When we read about digital reporting requirements or the transformation of business processes regarding invoicing life-cycle, we often encounter the term eInvoicing or electronic invoicing. If we take a bit deeper dive and try to look at when the electronic invoice or eInvoicing has been gaining traction or the terminology closely connected to it, we can see that the eInvoice, online tax reporting, aren’t something that started just a few years ago, but it has been present even more than the EU Parliament and Council Directive on Electronic Invoicing in Public Procurement.
Digitalization of the invoicing life-cycle started many years before the Directive came into force.This shift from paper-based invoicing to electronic invoicing and related digital reporting of transactional data has been rolled out for many years in Europe and globally. For example, Fiscalization, which is one of the categories of digital tax reporting for the Retail sector, rolled out the obligation of online transmission of transactional data two decades ago via, e.g., GPRS systems and has evolved in the last 20 years into the creation of cloud-based systems which through API connection transfer transactional data to servers of Tax Authority in real-time.
These retail business processes are mainly connected to B2C transactions, with customers getting an electronic receipt via email. Still, the supplier should digitally report transactional data in quasi/real-time.
Ok, so let’s not move too far away from electronic invoicing, and let’s not dive too deep into the technical specifics of electronic invoicing and connected digital reporting of transactional data.
What is meant by an E-Invoice?
Various definitions of electronic invoices can be found, and it’s important to emphasize that by comparing the most accepted definitions, we can see quite a few differences when it comes to approaches to what is meant by e-invoice. Within the confines of the European Union, the main definition within the national legislation of electronic invoice is adopted through the EU Directive on Electronic Invoicing in Public Procurement.
The Directive explains that an eInvoice is a type of invoice that has been processed automatically and electronically through its tax/legal life-cycle(issuance, transmission, reception, and storing).
We can categorically distinguish between two main currencies regarding the approach to electronic invoice and how we should differentiate from other types of invoices. The main characteristic upon which this differentiation is based is how the invoice data can be generated and extracted.
- We have a group of countries that define that electronic invoice can be issued in various types where the semantic content of invoice data is left in the unstructured format. Following this methodology, the electronic invoices can be invoices issued in Word and/or PDF template, images of invoices as JPG, scanned paper invoices, unstructured invoices sent via email, or visible in a webpage in HTML format.
- There are then countries that define electronic invoices, a bit differently. Their regulations define electronic invoice like or similar to the one adopted by the EU Directive on Electronic Invoicing in Public Procurement. For them, the eInvoice data should be organized in a structured format. The eInvoice data should be extracted electronically from the invoice, and some countries go even a step further, stating that this extraction should be done automatically.
Electronic invoicing is one of the main topics on the repertoire of discussion between tax technology experts and tax consultants in the modern times of indirect taxation. Why is that so?
In the last ten years, we have witnessed that many countries worldwide have introduced mandatory requirements for using electronic invoice for different types of transactions. The main focus was on the businesses supplying public institutions, the so-called B2G transaction scope. This mandate has gradually expanded into B2B transactions, and some countries have even introduced the requirements of electronic invoicing for B2C transactions.
From the tax authority’s point of view, the introduction of electronic invoicing was guided mainly by the vision to reduce the % of national VAT gap, because VAT is one of the most important sources of revenue from generated taxes for the country’s budget. The mandate to issue structured forms of invoice and to digitally report the entire invoice or subset of transactional data by the taxpayer creates a more transparent and straightforward overview of transactions and tax reporting.
Within the Global e-business environment, what were the first countries reaching out to e-invoicing solutions as tax technology tools to combat VAT fraud? Also, why was it there?
The first countries that have searched for ways to decrease the VAT gap and improve reporting procedures by implementing the e-invoicing mandate were LATAM countries. Chile was the first country to implement an e-invoicing compliance system, in the first phase as a voluntary reporting tool and later on as mandatory through gradual implementation requirements for different groups of taxpayers.
The Tax Administrations of Latin American countries have been witnessing the continuous progression of the VAT gap, so the tax authorities have been elaborating on the best possible ways to reduce the gray economy and expand awareness of mandatory tax reporting.
If we address the situation of electronic invoicing in the European Union, how many countries have, so far, expanded their mandatory obligations for exclusive usage of e-invoicing within the B2B sector?
Currently, only Italy has mandated the obligation of electronic invoicing within the EU. Italy has implemented a centralized clearance e-invoicing system. From next year, we can expect more countries to be within this group.
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What is the difference between Electronic Invoicing and real-time digital reporting?
Electronic invoicing is a compliance system that mandates an obligation to economic operators to generate, transmit, and receive exclusively eInvoices for the transactions in question. These invoice exchanges are handled automatically and electronically, so the entire exchange of invoices is entirely automated. As an additional requirement, the taxpayers have an obligation to, depending on the type of the system in place, transmit-report eInvoice to the Tax Administration system. This reporting can be based on reporting of the entire eInvoice and/or a subset of invoice data.
