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Kelvin Mullock |
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Tom Birch |
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Suzanne den Breems |
Electronic invoicing offers many benefits for businesses: greater accuracy of data, reduced costs, systems integration and guaranteed delivery. Rapid advances in technology and regulatory changes in recent years (and perhaps even worries about the rain forests) are encouraging businesses to abandon their traditional paper invoices and move to electronic systems.
Large businesses trading in many jurisdictions, often with shared services centres processing invoices for many countries, would like to implement a single invoicing model for all markets, but local country regulations mean this goal is difficult to achieve.
EU law
In the EU, businesses must issue invoices that comply with the requirements set out in each member state's legislation. The member states are governed by common European law, but each has a degree of control over the specific regulations in its own country. As a result, there are different invoicing rules in different member states. This is particularly true of electronic invoicing. The technology has developed more quickly than the regulations and the speed at which regulatory authorities have been willing to embrace it has varied from country to country.
The original EU legislation governing the issuing of invoices is contained in the sixth VAT Directive. It became apparent several years ago that the conditions imposed by some states and the wide differences between the regulations were impeding the growth of electronic invoicing. This was particularly the case for businesses trading in several countries. In light of this, it was decided to update the legislation, to accommodate emerging business practices. Clear regulations at EU level were felt to be needed, to stimulate the use and acceptance of electronic invoicing by both businesses and the tax authorities. Following discussions among member states, amendments (2001/115/EC) to the invoicing legislation (the directive) were agreed in February 2002.
The directive provided a harmonized list of data requirements for invoices and legislative frameworks for electronic invoicing, electronic storage of invoices and the self-billing and outsourcing of invoicing operations. The directive had to be implemented by the existing member states on or before January 1 2004 and by EU accession states on or before May 1 2004.
When invoices are sent electronically, the directive requires that the authenticity and integrity of the invoice data must be assured by one of the following methods:
electronic data interchange (EDI);
advanced electronic signatures; or
any other means subject to approval by the member state concerned.
EDI
Electronic invoicing has been available in many member states for a number of years in EDI form. This technology is a point-to-point system, based on agreed standards between the parties. Each user must agree a standard with each new user and strict conditions had to be fulfilled. These constraints made implementation costs high and precluded the possibility of a uniform system. As a result, EDI is generally used only by parties that trade very frequently with each other (the motor trade for example) and some of the savings businesses were trying to achieve were lost, because businesses still sent hard copies of the invoices to their customer to ensure legal requirements were met.
Table 1: Summary of electronic invoices accepted in 15 old EU countries |
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Au |
Bel |
Den |
Fin |
Fr |
Ger |
Gr |
Ire |
It |
Lux |
Neth |
Por |
Sp |
Swe |
UK |
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EDI |
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SST |
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Electronic Signature |
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QES |
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Other Means |
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Definitions: EDI 'Electronic Data Interchange'; SST 'Summary Statement required for EDI'; QES 'Qualified electronic signature' are required Source: KPMG LLP (UK) June 1 2004. |
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Advanced electronic signatures
Advanced electronic signature (AES) technology is still relatively new and has yet to be widely adopted. Interest has been growing recently, however, partly because AES is seen as a good way to guarantee the authenticity and integrity of invoice data, and partly because the directive allows the use of digital signatures and some member states (Germany for example) have enshrined them in local legislation as the only permissible means other than EDI for transmitting electronic invoices.
Electronic signatures are created by digital certificates. The directive obliges each member state to accept all electronic signatures created by a digital certificate issued in another member state. However, some authorities will only accept electronic signatures created by a digital certificate issued in their own country, so a business trading in many jurisdictions could still be required to obtain a different digital certificate for each market in which it operates.
Diagram 1: Point-to-point or EDI invoicing (multiple implementations/standards) |
Source: KPMG LLP (UK) |
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Other means
Most member states will allow other forms of electronic invoicing, such as web-based invoice presentation or invoices delivered by email in addition to EDI and AES, but there is little comprehensive law or guidance at EU or member state level. Businesses that want to use technologies that do not meet the EDI or AES requirements are experiencing problems gaining uniform and/or blanket approvals across the member states.
So, although the aim of the directive was to achieve a level of uniformity in electronic invoicing, the reality is that differences in interpretation between member states remain and have been exacerbated by the ambiguity of other areas of the legislation, such as electronic storage of invoices.
Another area that has caused confusion is cross-border invoicing, where an invoice is delivered from one member state, to another. You would normally expect the laws of the supplier's country to apply, but the guidance from the UK, Dutch and French authorities is that electronic invoices for cross-border supplies may need to satisfy the rules of both the buyers' and the suppliers' member states.
An electronic invoicing focus group reports to the European Commission on these and other points. The focus group consults with the different tax authorities, industry, advisers and providers and it is intended that its comments will influence future revisions of the directive.
On December 31 2008 at the latest, the European Commission will present a report on the development of electronic invoicing in the member states. It is highly likely that the regulations will then be amended, to reflect technological and commercial developments in the field.
Business overview
Electronic invoicing offers a wealth of process and economic benefits: process cost savings (keying-in, paper and postage for example), guaranteed invoice delivery, elimination of re-keying errors, speedier VAT recovery, and enhanced and more up-to-date financial reporting. Technology and business solutions are rapidly evolving to help business achieve these benefits.
Many companies have invested significantly in automating their invoice and financial management processes, but have been prevented from realizing the full benefits by tax and legislative frameworks that are out of step with changes in the business environment. Companies trading internationally or trying to streamline their financial management in shared service centers have the added burden of having to ensure they process and account for all transactions in accordance with the different national requirements.
