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As electronic invoicing mandates expand across the globe, businesses will need to comply with more than one country, model or mandate to cover cross-border transactions. Therefore, it’s beneficial to understand the most common models and how they work in practice.
No one model is exactly the same, but at a high level many mandatory requirements can be grouped into either of two models, the post-audit model and the clearance model.
How does the post-audit model work?
The post-audit model requires businesses to create, keep and report invoices, without tax authorities involved in the process.
Within the model, businesses must ensure their invoices are authentic, legible and accounted for, which means keeping the tax authorities up-to-date through periodical reporting. The integrity and authenticity can be ensured in the form of an electronic signature or a business process, being evidence of a document traceability.
Tax authorities may also undertake random audits for a certain period after a transaction. Therefore, businesses must keep a log of invoices to be compliant. The minimum timeframe of the log can vary from country to country.
How does the clearance model work?
The clearance model involves three parties: the seller, the tax administration and the buyer. Within this model, the tax authority must “clear” (validate) electronic invoices before they can be sent.
Compared to the post-audit model, the clearance model monitors and tracks invoices at a much higher level. Invoices must be sent and registered with the tax authority, ensuring proof of both the buyer and the receiver. This provides the tax authority with full visibility of economic activity.
Countries such as Italy - who have been leading the way on mandatory e-invoicing - have benefited from the clearance model for some time. The country’s use of a clearance model, combined with almost 100% of mandatory B2B electronic invoicing, has helped recover billions in business VAT.
Mexico, a pioneer of tax digitalisation, also uses the clearance model. The country mandated e-invoicing alongside live reporting to tax authorities. Mexico’s model requires businesses to send invoices to certified third-party service providers, who are then responsible for sending the invoices to the tax authority.
In terms of tax compliance, the clearance model offers many benefits for both businesses and the tax authority. As such, while post-audit remains popular in Europe, many authorities are adopting the clearance model. Reasons for the adoption include:
Structured communication – A real-time view of tax, helping reduce tax fraud.
Automation – Removes manual tax reporting and the likelihood of errors.
Revenue recovery – Governments are able to increase their revenue due to tax compliance from businesses.
Find out more about the various tax compliance models
Now that you have learnt about post-audit and clearance models, expand your knowledge even further by delving into the various tax compliance models within these two categories.
From real-time reporting to decentralised CTC and exchange. As more countries mandate e-invoicing, more models and variations come into place.