This blog was last updated on October 18, 2019
When I read this recent social media initiative by CloudTrade, my first reaction was a wave of nostalgia for the debate about VAT e-invoicing requirements that raged in Europe between 2005 and 2010. During those years, emotions ran high between e-signature haters and e-signature proponents in the context of B2B electronic invoicing. The first group was composed mostly of people from Northern and North-Western Europe to whom imposing specific form- or technology constraints of any kind on business transactions was – and remains – culturally foreign. The second group was a mix of e-business vendors as well as businesses and public administration experts from Southern and Eastern Europe who advocated e-signatures as the right tool for standardising on a single method of making e-invoicing legally certain for anyone, anywhere in the EU.
When viewed from their respective cultural and professional biases, legitimate arguments were made by both sides. If your home base is a relatively homogeneous country with rather high standards of fiscal discipline, say Finland, it is quite natural that you’ll judge tax-specific processes or processes on top of what you’d choose to implement as a business to be superfluous. If you are from, say, Spain or Italy, it’s much more likely that you’ll find explicit, exhaustively defined requirements that can guarantee tax compliance not only comforting but actually a precondition for engaging in e-invoicing at all. I apologise for the generalisation – I know plenty of exceptions and nuances exist along the spectrum.
The status in Europe since 2010
That debate was resolved in 2010 with a number of changes to Article 233 of the VAT Directive: a new principle was introduced which allowed complete freedom of choice as to the means by which companies prove integrity and authenticity of both paper and electronic invoices. Importantly, though, the requirement for companies to produce and maintain such evidence remained – some would argue: was further emphasised – in the VAT Directive. This freedom of choice as to how to prove invoice integrity and authenticity was supplemented with three examples of ‘methods’ which can be used to meet this obligation, in summary: (1) through audit trails based on business controls that demonstrate that an invoice supports an actual supply; (2) through qualified electronic signatures; (3) through Electronic Data Interchange based on a robust interchange agreement.
So CloudTrade, a UK-based vendor of B2B automation solutions, in their piece basically states that (many of) their competitors, as well as certain advisers in this space, are misinforming the market of the freedom they have to meet VAT requirements in e-invoicing. Their main concern with this situation is that it prevents people from implementing e-invoicing.
Once the nostalgia passed, I spent a couple of days considering what, if anything, to say in response to these really rather strong statements. I initially leaned towards not dignifying the CloudTrade piece with any comment at all, but I was persuaded by a number of people that it may be important for newcomers to the EU e-invoicing market to get more background information on the state of play from a slightly different – and hopefully subtler – perspective.
“Generally, if you’re going to spout allegations about three-quarters of your competitors deliberately misleading the market, I think you should do so on the basis of credible evidence”
Basic fact-checking
I must say that we at Sovos don’t feel particularly targeted by the CloudTrade piece. For those who don’t know what Sovos
does: we provide cloud-based compliance services for e-invoicing in over 60 countries – and e-signatures are the basis for our service in every single one of those. So we have a dog in this fight. However, we are big believers in sharing information on possible compliance options and strategies for different business scenarios very proactively. For the past seven years, we have issued an annual white paper where the available options to meet the requirements of Article 233 of the VAT Directive are explained in great detail. Sure, we have a view on what method of compliance works best in what circumstances, which I’ll talk about more below, but we’ve certainly never hidden the fact that companies are free to choose how to comply in the EU. Quite the opposite.
That said, though, we feel that some or all of our partners and their commercial positioning of compliance as a part of their e-invoicing services may be targeted by the CloudTrade piece. It seems like Cloudtrade was going for some sort of shock value in their statements, rather than being informative. Generally, if you’re going to spout allegations about three-quarters of your competitors deliberately misleading the market, I think you should do so on the basis of credible evidence. Interestingly, evidence is central to my below attempt at injecting some nuance into CloudTrade’s central thesis of a massive sign-spiracy on the European market – so here goes:
1) The type of enterprise that actually procures and pays for the majority of business-to-business transaction services in Europe (including e-invoicing) – in other words the ones that by and large decide what such solutions look like for everyone else – very often have legal, tax and compliance budgets that are huge. In fact they are so large that they represent a multiple of the revenues of pretty much every single provider of such services on the EU market. To state that these companies do not know about a provision that has been in the one and only VAT Directive in Europe since 2010 is naïve to say the least. Vendors don’t get to tell enterprises what the law says or what that means to them, period.
2) In my experience, companies essentially want the benefits of automation through solutions that offer both scalability and legal certainty. This discussion focuses on the legal certainty part of that equation, but to understand how that relates to digital signatures one must first acknowledge that the market for B2B automation is increasingly dominated by cloud-based third party platforms that manage increasingly rich end-to-end business processes. The moment an enterprise outsources a large part not only of the ‘pipe’ for channeling invoices from suppliers to buyers, but also e.g. the master data and procurement processes from which most invoice data is generated, it becomes inevitable that the third party platform that handles these B2B processes must also take a stand on compliance. In the vast majority of cases, enterprises expect their B2B automation vendors to not just provide features that enable compliance but to contractually ensure compliance on an ongoing basis. The next logical step is that vendors then need to look at how they can possibly do that at an acceptable risk level. This is where e-signatures come in. Under European legislation, qualified electronic signatures (actually: under the ‘new’ EU eIDAS Regulation, these are now normally called qualified electronic ‘seals’ in this context) are the only way to reverse the burden of proof as regards the integrity and authenticity of the e-invoice. Therefore, many B2B automation vendors have adopted this method in order to meet market demand for dependable legal certainty.