Another common, self-imposed constraint on exploiting the full benefits of electronic invoicing is the failure to consider the bigger picture where the true business advantage can be gained. The use of electronic invoicing paves the way to the seamless integration of accounting information, which can unlock many other areas of increased efficiency, such as more accurate and timely VAT accruals.
To realize the full benefits of electronic invoicing, businesses will need to understand the different rules and the different mentalities of the tax authorities across Europe, and the greater opportunities they will have in the future if a system is implemented properly now. A deeper understanding of the macro and micro issues and opportunities will allow a business to:
tailor current technologies to ensure their systems remain compliant under the current rules (widening the definition of EDI, closed systems and bill presentment for example);
influence the tax authorities' policy-making and general approach to different and developing technologies as they advance; and
capture all the business benefits offered by the opportunity to move all business processes onto an electronic medium.
The future of electronic invoicing
It is likely that the use of electronic invoicing will to continue to grow and the rate of adoption to gain momentum in the medium-term from impending legislative developments, the emergence of new technologies and intensifying pressure on businesses to maintain their market positions with ever faster and more efficient administrative processes.
SEC-listed companies have good reason to be early adopters of electronic invoicing because the increased ability it will give them to identify and understand potential exposures will make it easier for them to comply with the SEC's tougher regulatory and reporting requirements.
Many large businesses are now engaged in correcting their basic hard copy invoicing procedures to free-up resources for implementing electronic invoicing systems, so a surge of adoption next year seems likely, as these preparations are completed.
As demand and use increase, more cost-effective systems will be employed but the process of legislative liberalization is unlikely to allow invoices whose authenticity and integrity are guaranteed by other means to blossom on a pan-European basis until 2008.
In addition to the overall growth in electronic invoicing two other trends are likely to become more important.
The first is the growth of consolidators - third-party organizations that receive invoices from a range of suppliers and pass them on to the buyers. Consolidators offer two key benefits; they only require users to configure their invoicing systems once and they offer the potential, at any rate, to deliver cheaper and better controls, because directing invoices through a single, specified person or account should reduce administration costs and the chances of human error. It is likely that the use of consolidators to continue to grow and there is likely to be some consolidation of the consolidators. Some big players are already looking at the economics of buying the best solutions, rather than funding in-house development (see diagram 2).
Diagram 2: Invoicing through a consolidator (single implementation/standard) |
Source: KPMG LLP (UK) |
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The second is the increase in the use by larger businesses of self-billing systems, where the customer issues the invoice for the supply on behalf of the vendor. Pan-European self-billing has been impossible in the past, but it has considerable appeal for businesses with buyer power that want more control over their accounts payable. If this can be done electronically it will give a buyer all the advantages of electronic invoicing and increased levels of control and scrutiny over its purchasing arrangements.
The technology
As more businesses move to electronic invoicing, the platforms used by smaller businesses will need to become more sophisticated. It is likely that those businesses with the greatest buying and selling power will create the demand and dictate the final extent of technology development. In the meantime the smaller businesses will need systems that can accommodate and deliver to the requirements of those larger businesses. Inevitably, a global standard will emerge, but in the meantime, we expect a proliferation of systems and technologies.
In these competitive conditions the technology is likely to evolve rapidly and produce more and more efficient and robust systems and processes. This will allow greater synergies and integration between internal and external systems. It will be interesting to see how quickly the capabilities of the technology expand and what new features and functions become available. We are already aware of some technologies that can update sales and purchase ledgers between different accounting systems at the same time as producing tax invoices.
The tax authorities
The electronic invoicing directive is an historic step forward that allows more businesses to take advantage of advances in technology and commercial practice, in more countries. One of the main stumbling blocks now is the lack of guidance from the national tax authorities on how to apply the law.
There are some positive signs here too, however. Some tax authorities have become more accommodating recently - thanks in part to the experience gained in their negotiations with the industry, advisers and providers. Most tax authorities now recognize the need to accommodate new technologies and the drive for increased efficiency in the market place.
Some member states are still reluctant to adopt a pragmatic approach to the proliferation of technologies, however. This is a source of some frustration for businesses trying to develop generic, pan-European systems.
These problems will ease as the fiscal authorities gain experience, become more technologically aware and provide clearer guidance to help businesses eager to adopt electronic invoicing solutions. But, despite the intentions of the new directive, it is likely to be several years before all areas of ambiguity are resolved and all 25 member states apply the same principles. Indeed it may never happen. Although we expect the legislation to adapt in 2008 and to continue to evolve thereafter, there is always a risk that the legislation will not keep pace with speed of technological change.
Conclusion
Although there are still some grey areas in the legislation, the fact that there is now a recognition that electronic invoices are sufficient for tax evidence purposes and the growing availability of cost-effective solutions mean that businesses should now seriously consider taking advantage of the opportunity offered by electronic invoicing to reduce financial management costs and unlock some working capital.
Business leaders must consider two questions carefully:
whether to develop an in-house solution, purchase an off-the-shelf package, or outsource to a consolidator; and
whether to take a country-by-country approach, or seek a common system for many jurisdictions.
Businesses that adopt electronic invoicing properly and quickly are likely to gain a competitive advantage. When robust diligence steps are embedded in a solution it will provide security and process improvement on both the accounts payable and the accounts receivable sides of the business.
It should also be remembered, although not discussed in this chapter, that there are many countries outside the EU where similar possibilities can be explored and even greater benefits can be realized.
For further information contact:
Tom Birch - KPMG LLP (UK)
Tel: +44 (20) 7311 2681
Email: tom.birch@kpmg.co.uk
Suzanne den Breems - KPMG Meijburg & Co, Netherlands
Tel: +31 (20) 656 1024
Email: denbreems.suzanne@kpmg.nl
Kelvin Mullock - KPMG LLP (UK)
Tel: +44 (121) 232 3617
Email: kelvin.mullock@kpmg.co.uk
