The European Commission on 28 January 2009 adopted a proposal to change the VAT Directive 2006/112/EC (from 28 November 2006) with respect to invoicing rules. The main objectives are to reduce burden on business, increase the use of e-Invoicing, support small and medium sized enterprises (SMEs) and help member states tackle fraud.
Regulatory requirements for Electronic Invoicing will change with the advent of the measures aimed at further simplifying, modernizing and harmonizing the VAT invoicing rules. The foundation of the proposal is based on “equal treatment of paper and electronic invoices” in a technologically neutral way by removing the conditions for an Advanced Electronic Signature (AES) and Electronic Data Interchange (EDI).
While in the world of electronic agreements and contracts the need for electronic signatures is apparent the reasoning is that e-Invoicing is part of a larger process where every process step contributes to authenticity and integrity of the trade transaction. Nevertheless many Member States will continue to believe these guarantees can only be provided by electronically signed e-invoices.
Therefore removing the requirement to guarantee the authenticity of origin and integrity of content by means of pre-defined technological solutions, such as EDI and Electronic Signatures, is the most challenging from a political and governmental perspective. It requires a “paradigm shift” in thinking about audit management processes and strategies by Tax Authorities.
Apart from that increasing the use of e-Invoicing requires more than simplification of VAT invoicing rules. Although standardization efforts in Europe are huge the progress of standards bodies is slow with respect to data exchange standards. In response new initiatives emerge from humble beginnings, underpinned by new technologies, with potential to grow into creatures of substance and significance. The a priori standard for e-Invoicing, UN/CEFACT, starts loosing ground due to the growing need for inclusion of all types of companies, the rigidity and slowness of development, and the increased adoption of the Universal Business Language (UBL) as the European data exchange standard.
Although everyone is entitled to their own opinion creating the next wave of e-Invoicing requires re-alignment of views and goals. Hence there are two fundamental questions to answer:
- What is understood by the term “Compliant e-Invoicing”?
- What do SME’s and large companies need to jump on the bandwagon of e-Invoicing?
What is Compliant e-Invoicing ?
One such definition comes from the CEN/ISSS and Fiscalis e-Invoicing Compliance Guidelines as expressed in the section “e-Invoicing Basics Introduction”. Compliant e-Invoicing is about auditability of invoicing processes, verification whether VAT obligations are met and whether the invoice is an accurate reflection of sales and purchases.
Many people believe that e-Invoicing is the first step towards full automation of the end-to-end-trade process. Talking about “Compliant e-Business (Electronic Business)” is more appropriate in view of drafting the rules for the near future.
What do SME’s need to adopt e-Invoicing ? It should be clear that e-Invoicing for SME’s and for large companies requires more than simplification of VAT invoicing rules. There is a need for a multi-purpose exchange standard that enables companies to participate regardless whether they are able to process the invoice data automatically in their financial system.
Such a multi-purpose exchange standard should incorporate a readable image and processable data in one packaged container.
Bringing adoption of the new VAT directives to the next level
The CEN/ISSS e-Invoicing Workgroup Phase II Task Group 2 on Compliance recently presented their e-Invoicing Compliance Guidelines. The CEN/ISSS Task Group 2 and the Fiscalis e-Audit Project Group are paving the way for harmonization of VAT - Compliant e-Invoicing processes.
The principles in “the Guidelines” stimulate the use of a single coherent Business Control Framework (BCF) - Tax Control Framework (TCF) - across Europe. The aim is to attain a sufficient degree of auditability and legal compliance of e-Invoicing from a Tax perspective and to provide a solid foundation for performing tax audits in situations where e-Invoicing solutions are used.
The Guidelines provide practitioners a perfect instrument for self-regulation and self-certification of processes and technologies that are used to ensure invoices are reliable. Primarily enabling organizations to prove that invoices are processed and stored correctly within their individual spheres of governance and liability.
However, if well-understood, “Compliant e-Invoicing” is not about auditing e-Invoicing solutions or Service Providers but about auditability of invoicing processes and fraud prevention by validating whether VAT transactions are accurately administered (paid and deducted). e-Invoicing is part of the total Purchase-To-Pay and Order-To-Cash cycle and orders, deliveries and receipts need to be registered for legally valid transactions.
For most companies the three-way match at the end of their cycle provides means to control the integrity of the content and the authenticity of origin.
The focus of the recommendations should therefore have been more on the auditability and validation of VAT transactions from a Tax Authority’s perspective instead of on auditability of e-Invoicing solutions and Service Providers.
Currently Tax Authorities lack functionality and information to validate whether tax deducted and tax paid are correct and therefore force companies to guarantee authenticity and integrity. Reducing fraud is only possible if Tax Authorities are able to validate sales and purchases, deliveries and receipts, as well as the related invoice and tax transactions between the different involved parties.
Bringing adoption of the new VAT directives to the next level requires a mind shift of Tax Authorities, internal and external Tax Auditors, Businesses and Solution / Service Providers. This “paradigm shift” in thinking about Tax audit management processes and strategies has an impact on all stakeholders.
They all need to consider and establish a new “Compliant e-Business (e-Invoicing) approach” with less focus on the processes and technologies used (technologically neutral) but more on the end-to-end-trade process.
The foundation of the new Compliant e-Business approach is based on two important concepts:
- e-Invoicing is part of a larger process
- a multi-purpose exchange standard
e-Invoicing is part of a larger process
Study of the Purchase-to-Pay (P2P) and Order-to-Cash (O2C) processes with respect to legal and auditability requirements, arising from VAT, manifest that one important step, the exchange of trade related transactions to Tax Authorities, is missing. Based on practical experience with implementing electronic ordering and invoicing architectures a few ideas evolved. These ideas need further widespread elaboration and buy-in from stakeholders to define strategies for development and realization.
