As the EU plans to accelerate digitisation, tax professionals have urged businesses to take urgent action to meet e-invoicing compliance targets.
According to tax experts, businesses must act quickly to meet their e-invoicing compliance goals and stay clear of costly mistakes and penalties.
Tax directors have expressed concern over the companies' failure to meet their e-invoicing implementation goals. These are a part of the worldwide effort by tax authorities to digitize VAT reporting and close the VAT gap.
According to Richard Asquith, CEO of VAT Calc, a UK-based company that specializes in international VAT/GST reporting and calculations, "all that people talk about in indirect tax at the moment is this sweep of digitisation of VAT reporting, so things like e-invoicing."
“When it comes to this [e-invoicing compliance], businesses are in a terrible state,” he adds.
Given the length of the investment process and the EU's plans to implement e-invoicing regulations, which are anticipated to take effect in 2024, Asquith claims that the issue is of particular importance.
Asquith states that even though it is two years away, the cycle [of compliance] for these is only 18 months due to the size of the investment.
The difficulty most businesses encounter when running multinational operations is that each of the EU member states now has its own unique e-invoicing requirements.
These regulations seem to be going into effect at roughly the same time, which puts more pressure on businesses to comply.
The rush to put live invoice reporting into place has seemed to be on the minds of tax authorities, particularly those in Europe. The desire to combat VAT fraud and underpayment by businesses has encouraged governments.
This has caused a change in how invoices are generated and how tax authorities can view business transactions. In other words, it has fundamentally altered the information that tax authorities in the government receive and the timing of when they do so during the VAT payment cycle.
Between suppliers and customers in the supply chain, tax authorities have essentially encroached.
Asquith claims that "the governments have inserted themselves in the middle, effectively saying that suppliers cannot send out sales invoices to their customers until they [tax authorities] have seen and validated them. So, you literally cannot sell."
As e-invoicing regulations take effect, this poses a significant challenge for indirect tax specialists and their businesses across numerous jurisdictions.
Aneeta Samra, director at the London-based tax advisory firm Alvarez and Marsal Taxand UK, claims that failing to plan for the difficulties of e-invoicing could put businesses at risk for non-compliance, fines, and interest.
"But more importantly," she continues, "the inability to issue a compliant invoice which has been validated by the relevant tax authority will result in cash flow issues and additional costs, thereby eating into profits."
The failure to properly issue invoices, according to Samra, leads to non-payment. Her organization has worked with clients to take corrective action, which has involved liaising with businesses and tax authorities.
Italy, Hungary, and Spain are among the EU nations that have taken the lead in putting e-invoicing regulations into practice.
In parallel, developments are occurring and new regulations may be put in place in Belgium, France, Poland, Denmark, and, to a lesser extent, Romania.
According to Alex Baulf, senior director for global indirect tax at the UK-based Avalara tax technology company, e-invoicing appears to be the way of the future for VAT compliance. But he wonders if the tax authorities are doing enough to synchronize rules and give businesses clarity.
According to Baulf, "there is currently no real harmonisation concerning requirements, technical specifications, formats or even the invoice flow process."
"This makes it incredibly difficult for multinational businesses to find synergies and adopt single scalable methods," he continues.
By the end of this year, it is anticipated that the VAT directive amendments will have been published as a result of the European Commission's efforts to harmonize e-invoicing regulations through the Digital Reporting Requirements. These are a part of the EU's VAT in the Digital Age reforms, which also include platform economy treatment and a single VAT registration.
The European Commission would evaluate whether there should be full or partial harmonisation of regulations across the Union; the latter would permit member states to select which e-invoicing regimes to implement.
Questions regarding the clearance of transactions with government tax departments, the types of dealings that would be covered, such as business-to-business or business-to-customer, as well as the use of pre-filled VAT returns are additional issues that need to be taken into account.
Market participants worry that the EU's initiative to harmonize e-invoicing requirements may be too little, too late.
Companies have reacted to member states introducing their own rules by purchasing customized technology solutions to comply with the regulations. Despite the fact that e-invoicing regulations were introduced in Hungary and Italy in 2018 and 2019, respectively, some businesses have not made much progress in modernizing their systems.
Some businesses are looking for system upgrades that can be used across the EU rather than bespoke technologies due to the looming threat of more countries introducing live reporting requirements.
Tax managers in Europe have a lot to learn from businesses in countries like India that have already adopted e-invoicing.
The integration of the changes into internal ERP systems is one of the biggest challenges businesses face when introducing e-invoicing, according to Mohan Nusetti, senior vice president and head of indirect tax at Lupin India.
"Ensuring appropriate data capture, tax computation, and reporting of transactions is the first major challenge in implementing live invoice reporting," according to Nusetti.
In order to ensure full reporting and compliance, he claims that businesses would also need to carry out extensive testing of all transaction scenarios before going live. Since tax authorities would have access to real-time transaction data, this is especially significant.
E-invoicing requirements that are not properly implemented can seriously disrupt business operations.
According to Nusetti, “it is not only important to be on top of any tax regulatory changes that impact one’s business, but also to be agile enough to quickly adapt to such changes. Under the circumstances, having a strong technology platform is essential.”
Businesses are realizing that creating custom systems for each member state may not be the most effective strategy. As a result, businesses are searching for technology solutions that can be applied throughout the EU.
According to Nusetti, it seems more cost-effective to purchase an off-the-shelf solution and modify it to meet one's unique requirements than to create a solution from scratch.
Companies can prepare for the implementation of e-invoicing using both internal and external strategies in addition to technological solutions.
Speaking with international vendors who have experience providing live reporting expertise across multiple jurisdictions could be one external strategy.
Understanding what vendors can provide, the capabilities of their technologies, the areas where their services are lacking, and which vendors would be able to meet the compliance deadlines for various jurisdictions could be part of this.
Examining a company's accounting practices, ERP, billing, and e-commerce systems are possible internal strategies. In order to determine how application software or add-ons could integrate with an internal process and demonstrate a data link to national tax authorities, it is crucial to evaluate the adaptability of such technologies.
Asquith says, "Question is, will it work with your existing technology solution? And it never does work properly with your existing system."
The fact that many tax authorities are still using outdated technology and that adding-on software between businesses and the authorities can be a barrier to compliance should be taken into account.
Tax directors should use this opportunity to talk to both their peers and potential vendors about suitable solutions, even though there might be a mismatch in the application of e-invoicing rules across their markets.
They would do well to start early given how long it takes to implement a suitable system to satisfy compliance requirements.
By fLEXI tEAM