What Is The Invoice Clearance Model
Tax authorities around the world are pushing for e-invoicing adoption. The trend is predicted to exclusively take over global tax collection by 2025. The shift from traditional audit reports to e-invoicing will lead businesses to adopt the clearance model approach.
Government authorities worldwide have unanimously endorsed the benefits of electronic invoices in expediting the collection of taxes. Accepting invoices electronically also means that a greater number of taxpayers will accurately comply with tax reporting.
What Is The Clearance Model?
The clearance model is a digital method of tax compliance reporting. Small and large businesses are required to report invoices either before or during the transactions. Companies are required to archive and process the electronic invoice data with authenticity and the utmost integrity.
Countries, such as Mexico, have already begun to successfully implement the clearance model for both B2G and B2B enterprises. The government has mandated invoice reporting through its clearance model for all entities making up to or more than $12,000. This rapid transition has helped Mexico draw significant benefits associated with e-invoicing.
Here a few benefits to the clearance model.
- It allows an enormous number of tax reporting invoices to be processed in a significantly short amount of time. Mexico, for example, is now able to process over 10 billion electronic invoices annually
- Governments will be able to increase their revenue by a significant percentage. Instant and accurate tax compliance leaves little margin for tax evasion
- It ultimately reduces the VAT (value-added tax) gap. Mexico alone was able to close this gap by a commendable 21% ever since its large-scale implementation of the model
These benefits are now incentivizing many more governments in Europe, Asia, and Africa to make the switch. The format of the model’s application, however, might vary in the future depending on the region and tax policies.
How Does The Clearance Model Compare With The Post-Audit Approach?
The post-audit approach involves a free exchange of statements between the trading partners. Following the initial documentation of any transaction, companies are required to accessibly archive and report tax compliance for up to ten years.
This means that in many instances, compliance documents are scrutinized years after the actual transaction was carried out. This allows for inaccurate reporting and documentation errors.
Tax evasion is a common consequence of a post-audit approach to reporting. This gives countries in Europe, Asia, and Latin America even more of a reason to quickly make the switch.
Why Will Tax Authorities Embrace The Clearance Model?
With a clearance model approach, tax authorities can ensure a greater reporting frequency and data accuracy in real-time. This makes e-invoicing an invaluable revenue-generating tool.
Mexico and Brazil are even working to set up an interchange format between their clearance systems that will eliminate the necessity of custom documentation.
The following is a list of countries that have been at the forefront of successful clearance model integration.
- Portugal: The electronic bill is transferred to the government authorities by the party who issues it
- Spain: The country has made reporting e-invoices mandatory for both issuers and receivers within four to eight days following the transaction
- Hungary: Reporting of the electronic invoice in real-time is mandatory for businesses in hungary incorporating a VAT of $350 or upwards
- Italy: The country has mandated suppliers and public agencies to report electronic bills
How E-invoicing Will Help Companies Meet Regulatory Requirements And Save Money
Companies mustn’t look unfavorably upon mandatory e-invoicing. The process may enable them to save some money. Here’s how:
- Replacing paper-based invoicing with its digital counterpart can save corporations up to 30-40% on the compliance costs
- The authenticity involved in digital invoicing leads to reduced fraudulent practices. The process of electronically archiving and transferring bills adds validity to your transactions
- E-invoicing makes converting your fiscal documents into tax compliance reports in real-time considerably easy
- Several onerous procedures involved in paper-based invoicing, such as VAT declarations, deductions, and periodic reporting forms, are rendered unnecessary with e-invoicing
- Greater processing volume helps in significantly lowering the transaction costs