Looking at the Purchase-to-Pay (P2P) and Order-to-Cash (O2C) processes e-Invoicing is the last step before payment takes place.
All these steps contribute to proving the authenticity and integrity of the trade transaction to involved business partners. Reporting VAT to Tax Authorities at current is not a part of the end-to-end-trade process in most European countries. As such from a Tax Authority’s viewpoint trade transactions are difficult to follow and validate.
The future of the new VAT directives requires re-defining the position and importance of e-Invoicing in view of the total trade process. New ways of reporting, processing and validating tax-related transactions as part of the total trade process are required. These new ways of working should provide trust to all parties and be easy to implement once standards and procedures are in place.
The new Compliant e-Invoicing approach is based on the act of reporting all financial Tax related transactions from the General Ledgers and Sub-ledgers of Suppliers and Customers in a timely manner to Tax Authorities. The data exchange standards for reporting tax related financial data already exists and are implemented in some European countries. However there is no commonly accepted standard across Europe. SAF-T and XBRL-GL are data standards that qualify for the goal of reporting the related transactions.
The end-to-end-trade process flow will include one of these standards for reporting of transactions to Tax Authorities including corrections made as result of disputes.
Establishing the new Compliant e-Invoicing approach will require all stakeholders to join forces and work together on extending Business and ICT architectures for inclusion of Tax Authorities.
In the Business domain the focus should be on administrative and process-oriented elements. Governments and Businesses will have to ensure that Tax reporting is adequately embedded in policies and laws. Most work has to be done in the ICT domain to ensure technology, information and applications support the new flow of information. All involved parties face significant investments in infrastructures, application systems and exchange standards.
However adoption of e-Invoicing in Europe with a view to the future advent of electronic business will only become successful when Tax Authorities have a clear and complete view on trade transactions. They will gain more control and better understanding of businesses. Moreover the technology drift of e-? will come to an end and businesses will applaud for the transparency in the end-to-end-trade process.
A multi-purpose exchange standard
At current when organizations want to establish e-Invoicing with all their trading partners they will have to send two types of documents: a data message and a readable image. This will introduce additional complexity at both sides because companies will have to deal with the different capabilities of their receiving and sending trading partners.
Global adoption of e-Invoicing requires a business and technical environment that enables all types of companies to participate regardless their capabilities and maturity.
The technical environment must provide reach to all their business partners irrespective of data exchange standards. Providing reach is not about connectivity but about being able to process the invoice content as an image or as data.
The multi-purpose exchange standard is an XML Data Package that contains a readable image and document data. The exchange standard requires a technical platform for generating the XML Data Package at the sending side and processing the data at the receiving side. Apart from that a reader for viewing the image is required for companies that are not able to process the data automatically in their financial applications.
There are potentially two solutions available that can be used as the basis for the multi-purpose exchange standard:
- the Adobe XDP (XML Data Package) format
- the OASIS Open Document format.
Both formats are XML-based containers that are able to support all of the available international data exchange standards. Although Adobe is much further in providing a total working solution, Open Document is based on an Open and Collaborative Community supported by several Open Source minded companies.
Still there is much work to do to ensure these solutions fully support the processing and transmission of the multi-purpose exchange standard.
Building the new Compliant e-Invoicing approach
Establishing the new Compliant e-Business (e-Invoicing) approach requires all stakeholders to support the development of Governmental and Business ICT architectures for reporting, processing and validating the tax related transactions.
These efforts include:
- a data exchange standard for tax related transactions based on SAF-T or XBRL-GL
- a European-wide infrastructure for the communication and storage of tax related transactions including Business Intelligence functionality for analyzing transactions reported by businesses across Europe
- interfaces for generating the data exchange messages from data stored in the General Ledgers and Sub-ledgers from the financial and ERP systems of Suppliers and Customers
Data Exchange Standard based on SAF-T or XBRL-GL
Compliant e-Invoicing will be valid for all types of invoices for sales and purchases of goods or services.
Compliant e-Invoicing in the Staffing Industry where the focus is on delivery of services by hourly workers looks as follows:
Compliant e-Invoicing for non-product and product related (B.O.M.) goods and material looks as follows:
European-wide infrastructure
European Member States have to design and implement an ICT architecture that supports the exchange of trade related tax data between Tax Authorities of different Member States. Conceptually there are a few scenario’s for realizing such a collaborative infrastructure. These range from totally centralized to decentralized service oriented architectures.
1) a central European Tax reporting and Business Intelligence platform including:
- standardized connections for Businesses to provide tax related transaction data based on the European-specific data exchange standard via a web-enabled portal or data exchange services such as EDI
- a central data warehouse for storage of reported tax related transaction data
2) a decentralized country-based architecture including:
- country-specific standards and connections for Businesses to provide tax related transaction data
- decentralized local data warehouses for storage of reported tax related transaction data
- a Business Intelligence solution based on a service oriented architecture that enables analysis and validations of transactions across all Country-specific data warehouses
Conclusions
As many of us realize e-Invoicing is just the first step towards full automation of the supply chain. Only when the latter is accomplished all parties involved will realize the return on investment pursued.
Tax Authorities and/or the CEN/ISSS Work Group should launch a new Task Group in phase 3 that is going to formalize a standard for Tax reporting and define / develop European-wide functionality for processing the tax related transaction data by all Member States as such that they are able to validate cross-company transactions.
Tags: electronic data interchange, HR-XML, e-Invoicing, e-Business, UBL
Last updated: 26-11-2011
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