Bu Alex Baulf, Senior Director, Global Indirect Tax at Avalara, highlights the ten most common tax invoicing issues facing international businesses today.
The tax invoice is arguably the most crucial element in any VAT or GST system. Not only does it underpin a business’s ability to reclaim the VAT on its purchases, but it also forms the basis for tax calculation, reporting, posting to the ERP and auditing by tax authorities.
However, for companies operating internationally, the plethora of unique local invoicing requirements relating to contents, storage, language, and currency can make it challenging to ensure compliance. The more knowledge businesses have of these pitfalls, the better placed to avoid them.
With that in mind, below are the top ten tax invoicing pitfalls businesses should be aware of when operating internationally.
In the European Union (EU), the invoicing legislation does not prescribe the mandatory use of any specific local language. Where a business issues an invoice in a language other than the national one, the relevant EU country cannot restrict VAT recovery solely. However, tax authorities can request a translation in case of audits.
- Sequential numbering
Most countries with a VAT or GST regime require tax invoices to have a unique sequential number. This can be challenging for firms operating across separate business units or divisions or using a single shared service centre or ERP that centrally issues invoices from one series, covering several groups of companies.
- Digital signatures
While there is often a choice of digital signature standards or providers to use, some countries will mandate this or issue the digital signature themselves under a pre-clearance e-invoicing model.
- PDF is generally not an electronic invoice for VAT purposes
PDF invoices do not generally qualify as e-invoices. However, when a business issues or receives invoices in PDF formats, they may be subject to specific storage and archiving rules.
- Supplier and customer VAT numbers
It is mandatory for a supplier to clearly show its VAT registration number (or GST/TIN number in some jurisdictions). An invoice missing this number will generally not be classified as a valid tax invoice for VAT/GST purposes. In turn, the customer can’t generally recover the VAT as ”input tax”.
- Storage and archiving
Businesses must retain invoices for the minimum retention period set by national tax authorities. But, archiving requirements for e-invoices can be much more onerous; for example, in Italy, these cannot be altered and need to be grouped into archived packets, with a digital signature and timestamp applied.
- Currency and exchange rates
Where a VAT or GST is charged, the general requirement is to show this as the local reporting currency on the tax invoice.
But a common pitfall is that accounts payable teams in the country or within a regional shared service centre may not be aware of this requirement. The tendency is to enter the tax amount into the ERP system using the company’s chosen exchange rate rather than the suppliers. The amounts should match to demonstrate the symmetry between the VAT reported on the sale (the output tax) and the VAT recovered on the purchase (the input tax). This may lead to issues during audits or when tax authorities attempt to match the amounts in countries with digital reporting or e-invoicing systems.
- Description of the goods or services
Some tax authorities do not simply accept an SKU or material number. As a result, South Africa, for example, has recently updated its invoicing requirements for foreign digital service providers, stating that the description on the invoice of the electronic services supplied must now be “full and proper”.
Businesses should be aware of local requirements. Hungary, for instance, mandates companies to show the relevant HS code for each item on the invoice if a non-standard VAT rate is charged.
- Commercial and legal requirements
While most invoicing requirements country guides focus on specific tax-related needs, businesses entering new markets should ensure that they are aware of the broader commercial and legal invoicing requirements.
Likewise, France recently introduced a law that requires the billing address of the buyer and seller to be shown on the invoice if these are different from the main business address. Other local legal requirements include the company’s incorporation number from the trade register, registered offices, legal forms, names of directors, and share capital amount.
Not only must self-billed invoices meet all the usual invoicing requirements in that country, but there are generally additional requirements to make them valid for VAT purposes.
For instance, in the EU and the UK, there must be a valid self-billing agreement in place. While self-billing can be an efficient way of doing business, there is also a risk if requirements are not fully understood or met.
Staying up-to-date with complian
ceMaintaining compliance with constantly evolving local tax invoicing rules across multiple countries can be time-consuming and stressful for internationally-operated businesses. Knowing and understanding the most common pitfalls, like those listed above, is critical if companies wish to avoid them. An even better approach is working with an international tax specialist who can help ensure tax compliance regardless of the business strategy.