help you navigate global I2P compliance mandates by contacting us today.