At the annual European Exchange Summit held earlier this month in Berlin, the organizers surveyed participants on several issues relevant to e-invoicing. One question was of particular interest: “Should clearance models or mandatory e-invoicing become the norm in the EU?”
The Exchange Summit is an industry event attended by experts and practitioners from around the world; however, the European version attracts mostly European participants. Interestingly, a whopping 55 percent of participants answered YES to the question posed.
Here’s why this is a metric that European policy makers should pay attention to.
- Generally, if you ask businesspeople for their opinion on the need for legislation or other public policy requirements on data flows, the answer will be overwhelmingly “don’t regulate.” This can hardly be surprising: Businesses exist primarily to provide value to their shareholders, and legislation does not often contribute to that objective.
- European law makers and policy experts have long considered that the imposition of technical requirements on business data flows is taboo. European business associations have historically violently rejected even the slightest suggestion of such constraints to meet public policy objectives.
- The people at the Summit aren’t naive about the many challenges that “continuous transaction control” systems in Latin America and countries like Turkey have brought about. Indeed, many have been on the receiving end of the complex, expensive and often frustrating consequences of variations among requirements in jurisdictions, quality issues and commercial challenges of regulatory mandates in these areas in the past 5-10 years. It is entirely fair to assume that participants in this poll expressed this preference despite these challenges.
From discussions with VAT managers and other stakeholders in the corporate world, these are the arguments that people often make when they say they prefer the LatAm approach to e-invoicing:
- Legal certainty – In countries with continuous transaction controls, “the law is (computer) code” and based on a technical specification – there is very little or no room for interpretation and you get a binary good/not good response for every transaction in real-time or near-real-time. This makes indirect tax compliance more predictable.
- Level playing field – When the exact same requirements apply to all businesses, there is no risk that your competitor finds a better way of “optimizing” compliance or is able to cut a deal with an inspector. This certainty creates an environment with fairer competition.
- Standards – Yes, jurisdictions often have varying standards for the form and content of structured data files to be submitted to the clearance system, and that’s very painful for cross-border transactions and multinational businesses. But within each jurisdiction, these schemes simply define what an invoice looks like – and that’s it. As a result, software vendors will adjust to this definition and systems become more inter-operable.
- Affordability – Because most tax administrations that have launched continuous transaction control systems so far have had the good sense of anticipating the need for the competitive supply of compliant e-invoicing solutions, local businesses can purchase such solutions inexpensively. Due to major differences among countries, this is very different for multinational businesses – I have written about the costs and risks of working with disparate local vendors in previous posts.
- Less intrusion – One of the great benefits for tax administrations is that they will have high-quality, authenticated, real-time transaction data that they can analyze to detect anomalies and then focus their audits on such areas. This means that legitimate businesses should over time get fewer audits, leaving more time for getting on with business.
- Better financing – In countries that have had continuous transaction controls for some time now, we have often seen the emergence of a vibrant fintech startup scene. These companies, for example, build invoice financing (e.g. factoring) services leveraging the fact that invoices will be government-approved in real-time. In some countries, like Chile, the tax administration has created additional flags in its system to assist the market with additional financing security.
- Better annual accounts – When a large part of the data that governments collect on business processes is harvested from real live transactions, this not only greatly reinforces legal certainty for indirect taxes but also provides a more stable basis for a company’s annual accounts and direct tax reporting.
- Reduced impact of corruption – It’s not something people like to talk about, but fraud and avoidance aren’t the only problems in tax collection. Corruption among tax officials exists, and digital tools that act on if-statements rather than emotions can help eradicate such harmful practices.
- Shorter archiving, simplified reporting – Long-term archiving and indirect tax reporting will probably always exist, but based on our experience over the past 5-10 years of countries with continuous controls, such requirements are usually adjusted to reflect the fact that the tax administration already has the bulk of your transaction data. As we’ve seen in Italy, even if archiving is formally waived as a requirement for VAT purposes, most companies want to maintain their own well-protected evidence anyway. Reporting obligations are often refocused on non-transactional data such as fixed assets.
Preference for the LatAm e-invoicing model in Europe speaks to the importance of having clearance capabilities along with reporting functionality. Real-time clearance is the primary focus of the e-invoicing mandates in LatAm; reporting typically focuses on of non-transactional data that allows the tax administration to strengthen cross-checks.
As is the case in Italy, enforcement and penalties will revolve primarily around clearance mandates. Focusing on reporting without real-time clearance solves the wrong problem for companies seeking to stay in compliance both in Latin American and in European countries that are developing real-time e-invoicing control mandates.
Again – no one is saying that continuous controls on business transactions as we know them today are perfect. However, the concept has the potential to remove a lot of the friction that could not be avoided in the paper-based system. We now know that most practitioners prefer this path forward to the disappointing result of the 1:1 transaction from paper to electronic that has until now been ‘e-invoicing’ in Europe.
Find out how Sovos saves clients from penalties, cancelled shipments and other potentially expensive e-invoicing pitfalls.