Is e-invoicing the same as digital invoicing?
If you don’t have an immediate and accurate response to that question, you’re hardly alone. Just a few years ago, the Organization for Economic Co-operation and Development (OECD) reported that one-quarter of tax administration officials were not clear on the differences between a digital document vs. an image of a paper document vs. an electronic invoice (e-invoice).
Tax professionals within companies that do not conduct business in countries with e-invoicing requirements – such as Brazil, Mexico, Taiwan, Italy and India – should consider familiarising themselves with the fundamentals as more countries move to adopt new e-invoicing regulations. The European Union’s VAT in the Digital Age (ViDA) proposal features an e-invoicing mandate as one of its three pillars, as my colleague Peter Boerhof, Director of VAT for Vertex, reported earlier this year.
How e-invoices differ from digital invoices
As all tax pros know, paper invoices contain key data (product amounts, descriptions and quantities) on a printed paper that is read manually. The physical nature of the paper invoice requires the invoice to be manually sent by the supplier and manually received by the buyer.
Digital invoices, contained in PDFs and other digital formats, replace the physical form of paper invoices with digital images. While this enables digital invoices to be managed and stored in more efficient ways, this form still requires manual interventions. Sending and receiving processes are partly automated and partly manual and the buyer must manually read and enter a digital invoice’s data into an accounts payable (AP) system.
E-invoices enable a more automated exchange. A structured e-invoice contains data from the supplier in a machine-readable format that can be automatically imported to the buyer’s AP system without manual intervention. This transmission does not include a visual representation of the invoice data. The primary objective is accuracy and efficiency as opposed to viewing the invoices (which can be performed when certain instances make manual reviews necessary).
Although their specific rules vary, the primary regulatory objective of e-invoicing requirements is for tax jurisdictions to gain immediate (or close to it) access to tax-relevant data on the invoices. This approach increases tax administration efficiency, helps ensure compliance accuracy and reduces tax fraud. Tax authorities tend to emphasise these benefits when proposing new e-invoicing rules.
E-invoicing rules and requirements
For companies and their tax groups, e-invoicing requirements are a mixed bag. Potential benefits include increased digitisation; opportunities to advance accounts receivable (AR) and accounts payable (AP) automation; greater certainty concerning VAT deductions; and less burdensome tax compliance audits. Disadvantages include inserting tax authorities’ processes and requirements into the sales cycle upfront; following up on credit notes and debit notes; implementation and maintenance costs; and the fact that any errors become immediately visible to tax authorities.
Indirect tax groups whose companies operate in jurisdictions that have e-invoicing requirements planned (or already on the books) should deepen their knowledge of the compliance implications.
On that count, one more high-level point is essential to get right. In his recent International Tax Review (ITR) article, The Domino Effect of E-invoicing, Peter stresses that compliance with these rules represents a strategic business priority that extends beyond the scope of a technology project or a technology-enabled tax initiative. E-invoicing, Peter emphasises, “should be considered as a strategic issue for every company as it is imperative to invest in a system that supports multiple models because e-invoicing is core for revenue collection and procurement.”
For those seeking to learn more about e-invoicing and what the future may hold, I suggest reading my recent article in ITR, Reimagining invoices for the 2020s. Stay tuned for future thought leadership content on this trending and evolving topic.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position or opinion of Vertex Inc.