Korea and Peru:

Digitalization and VAT Compliance

Introduction

In recent years, tax administrations worldwide have turned to digitalization to boost VAT compliance and reduce evasion. One prominent digital tool is electronic invoicing (e-invoicing), which requires businesses to issue invoices through government-connected electronic systems. By instantly transmitting transaction data to tax authorities, e-invoicing creates a real-time “paper trail” of sales and purchases. This enhanced transparency is expected to deter underreporting and fraud, while also reducing compliance costs through automation. Many countries have implemented mandatory VAT e-invoicing regimes, aiming to narrow VAT gaps and improve collection efficiency.

This case study relies on Lee (2016) and Bellon et al. (2022) and focuses on two country experiences—the Republic of Korea and Peru—to assess whether digitalization in the form of mandatory e-invoicing improves VAT compliance.

Korea

Korea introduced mandatory e-invoicing for VAT in 2011 as part of a broader tax modernization agenda. All corporate businesses and qualifying individuals were required to issue VAT invoices electronically through the National Tax Service’s platform. The policy’s goals were to increase transaction transparency and reduce compliance costs, thereby improving VAT compliance. The rollout was swift—within the first year, e-invoicing adoption (by transaction value) jumped from about 15% (when it was voluntary) to 99.8% under the mandate.

The government supported the transition by providing free software, extensive training, and by developing an early warning system to utilize the flood of invoice data for enforcement. Effective design and execution were crucial: Korea’s system was user-friendly and integrated with existing e-filing processes, helping taxpayers comply with minimal burden. By 2013, e-invoicing usage exceeded 99.9% of transactions, essentially universal coverage. This comprehensive adoption gave the tax authority unprecedented visibility into business sales and purchases in real time.

Peru

Peru’s tax authority began requiring e-invoices in 2014, but through a staged approach. Mandates were introduced in phases targeting specific groups: the largest taxpayers and some medium firms in initial phases, followed by additional phases for smaller firms and those flagged for past tax fraud. The first mandates took effect in 2014-2015 for large companies, with subsequent deadlines through 2016-2017 for medium and selected small firms. This phased rollout allowed firms more time to adjust (indeed, deadlines were later extended by several months for many groups).

By design, Peru focused early mandates on firms accounting for the bulk of VAT receipts—by the end of 2017, firms already required to e-invoice represented over 77% of total reported value added. Adoption rates in Peru climbed rapidly after each group’s deadline, though rarely hitting 100%. Within six months of their mandate, most large firms reached over 80% e-invoice usage.

However, compliance among the smaller, high-risk firms lagged: in one wave of firms previously caught issuing fake invoices, e-invoice adoption remained under 20% two years after those firms were mandated. Additionally, by 2017 a modest share (around 10%) of firms not yet mandated had voluntarily started e-invoicing, encouraged by anticipation of future requirements or network pressures.

After 2017, Peru continued expanding e-invoicing to virtually all VAT-registered businesses, lowering the size threshold so that by 2019 nearly all but the very smallest taxpayers were integrated into the electronic system.

Key Outcomes

To evaluate the impact of e-invoicing on VAT compliance, it is instructive to compare key outcomes in Korea and Peru.

Both country experiences demonstrate that a well-implemented e-invoicing system can boost VAT compliance, though the magnitude and nature of impacts differ by context. Korea’s all-at-once mandate quickly brought almost every transaction into the open, sharply curbing traditional VAT fraud schemes (e.g., fake invoices) and yielding measurable revenue gains from enforcement. Peru’s phased approach revealed more nuanced effects: compliance gains did materialize—especially through spillover effects on smaller firms linked to large taxpayers—but some evasive behavior initially shifted (or relationships dissolved) as the system expanded.

In both cases, digital invoices improved the tax authority’s audit trail, making evasion riskier and more detectable. However, the Peru case shows that if coverage is incomplete or gradual, some taxpayers may try to avoid the net by transacting outside the system, at least until e-invoicing is ubiquitous.

