Starting in 2023, French VAT rules will require businesses to issue invoices electronically for domestic transactions with taxable persons and to obtain ‘clearance’ on most invoices before their issue. Other transactions, such as cross-border and B2C, will be reported to the tax authority in the “normal” way.

This will be a major undertaking for affected companies and although the changes are more than a year away, planning should start now. But what does planning mean in the context of a continuous transaction control (CTC) rollout? What have businesses on the cusp of such a transformation learnt when faced with the same challenge in countries such as Italy, India, Mexico and Spain? And how can businesses leverage those best practices for future CTC rollouts?

We share the points businesses should consider when planning for any CTC rollout, which can be used as a checklist for the France 2023 mandate to help you prepare.

Understand the new changes, and be aware of what’s ahead

• Is your organisation aware of, and do the relevant functional teams understand, the material changes proposed by the government?
• