Intra-Group Invoices: From Haven of Peace to Corporate Achilles Heel

Christiaan van der Valk
October 10, 2018

Few things in VAT are ever straightforward. A notable exception is the unambiguous requirement to issue, process and archive compliant invoices for all transactions ‘within the scope of VAT’ – roughly, transactions between VAT-registered entities, whether they explicitly carry VAT or not.

What constitutes a ‘compliant’ invoice is, of course, defined by applicable VAT law – requirements typically address the form (paper, electronic, or either) and content (minimum data, applicable tax rate) and range from pretty simple to virtually incomprehensible.

Practically speaking, if you’re a registered business and you sell something to another registered business, you must issue a compliant invoice. For the avoidance of doubt, VAT experts have invented the ‘arm’s length principle’ to clarify that this applies regardless of whether or not such companies are independent or belong to the same corporation. This area of ‘intercompany’ (or perhaps more correctly: intra-group) invoicing is currently causing unprecedented levels of anxiety in multinational organizations. To understand why, let’s look at how corporations came to think of such invoices as the one area where the shift to e-invoicing legislation in many countries created an opportunity to reduce rather than increase complexity.

Something odd happened when, in the years following the turn of the millennium, e-invoicing was introduced as an option in the European Union – and many other countries outside Latin America – with the only condition that taxpayers maintain evidence of invoice integrity and authenticity. Seeing that invoices could now be in electronic format in these countries, many international companies with multiple subsidiaries but a single ERP system decided that their internal processes and security safeguards provided a superior environment for meeting these evidence requirements compared to practices in the paper-based world where such invoices were printed and often physically exchanged between group legal entities. From that moment onwards, these corporations have considered that there was no better way to meet e-invoicing requirements in such ‘post audit e-invoicing’ countries than to keep invoices within the ERP and essentially just mimic an invoice exchange between database entries. This was a welcome decision because it was consistent with existing enterprise tools and stood in sharp contrast to the complex requirements that external e-invoices were subjected to under e-invoicing and e-archiving requirements in these jurisdictions.

This relatively effective ‘sweeping under the carpet’ of intercompany invoices in post audit countries is now backfiring. Here’s why.

  • The first reason is driven by corporate income tax considerations rather than VAT or invoicing rules. In the past few years, tax administrations have started taking radical measures in an area of tax avoidance that has become known as base erosion and profit shifting (often shortened to ‘BEPS’) by multinational enterprises. This article isn’t about BEPS as such but suffice it to say here that OECD attention and aggressive policy measures in this area have catapulted intra-group transactions from their haven of peace within corporate systems into the uncomfortable spotlight of geopolitical strife.
  • Adding insult to injury, the wave of real-time and near-real-time VAT control measures being introduced in countries outside of Latin America – including the European Union – brings companies back to the reality that intra-group invoices aren’t actually exempted from any VAT invoicing rules. If in Hungary or Spain invoices must be reported dynamically to the tax administration – or worse, if in Italy an invoice cannot be validly issued unless the tax administration has approved – this also applies, mutatis mutandis, to intra-group invoices.

These two colossal tax policy agendas are conspiring to force multinationals into an immediate re-evaluation of their digital transformation programs. It’s difficult enough to prepare external invoice flows for the digital tax tsunami, but at least most companies have over the past decade taken process, organizational and technical measures to prepare such external documents for the rugged conditions of exchange with diverse trading partners outside the corporate firewall. Taking intra-group invoices from their cozy databases into a world where tax administrations assume they can be converted into massively complex XML formats of their design, digitally signed and exchanged by both the supplier and the buyer with tax administration platforms according to very specific request-and-approval choreographies, and then being archived in accordance with heterogenous legal requirements, is truly like telling your average office clerk they have 24 hours to climb the Annapurna.

Multinationals, it’s high time to take a hard look at your intra-group invoices and prepare them for a radically different future.

Take Action

Learn more about Sovos eInvoicing solutions and how to stay compliant amid changing regulations. 

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Christiaan van der Valk

Christiaan Van Der Valk is vice president, strategy. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice and commercial issues. Formerly co-founder and president of Trustweaver (acquired by Sovos), Christiaan also holds long-standing leadership roles at the International Chamber of Commerce (ICC) and the European E-invoicing Service Providers Association (EESPA). Over the past 20 years, he has presented at and authored key papers for international meetings at the Organisation for Economic Cooperation and Development (OECD), the Asia Europe Meeting, World Trade Organization and several other UN agencies. Christiaan earned his Master of Laws degree from Erasmus Universiteit Rotterdam.
Share This Post

EMEA IPT
June 26, 2019
HRMC Launches Consultation on the Operation of Insurance Premium Tax

Her Majesty’s Revenue & Customs (HMRC) – the UK Government department responsible for the collection of taxes – is undertaking a call for evidence to understand how the administration and collection of Insurance Premium Tax (IPT) can be modernised and how it can address emerging practices that may lead to unfair tax outcomes. The aim […]

E-Invoicing Compliance
June 24, 2019
Indian GST Council Confirms Plan to Roll out B2B E-invoicing System

Last week, the Indian GST Council convened for its 35th session, this time chaired by the recently appointed finance minister, Nirmala Sitharaman. As expected, the topic of a nationwide mandatory B2B e-invoicing system was on the agenda, and the GST council confirmed two important principles: Scope: The e-invoicing system will cover only B2B transactions to […]

E-Invoicing Compliance Tax Compliance
June 20, 2019
Is India on a Path toward Mandatory B2B E-invoicing?

As more and more countries across the world depend on VAT, GST or other indirect taxes as the single most significant source of public revenue, governments are increasingly asking themselves what technical means they can use to ensure that they maximize the collection of the taxes due under the new tax regimes. India is the […]

E-Invoicing Compliance EMEA Italy VAT & Fiscal Reporting
June 20, 2019
From E-invoicing to E-ordering: New Mandate Coming to Italy in October

Italy has been at the forefront of B2G e-invoicing in Europe ever since the central e-invoicing platform SDI (Sistema di Interscambio) was rolled out and made mandatory for all suppliers to the public sector in 2014. While a number of its European neighbors are slowly catching up, Italy is continuing to improve the integration of […]

EMEA VAT & Fiscal Reporting
June 19, 2019
SAF-T – Where Are We Now?

Anyone who has been closely following SAF-T announcements over the past few years may be forgiven for thinking that it all seems rather like Groundhog Day.  Commencement dates and reporting requirements have been announced and subsequently amended and re-announced as the respective countries re-evaluate their needs and the readiness of companies to provide the data […]