3) I do not exclude that a sloppy or lazy sales person for such B2B automation vendors from time to time takes a bit of a shortcut in explaining the mechanisms behind them using qualified e-signatures are the basis for their compliance assurances – and present these as ‘mandatory’, in theory or in practice or both. This isn’t very elegant and indeed something Sovos and its partners actively discourage. Nonetheless, given point 1 above, such shortcuts in the sales process rarely impact solution purchase decisions, as legal or tax departments are usually quite quick to set the record straight on what their compliance choices really are.
4) In my humble opinion, the reference in the CloudTrade piece to the CEN e-Invoicing Compliance Guidelines takes the description of PO- or more sophisticated matching processes slightly out of context. (Full disclosure: I am listed as one of the authors of that document, but it’s a consensus text that has been co-written by a sizable group of both industry and tax administration experts). Here, it becomes important to note that this is very understandable for a company that probably judges tax compliance to some extent on its experience in the UK. In a Common Law-inspired context, the following isn’t always valued on the same level as in other countries: it’s not about just doing the right thing, but about retroactively being able to prove you did.
A great three-way matching process is indeed a good way for a buyer to ensure a business validation of an invoice, and this can go a long way towards meeting the integrity and authenticity requirement. However, the CEN Guidelines contain several sections and tables of anything from internal controls to master data and trading documents that must be maintained as evidence during the entire mandatory storage period for this to suffice under the ‘audit trails’ option of Art 233. The whole idea of this option in the VAT Directive is that an auditor can use the invoice as a ‘table of content’ and pull out historical data from the sales/purchase process to corroborate, on a semantic level, the veracity of each mandatory field. And, for the careful reader: the CEN Guidelines use words like ‘contributes to integrity and authenticity evidence’ – because, as pointed out before, there is no guarantee that a tax auditor actually will judge such audit trails to be sufficient. It’s his or her call – which is why this option is often viewed as not meeting the business requirement of ‘automation through solutions that offer both scalability and legal certainty’. If you and your trading partners can achieve sufficient legal certainty through this method that is fabulous and truly worthy of admiration, but you cannot expect every type of business or transaction to meet these high standards of controls and comprehensive archiving.
“The world has moved on in regards to e-invoice compliance – today, the trend among tax administrations is to impose real-time ‘clearance’ of invoices”
If you think signatures are a pain, try clearance
A lot more can be said on this subject. One commentator, for example, pointed to the fact that buyers have a veto under EU law as to whether they’ll accept e-invoices in the first place; this mechanism reinforces some of those described above. However, I’ll close with an observation on a different level:
5) The other reason that the CloudTrade piece feels a little retro is that the world has moved on in regards to e-invoice compliance – today, the trend among tax administrations is to impose real-time ‘clearance’ of invoices. Electronic signatures are nearly always a part of the specification towards such control processes, but they are just a minor part. In fact, our numbers show that the average implementation towards a clearance platform is about 50 times more expensive than implementing full support for qualified electronic signatures. This is not an exaggeration but naked, verifiable facts. And this ‘clearance’ trend is coming to Europe – in part because many countries disagreed with the changes to the VAT Directive in 2010, which moved away from standardised technical controls and accommodated the views of Northern and North-Western Europe a little more than the position of Southern and Eastern Europe. Just check what’s happening in the countries that were left unhappy with that outcome – countries that are rapidly moving towards different forms of real-time tax administration controls such as Portugal, Spain, Hungary, Italy etc.…
The result is that we’re quickly getting to a situation that’s countless times more complicated than the most complex technology options of Article 233 of the VAT Directive. Complaining about signatures against that backdrop feels a little out of touch.
Conclusion
Each country has its unique fabric of intertwined business practices and law enforcement approaches. It’s by definition hard to judge the way these two forces interact in cultures that aren’t yours – specific ways of doing things may seem ridiculous to you, and may convince you that some evil conspiracy is leading the entire market up the garden path. The truth is usually simpler. In the case of vendors and businesses using e-signatures for complying with e-invoicing evidence requirements, it’s this: most countries in this world have a problem with tax collection, and most tax administrations are quite formalistic in enforcing legal requirements. Governments are collectively investing billions in tightening tax controls, and electronic invoicing is at the centre of their experiments and mandates. Enterprises will by and large seek to implement the measures that provide the highest degree of compliance certainty and that scale across as many countries and processes as possible. Electronic signatures meet those requirements. As since e-signatures are central to nearly all ongoing initiatives to further enhance tax controls with ‘clearance’ methodologies, that’s unlikely to change anytime soon. This is a verifiable fact – and companies don’t purchase complex IT-based services without checking facts.
This article was originally published on LinkedIn: https://www.linkedin.com/pulse/old-news-fake-sign-spiracy-europe-christiaan-van-der-valk/
