By Alex Baulf, Senior Director, Global Indirect Tax at Avalara, highlights how e-invoicing continues to evolve, with a focus on scalability and strategy
Europe is marching towards the wholesale adoption of e-invoicing.
Earlier this year, the European Union conducted a public consultation for its VAT in the Digital Age reforms on e-invoicing and digital reporting requirements. Meanwhile, France, which currently recently sat in the EU presidency chair for the last term, hosted a virtual conference in February on electronic invoicing and how it can transform the digital landscape of businesses and government. France itself will mandate e-invoicing from July 2024.
The way e-invoicing is being approached continues to evolve, but one marked shift we’re seeing is a move from a local and a tactical approach to one that is global and centred around scalability and strategy.
The early days of e-invoicing
Traditionally, businesses opted for a quick, local, and tactical solution for e-invoicing to comply with Europe’s new digital reporting regulations.
This approach involved data being periodically uploaded or submitted to tax authority platforms, with traditional paper invoices issued to customers and trading partners, outsourcing digital reporting of invoice data to a third-party compliance specialist or licensing a niche software package from a local vendor.
This created a situation that failed to achieve genuine real-time transactional reporting nor increased automation. In addition to the constantly evolving compliance landscape, with either a new mandate coming up or an existing one is changed, companies essentially engage in a game of regulatory ‘Whack-A-Mole’– to ensure that they remain compliant.
E-invoicing and the current direction of travel
Companies are now seeking global and scalable solutions for a unified e-invoicing solution that is futureproofed and in line with up-to-date regulatory requirements. This means deploying a compliant system across multiple jurisdictions to handle new and changing mandates and growth in transaction volumes.
Businesses can no longer view e-invoicing and indirect tax compliance as two distinct areas. The improved scrutiny from governmental tax authorities is becoming savvier, with AI and algorithms being applied on the larger datasets and detailed business exemption reporting and analytics.
In doing so, tax authorities can better identify tax errors in real-time, either during audits or under a pre-clearance model, highlighting and profiling higher-risk tax accounts.
Cutting the VAT gap
A major concern for governments across the continent, is typically caused by a combination of fraud and tax evasion, among other activities. In nominal terms, the European Union recorded a VAT gap of €134 billion, representing more than 10% of the total VAT tax liability in 2019. Although this indicates a trend in the right direction (i.e., a decline in the VAT gap versus 2018), governments still miss out on huge sums of revenue. Further to this, it’s no wonder that EU countries are beginning to introduce mandatory e-invoicing to make the VAT process more watertight and efficient.
In Spain, for example, data received through e-invoicing and e-reporting submitted under the Suministro Inmediato de Información (SII) is being used by its tax authorities to pre-populate annual VAT returns. If others follow suit, businesses may shift in how VAT returns, with taxpayers expected to review, edit and augment returns given to them by their tax authorities.
With this in mind, tax and finance leaders must assume a central role in RFPs and vendor selection and take a hands-on approach to designing and implementing new e-invoicing processes. Those who stay on top of these trends and have a breadth of insight must steer this transition.
E-invoicing is here to stay and will transform tax compliance procedures. Those organisations that get ahead and get on the journey are better placed to handle the waves of changes coming now and further into the future.