Total Control: Three Ways Global Tax Administrations Are Cracking Down on VAT Liability (Part III: Transitional Systems in the European Union)

This blog was last updated on June 27, 2021

In this conclusion to our three-part series on how tax authorities in VAT jurisdictions are using e-invoicing to control the VAT return process, we’ll look at some of the transitional systems E.U. governments are leveraging prior to or in lieu of mandating ex-post remittance/validation or ex-ante/real-time invoice validation. Governments are reporting increased VAT revenues as a direct result of the e-invoicing mandate, as companies now must immediately submit invoice data. In turn, tax authorities around the globe are implementing additional measures to ensure taxpayer’s compliance and gain greater visibility into VAT liabilities. This is especially true among E.U. countries, which reported a combined uncollected VAT gap of €159.5 billion in 2014. These tax authorities are still in the process of adopting electronic invoicing, and are turning to transitional systems to ease into fully automated e-invoicing and VAT reporting.

What is a Transitional System?

The use of electronic invoicing is not mandatory across the board, but some jurisdictions have issued regulations requiring certain sectors or specific transactions to be supported electronically. Such countries, many of which are in the E.U., are in what we call “transitional systems.”  

E-Invoicing Momentum Taking Hold in E.U.

With the exception of Spain, the E.U. has been particularly slow to control taxpayer’s compliance through electronic remittance or validation of invoices. However, this status quo is about to change. In 2014, the European Parliament and the Council of the European Union issued a directive on electronic invoicing in public procurement. This mandate requires the public contracting authorities of member states to receive and process electronic invoices compliant with the soon-to-be-announced European standard on electronic invoicing. The deadline for implementing this new standard and enacting local legislation is set to be 18 months following the reference of the European standard’s publication on electronic invoicing and the list of syntaxes, which is anticipated to happen by May 27, 2017. This means all member states’ central administrations are expected to be compliant with the new mandate by November 27, 2018. In addition, all subnational public entities are expected to be compliant by November 2019,. However, some countries are moving forward before the countdown toward required compliance begins.

E.U. Countries Already Transitioning to Electronic Invoicing

On June 26, 2014, the French government issued an ordinance mandating companies doing business with French public entities submit invoices electronically using a web portal established by the state. The mandate enters into effect in four stages, the first of which started in January 2017 for large companies. In January 2018, 2019 and 2020, medium-sized and small businesses will need to comply with these mandates respectively. To facilitate this transition, the French government created a centralized website that includes not only the most recent regulations and information about the new mandate, but also tools to help suppliers understand and deliver electronic invoices. Italy has accelerated the E.U.’s requirement not only by making it mandatory for suppliers of Italian public entities, but also by providing incentives to taxpayers that opt to use electronic invoices in B2B transactions. For instance, taxpayers that adopt electronic invoices using the tax authority’s official portal are exempt from submitting certain additional returns, like the annual VAT summary known as the Spesometro. These taxpayers are also given priority when requesting tax refunds. Other countries, like Denmark, started to impose a mandate even before the E.U. directive was issued. As of now, in addition to the aforementioned countries, the Netherlands, Poland, U.K., Portugal, Estonia, Slovenia, Sweden, Austria and Belgium have all enacted legislation requiring the use of electronic invoices by suppliers to public entities. The European Union is still in a transitional phase, and the parameters for the implementation of e-invoicing that will be used across member states are still development. However, developments in Spain and Italy prove there is no doubt that, as the system matures, it will become similar to Latin America’s ex-ante/real-time model, where immediate remittance of transactional information has become the main tool for controlling taxpayer compliance. VAT mandates on electronic invoicing are here to stay. In fact, all signs are pointing to tax jurisdictions aiming for total control of taxpayer compliance by focusing on daily business transactions. This new compliance burden is unavoidable, so taxpayers must ensure proper communication and compliance between their systems and the tax authorities’.