The clock is ticking on new e-invoicing and digital reporting requirements evolving throughout European Union (EU), so it’s worth a quick look back for some context on how we got here. Organizational concerns about these e-invoicing and additional reporting requirements are also worth considering.
Most VAT legislation around the globe originally assumed that a valid VAT invoice was a paper document. Over time, this changed from allowing digital options like PDFs and EDI to permitting digital structured e-invoices alongside paper-based invoicing, and most recently, requiring e-invoicing as a complete replacement for paper-based invoicing. Mandated e-invoicing often comes with additional digital real-time reporting requirements.
E-Invoicing can be defined as the issuance of structured electronic invoices capable of being exchanged between economic operators and automatically processed. This structured e-invoice contains data in a machine-readable format that can be automatically processed into the buyer’s AP system.
There are several arguments for legislators to enact mandated e-invoicing. The primary (related) arguments in many cases for mandating B2B e-invoicing are a reduction of a VAT gap, pushback of the black/grey economy, fraud reduction and increased compliance. For B2G the primary argument for mandating e-invoicing is procurement efficiencies, which is sometimes also used in the B2B context.
Brazil’s pioneering e-invoicing requirements took effect in 2008. Brazil’s legislators and tax authorities enacted these rules, in large part, to push back against grey- and black-market activity. Other countries in Latin America followed Brazil’s lead by mandating their own e-invoicing rules in subsequent years.
Italy mandated B2G e-invoicing in 2014, followed by their e-invoice clearance portal for B2B transactions in 2019 as part of an effort to counter VAT non-compliance and fraud. Until about a year ago, e-invoicing in the EU felt more like an Italian anomaly than an indication of upcoming of EU-wide e-invoicing. But that perception quickly faded, as more countries, such as France, Poland and Germany, began to consider mandatory e-invoicing and subsequently are moving ahead with formal proposals and final rules.
Last December, the European Commission published its comprehensive VAT in the Digital Age (ViDA) proposal, which calls for a mix of mandatory and optional e-invoicing, combined with digital and traditional reporting. The proposal seeks to harmonize e-invoicing within the EU and mandate how vendors and recipients electronically submit invoice data to the tax authorities.
The fate of this harmonization figures prominently among tax groups’ top e-invoicing concerns, which include:
- A spaghetti bowl of stipulations: Tax leaders are understandably concerned about the expense and effort that would be required to comply with numerous different, country-specific e-invoicing regulations. At the moment, Italy, France, Germany, Poland, Hungary, Spain, Belgium, Romania, Latvia, and Croatia have proposed or finalized unique rules. While the ViDA initiative seeks to harmonize e-invoicing rules and compliance processes across EU member states, this objective hinges on the proposal being finalized – which is not guaranteed.
- Heightened transparency: E-invoicing rules require businesses to provide substantial amounts of transactional data and tax information to tax administrations. As a result, tax administrations will have more visibility than ever into a company’s procurement activities, sales activities and tax data (including data related to transfer pricing). There’s even a risk that some technologically advanced tax administrations will know more about a company’s sales and procurement activities than their corporate tax groups with less advanced supporting technology in place.
- Opportunity cost: If the magnitude of the e-invoicing compliance burden becomes excessive, it could impede companies as they enter new geographies, launch new products and attempt to perform other strategic activities.
While these concerns are valid, e-invoicing also offers benefits including efficiency opportunities, improved tax controls and more certainty regarding VAT deductions. Tax leaders and teams should learn as much as possible about the pros and cons of e-invoicing requirements; see my other post about ViDA as a possible place to start.
Please remember that the 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.