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

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.