Comparison of VAT e-invoicing outcomes in Korea and Peru
Indicator Korea (Mandatory from 2011) Peru (Phased 2014-2017)
Adoption Rate ~99.8% of VAT invoices (by value) in first year of mandate (vs. ~15% prior voluntary). Virtually universal coverage (99.9%) by 2013. 80-90% adoption within 6 months of deadline for large/medium firms; <20% for some high-risk small firms even 2 years post-mandate; and ~10% voluntary adoption among not-yet-mandated firms by 2017.
Change in VAT Compliance Higher transparency and reduced evasion: 69% of surveyed taxpayers say e-invoicing helped curb VAT evasion. Tax authority data show a faster decline in fake invoice fraud: post-2011, detected invoice seller fraud cases fell by ~85 per year vs. 52/year pre-ETI trend (2013: 592 actual vs. 706 projected without e-invoicing). Mixed initial effects: Firms with a trading partner mandated into e-invoicing showed on average a slight drop in reported sales (−1.5%) and purchases (−4%) in the first year, possibly due to cutting ties with non-compliant partners or eliminating false invoices. However, small firms connected to newly mandated partners ultimately increased their reported activity – reporting ~11% higher sales and paying 17% more VAT than before, on average, indicating improved compliance for that subset. No significant change in aggregate VAT revenue was immediate, but mandated firms’ counterparts became more likely to remain in the formal tax system (higher likelihood of continuing to file taxes) rather than go informal.
Enforcement & Detection Massive data use for enforcement: 2012-2014, the new Early Warning System (EWS) flagged 6,822 suspicious cases, leading to 1,922 tax investigations and 1,159 prosecutions with KRW 1.19 trillion in additional taxes assessed. The ratio of fraud charges to warnings rose as data analytics improved, indicating more accurate targeting. Improved ability to track transactions across firms. Some network segmentation occurred as compliant firms reduced dealings with non-compliant ones. Nevertheless, the e-invoice data enabled SUNAT to detect reduction in fake credit claims (sharp drop in new VAT credit filings among firms with mandated partners), suggesting the reform closed avenues for claiming fraudulent refunds. Positive spillovers were observed when both parties in a trading relationship adopted e-invoicing—such pairs saw increased reported sales, implying that shared digital records fostered greater honest reporting.
Taxpayer Costs & Perceptions Compliance cost savings: Automation of invoicing cut costs by an estimated KRW 978 billion annually (~0.7 billion USD), largely from eliminating paper invoice issuance and storage. These savings far outweighed one-time implementation costs (~KRW 263 billion private, 27 billion public). Taxpayer service: 73% of businesses reported e-invoicing made VAT filing more convenient. Some initially felt burdened by the change, but overall the reform was viewed as a success by the private sector. Compliance burden: Transition was harder for smaller firms. Deadlines were extended to give businesses time, acknowledging capacity constraints. While Peru’s study did not quantify compliance cost changes, anecdotal evidence suggests e-invoicing reduced paperwork for adopters over time. Taxpayer sentiment: No survey data available in the study, but voluntary uptake by some firms indicates growing acceptance. Policymakers engaged in outreach and adjustments (including free e-invoice tools) to assist small taxpayers.

Reform Impact

  • Increased Transparency and Third-Party Verification

    E-invoices create a verified digital trail for every sale and purchase, allowing tax authorities to cross-check transactions in real time. In Korea, this enabled early detection of discrepancies and fake-invoice schemes; in Peru, firms could no longer rely on phantom suppliers or conceal sales. The visibility of each invoice raises the perceived risk of detection and strongly discourages underreporting.

  • Deterrence of Fraudulent Invoices and Evasion

    Both countries saw declines in traditional VAT fraud. Korea’s e-invoicing and early-warning system quickly exposed false credit claims and boosted prosecutions. In Peru, firms linked to mandated partners sharply reduced fictitious input claims, showing that once both sides report digitally, fake invoices become unviable.

  • Spillover Effects Through Business Networks

    In Peru, mandates on large firms triggered voluntary adoption by smaller suppliers and customers. These firms increased reported sales and VAT payments, suggesting that compliance spreads through business networks. When major firms insist on electronic invoices, their partners are drawn into the formal system, normalizing compliant behavior across the value chain.