This transmission can be after the issuance and transmission of the invoice to the recipient – without the need to get “sort of” authorization from the central IT platform(no clearance system); or before the e-invoice is transmitted to the customer, the eInvoice or a subset of data needs to sent to central IT platform of TA before issuance/during issuance/right after issuance as a necessary step, before an invoice can reach the final recipient.
E-invoicing is the most complex type of digital reporting requirement of transactional data.
Real-time or near-real-time digital reporting means that for economic operators, there is a mandatory requirement to transmit a subset of invoice data(transactional data) to tax authority e-service for each transaction in question. This transmission of transaction data is handled mainly in an automatic manner. The transmission is done directly after the issuance of the invoice or within a few days.
One more specific question when it comes to digital reporting requirements. What are the most common electronic reporting mechanisms used within countries? Also, what are the key differences between them?
Besides the above-mentioned two types of digital reporting requirements, following the EU approach when it comes to the classification methodology, there are also SAFT and VAT Listings as additional two types of digital reporting.
Standard Audit File for Tax(SAFT) is an audit e-file developed by the OECD standard. At the moment, seven EU countries have mandated the obligation to economic operators to generate SAFT files annually and/or on request from the authorities. The SAFT e-file is often locally specified due to the fact that most of the countries that have mandated its usage for businesses have looked to input some national semantics. This electronic file can capture a very broad spectrum of relevant tax and accounting data, not just from indirect taxes but also direct taxes, etc.
VAT Listings, as the type of digital reporting requirements, represent an e-file that economic operators should submit periodically to tax authorities. This electronic file is composed of the transactional data generated by the accounting/invoicing software of the taxpayer following the local rules. It’s often submitted electronically together with the VAT Return.
Are there different types of digital reporting requirements imposed by local legislation within EU countries?
The short answer to this question would be yes. We have Italy, a pioneer country in the full roll-out of the E-invoicing mandate, which covers all types of transactions: B2G, B2B, B2C, and has also mandated the digital reporting obligation for B2C transactions in the retail sector. Besides Italy, many European Union countries have mandated some type of DRR within national boundaries. Some countries like Hungary and Spain have mandated real-time digital reporting.
From the perspective of EU institutions, can we expect an initiative to mandate uniform requirements regarding some extent of B2B transactions between Member States? Or even to go beyond and mandate a standardized form of digital reporting system, which needs to be followed if the country decides to implement an obligatory electronic reporting solution for domestic transactions?
In the last few years, EU institutions have been looking for ways to decrease the EU VAT gap, and the first practical moves can be seen through the extent of analysis conducted by tax experts contracted by the European Commission as a necessary step for drawing proposals to make modifications of the present EU VAT legal framework.
These reforms have been captured with the modern label of VAT in the Digital Age(ViDA).
One of the pillars upon which the reform is based is the proposal to introduce mandatory digital reporting requirements for EU-established businesses when it comes to cross-border transactions for both goods and services.
What is the scope of transaction types when it comes to electronic invoicing?
This depends on the extent of the mandate which the country has imposed. In general, the countries have been implementing the eInvoicing reporting requirement through gradual expansion when it comes to transaction types, as well as the category of taxpayers.
Mainly, the first step would be to oblige economic operators who conduct business with the public sector to be able to generate, transmit, and later on receive invoices from public institutions. Then, the national mandate would expand into the B2B environment and, in the end, even capture B2C transactions.
Important to emphasize is that some countries, even after the decade of successful implementation of the B2G mandate, haven’t moved into the B2B or B2C e-business environment.
If we take a look at the collected data by the Tax Authorities in countries where the electronic invoicing mandate has been operative for some time, what results have been achieved since the introduction of the new system?
Collected data from various official sources, national and international, undoubtedly show that when it comes to levels of VAT gap within the countries that have mandated the usage of e-invoicing to some extent, the % of the gray economy has been continuously decreasing. This is much more visible in countries where the mandate covers B2B or even B2C ones.
The digital reporting requirement, which comes along with the usage of the structured, pre-defined format of invoices, is undoubtedly a great move from the tax authorities as the tool to combat the gray economy, to have a better overview of transactions, as well to reduce costs when it comes to auditing.
As we can witness, more and more countries are considering introducing electronic invoicing or some other digital reporting tools. Will this trend continue in the future?
E-invoicing and other types of digital reporting systems are definitely here to stay and to expand to more and more countries, not just within EU Member States but also globally. We are witnessing that in just a few months, countries like Romania and Germany have obtained a derogation from the Council to implement B2B e-invoicing within their respective countries. From July next year in Poland, the e-invoicing B2B mandate becomes obligatory for a specific group of taxpayers and operations. France has postponed the mandate for some time due to the system’s complexities; it can be expected to start in 2025 or 2026.
This is just within EU boundaries; the same is happening worldwide, and the trend will continue.