E-invoicing is a topic climbing up the business agenda as European tax authorities look to integrate digital efficiency with indirect tax compliance.
This transformation has been largely driven by the realisation by governments that large amounts of revenue can be generated by collecting from those parts of the economy where revenue goes unreported. In 2020, it was estimated that EU member states in total lost €90 billion in VAT revenue due to tax fraud and insufficient tax collection mechanisms.
Commonly known as the ‘VAT gap’, the difference between expected VAT and VAT effectively collected, indirect tax compliance has become an important issue to ‘solve’, especially given today’s economic uncertainty.
Although proposed, there is no directive in place yet to enable the European Commission (EC) to standardise B2B or B2C e-invoicing. However, whether the EU VAT in the Digital Age (ViDA) proposal is adopted or not, it is likely we will see a domino effect of countries mandating it anyway.
With the question revolving more around the ‘how’ than the ‘if’, businesses will need to start preparing for this eventuality to not only avoid the risks associated with non-compliance, but also to take advantage of the potential efficiency benefits it creates.
The state of play
In December 2022, the EU released the ViDA proposal, with one of its three pillars outlining its aim to modernise reporting through mandating e-invoicing. However, the reality of ViDA coming into force is a topic of much debate due to the number of barriers it needs to overcome before it can come into effect. All member states must unanimously agree on its implementation, which will prove to be challenging, especially when some countries have invested heavily in their own tax frameworks.
Despite this, many European tax authorities have already started to make plans to mandate e-invoicing, with more expected to follow. However, this is easier said than done. For e-invoicing to be realised, an invoice reporting or clearance model needs to be put in place to ensure tax authorities have visibility on transactions either before or as a transaction happens.
Under the current legislative framework, mandated e-invoicing needs to be authorised by the EC, effectively allowing a member state to derogate from the EU VAT Directive. There are only three countries that have this authorisation at present – Italy, France, and Poland – whereas several countries are at various stages of applying for a derogation.
While Italy is the only example of an EU country that has rolled out mandatory e-invoicing, and might be ahead of the curve in Europe, e-invoicing is ‘old news’ in regions such as Latin America, meaning a template is already in place for how e-invoicing can work successfully.
E-invoicing considerations
E-invoicing is a trend that is happening worldwide – and not just in Europe. Research by management strategy and market research specialist IMARC Group predicts that the e-invoicing market will reach $35.9 billion by 2028, a growth rate of 20% over a five-year period (2023–28). Besides business efficiencies, this growth is also driven by the growing number of government mandates. However, with global tax authorities taking different approaches to e-invoicing and working in different languages, it can be complicated for businesses to stay on top of all the rules and technical requirements.
In the absence of standard compliance obligations, businesses need to be aware of upcoming changes, understand the different mandates they will face, and begin to overhaul their financial systems and tax processes accordingly. However, this should not just fall on the shoulders of indirect tax teams, as it presents greater challenges and opportunities that affect the wider organisation.
E-invoicing may appear, on the surface, to be a modernisation of how companies issue invoices and report on indirect tax, but that is an underestimation of its broader impact and the risks involved from poor implementation. Firstly, e-invoicing 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. Secondly, the system increasingly needs to support e-invoice or real-time reporting mandates. Push-back from tax authorities or delays in invoice processing should be expected if invoices are not compliant. Senior leadership teams should be aware of these scenarios and have a safety net in place in case something goes wrong.
While one of the major benefits of e-invoicing is enhanced compliance, this is far from guaranteed if businesses do not get their processes right.
Take the accounts payable process as an example. There may be a lot of manual intervention, including the booking of invoices, which will lead to discrepancies between the invoices booked compared with actual vendor invoices. E-invoicing provides the opportunity to automate this process, which is a big advantage. But correct tax coding of accounts payable (AP) invoices is not a given, not even with mandated e-invoicing, as without further changes to systems and processes, this will remain a manual intervention. Getting invoice processing right therefore matters to the company as a whole. Other opportunities include:
Intensified relationships between tax, finance, and IT functions, which can enhance collaboration;
Greater uniformity and efficiency in the billing and accounts receivable process, helping to make the settlement of invoicing faster and improve vendor and customer relations; and
Integrating e-invoicing investment into wider digitalisation efforts, optimising operational performance and resource management, triggering efforts towards better AP automation and improved indirect tax determination.
Preparing for change
It is only a matter of time before mandatory e-invoicing will be a common requirement for indirect tax compliance globally. And the gains to companies and economies as a whole could be much larger than the benefit of increased tax revenue for governments.
However, businesses trading to, and within, the EU must invest in their indirect tax compliance strategy to not only remain compliant but also to reap the rewards. Governments, meanwhile, must continue to use e-invoicing as a tool to enhance the ease of doing business and, therefore, the competitiveness and size of the domestic economy. Get it right, and it could be a ‘win-win’ for all.
Looking to learn more about how you can prepare for e-invoicing mandates? Head over to Vertex’s guide.
Get in touch with Vertex here.
