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Governments Implement E-invoicing And Reporting Requirements To Reduce Tax Fraud

It’s essential that companies take a proactive approach to compliance, immediately starting to button up processes to improve accuracy, moving to centralized data and financial accounting systems to ensure information is accessible.

Strict e-invoicing and financial reporting requirements have long been the domain of Latin American governments, where a focus on reducing tax fraud and increasing transparency into business transactions has made this the most complex corporate regulatory environment in the world. However, tax authorities around the globe have taken note of the many governments in Latin America that have been able to increase their tax revenues through such measures. Now, these governments are working toward similar legislation of their own. The U.S. is no exception, recently introducing two new requirements designed to create transparency and drive cost reductions in government procurement processes. For some manufacturers, these new requirements may require a shift in age old processes and operations, but can also provide benefits in the form of internal efficiencies, reduced costs and improved cash flow.

U.S. Government Introduces e-invoicing for all Business-to-Government Transactions

The U.S. Treasury Department has been testing e-invoicing for several years, and as of 2018, government agencies will be required to process invoices electronically. The government is the largest single purchaser of goods and services in the country, and any manufacturer doing business with governmental agencies will have to adapt their processes to comply with this new e-invoicing mandate.

Initial implementation of government mandated e-invoicing may be cumbersome for manufacturers, requiring new invoice creation, formatting, submission, approval and receiving processes. However, the Treasury is actually facilitating improved operations with this requirement. First, moving from paper to electronic invoicing offers a cost savings to manufacturers — both in terms of physical costs and labor. The U.S. government itself anticipates an annual savings of $150 million to $260 million. While most businesses don’t produce enough invoices to see savings like this, the cost savings can still be significant.

The second benefit of the government’s move to e-invoicing is improved cash flow. The Treasury reports that it anticipates paying its vendors more promptly and with increased accuracy, meaning manufacturers will receive their money faster and reduce time spent on addressing errors. Finally, this move can also benefit manufacturers in the form of improved record keeping. These new processes will create an electronic trail of all invoices and payments that will be easier to track than paper-based methods.

Country-by-Country Reporting Scrutinizes Multinational Manufacturers

The second major new initiative affecting manufacturers is the U.S. government’s move to country-by-country reporting requirements. While this initiative will affect only manufacturers with operations in multiple countries with revenues greater than $840 million, the requirements will necessitate a major shift in the way many companies operate. By 2017, these manufacturers will be required to report revenue, operating income, taxes paid, capital, employees and assets by jurisdiction.

Country-by-country reporting is a joint initiative between the member countries of the Group of Twenty (G20), including the U.S., and the Organisation for Economic Cooperation and Development (OECD). This mandated reporting is designed to give tax authorities greater visibility into business operations so that they can share key information and prevent fraud. This initiative is a global effort to ensure that companies pay taxes where they conduct business, and don’t transfer their cash to countries with lower tax rates or manipulate earnings. Globally, such practices equate to lost tax revenues of $100 billion to $240 billion annually, according to a report by OECD/G20. In particular, the U.S. government will be scrutinizing transfer pricing practices between business units in order to cut down on tax evasion.

Country-by-country reporting will require manufacturers to report revenues broken down by internal and external transactions, in addition to profits/losses, taxes paid and accrued, assets, etc., for each legal entity a business owns or operates. This is a level of detail that many manufacturers aren’t used to providing, requiring new processes to collect and report this information. Ultimately, the time savings afforded by mandated e-invoicing may be counteracted by country-by-country reporting, at least for the largest manufacturers.

Global Move Toward Increasingly Complex Corporate Compliance Initiatives

Analyzed collectively, and in light of recent global trends designed to give governments greater access to corporate financial records, these two new requirements can be seen as the U.S. Treasury’s first foray into the business-to-government-style mandates that are commonplace in Latin America. Companies need to be prepared for the increased globalization of data — under which governments will scrutinize and share corporate transactions.

It’s essential that companies take a proactive approach to compliance, immediately starting to button up processes to improve accuracy, moving to centralized data and financial accounting systems to ensure information is accessible. By automating accounts payable, accounts receivable and tax reporting as much as possible, these proactive companies will minimize errors and reduce risks. These initiatives will go a long way in helping manufacturers prepare for the incoming tidal wave of financial compliance legislation.

Scott Lewin is president and CEO of Invoiceware International.

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