As the new e-invoicing rules are either in effect or legislated for this year, hopefully anyone reading this article has ensured that their company’s invoicing practices are already tax-compliant. However, as 2013 gains momentum it is a good time to take an in-depth look at the regulations, the new options and, in some cases, the mandated requirements they present for businesses. A regional overview follows.
From 1 January 2013, new EU value added tax (VAT) rules came into effect for all 27 member states. These new regulations have two primary objectives, intending to reduce cash flow issues for small businesses and to encourage wider adoption of both domestic and intra-EU e-invoicing. Small businesses that turnover less than €2m a year can now use cash accounting, meaning they will not pay VAT until it is received from the customer. But the primary interest here is that both electronic and paper invoices are now treated equally which, in theory, simplifies how e-invoices are audited and encourages wider adoption.
The European Commission (EC) has long recognised the competitive advantage that e-invoicing could offer European businesses and governments. A joint Capgemini/EC report predicted potential annual benefits of up to €40bn in the business-to-business (B2B) field alone while a Euro Banking association report suggests savings of over €200bn across the whole of Europe. However, tax collection is a serious matter for European tax authorities with, on average, VAT revenues representing a third of a country’s gross domestic product (GDP). This is why the EC has implemented several rounds of legislation that, while encouraging the use of e-invoicing, also ensures there is a commonly-understood structure that must be adhered to.
There have been EU regulations in place for electronic invoicing that date back to 1994, with the last round of rules implemented in 2006. While these rules created a structure that every member state could adhere to, there were complaints that interpretation by some countries led to very rigid requirements that made e-invoicing unnecessarily complicated and expensive.
Essentials of Tax Compliant e-invoicing in Europe:
- Tax Data: The correct tax fields must be present.
- Authenticity and Integrity: The authenticity of the origin and integrity of the data must be ensured.
- Archive: Invoices must be stored for an appropriate period and in accordance with local data protection laws.
The new rules, designed in 2010, are intended to simplify the essential components of compliance in Europe. While the new legislation does not greatly alter the requirements on tax data and archiving, it has concentrated on the requirements for ‘authenticity and integrity’. Previously, member states were allowed to specify particular technologies, such as Electronic Data Interchange (EDI) or digital signatures, to ensure authenticity and integrity, but this has now been taken away with an emphasis on the use of ‘business controls and a reliable audit trail’. This removal of specifying certain technologies has been hailed as the ‘liberalisation’ of electronic invoicing in Europe.
However, there is also a big but. Look closely at the legislation and it is evident that while member states cannot specify certain technologies, the requirement for authenticity and integrity remains. So what does this mean and what exactly are business controls and a reliable audit trail? Right now that is the question everyone is asking. Happily, the Commission gives two working examples of such technologies that will help your company to achieve tax compliance. What are they? Why EDI and digital signatures.
Confused? Actually it’s pretty simple; your company can use any system in Europe provided it meets the Commission’s requirements for authenticity and integrity. Most companies will consult their auditor on this matter, but be wary. Money spent on consulting hours on new systems, which will require ratification and possibly a detailed audit by the tax authorities, could be better spent on established and cost-effective methods such as EDI or digital signatures.
Within Latin America there has been a different approach to e-invoicing. Starting initially with Chile, the Latin e-invoicing programmes are designed for increasing tax collection and reducing the ‘grey economy’. These are government initiatives, where all companies turning over specified revenues must issue invoices through central government systems.
Brazil and Mexico have received the most attention and the compliance deadline for both countries is 2013. Any company sending or receiving invoices domestically within these countries must be aware of their legal obligations to integrate with these government systems, use only approved certificate authorities (CA) for digital signatures, and adhere to the specified data standards.
Essentials of Tax Compliant e-invoicing in Brazil or Mexico:
- Creation of legally-admissible e-invoice data.
- Registration and approval of e-invoices by tax authorities.
- Delivery of outbound e-invoices to customers.
- A single, centralised repository for digitally-signed invoice data.
- Obtaining permission to ship goods.
- Validating inbound e-invoices from suppliers.
To issue invoices in Brazil a corporate must integrate their accounting solution with the Brazilian Tax Authority (SEFAZ) electronic online system. Invoices sent to this system must be registered and approved by SEFAZ before a Nota Fiscal Eletronica (NF-e) can be sent to the recipient. For Mexico, a corporate must integrate their accounting solution with the Mexican Tax Administration Service (SAT) electronic online system. Invoices sent to this system must be registered and approved by SAT before a Factura Electrónica can be sent to the recipient.
While this appears to be a draconian method, the ambition is pretty clear, and so far it appears to be working. The volume of e-invoices within both countries is increasing rapidly, and with the deadlines for Brazil and Mexico falling in 2013 it is obvious that they will increase further. Any global corporate operating domestically within these countries must comply or face fines, so while this is a completely different approach to Europe and the US, it certainly assures success.
Let’s be clear, the US does not have federal legislation that forces companies to use e-invoices. That’s not to say the US government does not recognise the value of this technology, the US Treasury estimated that adopting e-invoicing across the entire federal government would reduce the cost of invoice processing by as much as 50% and save US$450m annually.
In alignment with President Obama’s ‘Campaign to Cut Waste’, the Department of the Treasury mandated that all treasury bureaux implement e-invoicing through the Internet Payment Platform (IPP) based out of the Boston Federal Reserve, by the end of 2012. This means that any supplier to the Treasury now has to submit their invoices using the IPP.
This initiative is in contrast to the Latin American model, where tax collection is the issue. The US system is designed to avoid austerity by making government more efficient and reducing the tax burden on its citizens. By processing invoices efficiently the federal government is also able to pay suppliers quickly, thereby injecting much needed liquidity into their supply base.
This will not be the end of this initiative as the programme is intended to spread across the entire federal government, meaning if your company does business with government you will be e-invoicing. Nor is the US government alone in looking to make cost savings within its own central and local authorities. Up to 2012, Austria, Ireland, Russia, France, Kazakhstan, Macedonia, Norway, Greece and, most recently, Azerbaijan had all confirmed their public sector organisations will accept electronic invoices. For 2013, Germany is discussing a mandated public sector system while Portugal is considering a Latin American e-invoicing model.
While my personal preference is for 2013 to be the year of the Higgs boson, when more of the mysteries of the universe are unveiled to us, global market pressures and the challenges we all face deem that simple and practical solutions are the watchword for corporates, banks and government alike in the year ahead.
The new rules and regulations around e-invoicing are a clear indicator that these simple technologies, along with others such as e-procurement and supply chain finance, have the potential to achieve the efficiencies and savings required to help kick-start economies. So expect to see more of these initiatives throughout 2013. This may seem daunting for a corporate operating across many jurisdictions, but needn’t be. There are many solution providers who can help your company navigate these regulations and ensure compliance in a cost-effective manner.
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