Real-Time VAT Control Has Come to Europe and Is Changing e-Invoicing as We Know It
e-invoicing Trends, Industry Trends and Technology, E-invoicing
Some time ago, the Italian government made the decision to make electronic invoicing mandatory for all companies, both in business-to-business trade and for consumer billing to gain tighter control over VAT. You should not pass this news by, even if you have nothing to do with Italy. It might be a sign of a game-changing trend in Europe.
Italy will be the first country in Europe to implement real-time VAT (Value-Added Tax) reporting requirements, in other words, a clearance model. Paper invoices will no longer be valid, but all invoices must be exchanged electronically in Italian Fattura PA format via a government-managed SDI e-invoicing platform. The schedule is rapid: already in July 2018 companies who operate in petrol sales or are subcontractors to suppliers in public procurement must comply, and as from January 1, 2019, e-invoicing will be mandatory for all. There are still a lot of question marks in the air on how this will be executed, but the decision and determination are there.
Moving from post-audit to real-time VAT control
Until now, Europe has been the stronghold for the post-audit model in tax control. The post-audit model allows business partners to freely exchange invoices between them, as long as the authenticity and integrity of the invoice is ensured. Tax authorities control VAT by random audits for a certain time period after the transaction has taken place. Thus, regulatory requirements for e-invoices concern mostly the content of the invoice and how to archive it.
In the clearance model, the tax administration gets involved at a much earlier stage of the invoice lifecycle and requires that each invoice is reported and validated before or during the invoice exchange process. This is why the government needs to regulate not only the content of the invoice but also the way the invoices are exchanged, i.e. the infrastructure. This is what the Italian government has done with their real-time VAT control.
VAT gap of hundreds of billions of euros
Globally the trend toward real-time or near real-time invoicing controls has been accelerating over the last decade. Latin America countries such as Brazil, Chile, and Mexico were pioneers in making e-invoicing mandatory in both business-to-government and business-to-business invoicing. Similar clearance models have been implemented in Russia and in parts of Asia. I am sure that Italy will not be the only one implementing a clearance model in Europe.
Actually, according to the compliance expert Trustweaver, by 2025 most of the world will be using some sort of clearance model to regulate invoicing and achieve a tighter control over VAT. Italy is now opening up the development in the European Union.
The interest toward the clearance model, and thus electronic processes in invoicing, is due to the government's aim to stop VAT leakages. There is a vast gap between the amount of VAT that is due and the amount that is actually collected. Due to fraud, malpractice, and errors, the gap represents 20–30% of the VAT that should be collected.
In terms of cash, it can mean as much as half a trillion euros globally. In Europe, the VAT gap is EUR 150–200 billion every year. (Source: Tax-Compliant Global Electronic Invoice Lifecycle Management, Trustweaver whitepaper, November 2017.) No wonder the interest in real-time VAT control and reporting is growing.
More technical compliance requirements ahead?
For one thing, e-invoicing adaptation will definitely continue to grow with the rise of the clearance model. The development does not undermine the European level standardization that has been ongoing for years. I believe that the common European norm, which will be mandatory in business-to-government trade in 2019, will be one of the approved formats in future clearance platforms in Europe, even if Italy is at the moment planning to continue with their national standard.
By default, the clearance model does mean more technical compliance requirements for organizations. Unfortunately, every government so far has implemented clearance in their own way. On a national level, a well-defined clearance model should simplify invoicing as all organizations will need to be integrated into the same infrastructure. But as trade extends across borders, companies will be faced with these diverse requirements, which add complexity in the international context.
My sincere hope is that European countries (unlike countries in Latin America) will be able to standardize the use of the clearance model and the way to implement real-time VAT control, as they have already harmonized the core elements of the electronic invoice with the common European norm.
New priorities for companies
This global trend will put compliance at the top of the things that companies are focusing on in their e-invoicing initiatives. Until now, for many companies, the starting point has been the digitalization of their own order-to-cash and purchase-to-pay processes. The pursuit of digitalization, and the process efficiency and cost savings that ensue, will naturally continue but companies will need to focus more and more on maintaining internationally compliant e-invoicing in the future.
Ahti has been active in the e-invoicing industry since the year 2000. A large part of his work involves developing the e-invoicing ecosystem in Europe, for which he is a member of the executive committee of the European E-invoicing Service Providers Association (EESPA). He also acts as the OpusCapita representative for the OpenPEPPOL Association.
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