  • Market Segmentation and Formalization

    Initially, some Peruvian firms avoided trading with mandated partners to stay off the digital radar, fragmenting markets temporarily. Yet those linked to mandated firms were more likely to keep filing VAT returns, indicating a net shift toward formalization. As coverage widened and both sides e-invoiced, trade volumes recovered and transparency became the norm.

  • Reduced Compliance Costs and Improved Services

    Digital invoicing lowers compliance costs and simplifies filing. In Korea, firms saved nearly $1 billion annually and reported greater convenience from automation. Peru’s free software and support similarly eased transition for small firms. By making compliance cheaper and easier, digitalization builds trust and strengthens voluntary compliance.

Key Takeaways

  • Electronic invoicing enhances the traceability of transactions and provides tax administrations with real-time data on taxable supplies and credits. This transparency limits opportunities for underreporting, fake invoices, and other VAT fraud schemes. Evidence from Korea shows that near-universal e-invoicing sharply reduced fraudulent refund claims and increased tax assessments through data-driven audits. Peru’s phased rollout also led to measurable compliance gains—especially as firms linked to mandated taxpayers improved reporting and VAT payments. When properly implemented, e-invoicing can therefore reduce the VAT gap and increase net collections without raising statutory rates.

    Uzbekistan’s experience demonstrates that a broad-based VAT with a low rate can achieve comparable or greater revenues with fewer distortions. Broadening the base reduces opportunities for fraud, simplifies compliance, and enhances fairness. Moreover, rate reductions are politically appealing—broad-base, low-rate reforms are often perceived by the public as lowering the tax burden while preserving revenue.

  • The impact of e-invoicing depends on the breadth and quality of its rollout. Korea’s rapid, nationwide mandate achieved near-complete coverage within a year, while Peru’s gradual approach revealed that partial coverage limits early gains. For e-invoicing to yield full compliance benefits, the system must include a critical mass of taxpayers and transactions, supported by stable IT infrastructure and clear legal obligations. A phased approach can work if expansion is predictable, deadlines are enforced, and the digital platform is reliable and user-friendly.

  • The introduction of e-invoicing changes incentives within the taxpayer population. Compliant firms adapt quickly, while evasive ones may initially alter trading patterns to avoid visibility. In Peru, some firms reduced business with mandated partners to remain outside the system, but over time more suppliers joined the e-invoice network to maintain access to formal markets. These dynamics highlight both short-term adjustment effects and long-term gains in formalization, as digital transparency becomes the norm across supply chains.

    By accelerating refunds, firms faced fewer cash flow pressures and reduced exposure to exchange rate risk. Allowing input VAT deductions on capital goods further removed distortions in production and encouraged investment. These measures illustrate how administrative efficiency can reinforce policy outcomes, fostering a more conducive business environment and supporting growth.

  • Digitalization can impose adjustment costs, particularly on smaller firms with limited administrative capacity. Tax administrations should anticipate these challenges by offering free or subsidized e-invoicing software, technical support, and training programs. Temporary relief measures—such as extended deadlines or simplified procedures—can also ease the transition. Active communication and outreach help taxpayers understand the benefits of digitalization, reinforcing voluntary compliance and minimizing disruption during implementation.

  • E-invoicing delivers compliance gains only when the information it generates is effectively used. Korea’s experience illustrates the value of analytical tools such as early-warning systems, automated risk scoring, and real-time discrepancy detection. Data from e-invoices can also improve taxpayer services through pre-filled returns and quick feedback on inconsistencies. Building analytical capacity and integrating e-invoicing data into audit and compliance strategies are therefore central to realizing the full potential of digitalization.

  • E-invoicing strengthens VAT administration but cannot substitute for core tax functions. Its effectiveness depends on complementary reforms—accurate taxpayer registration, streamlined filing and refund processes, and risk-based audit systems. Political commitment and sound legal frameworks are equally critical to sustain compliance gains. Over time, digitalization can transform administrative culture by embedding transparency, accountability, and service orientation, but it must operate within a well-governed and adequately resourced tax system.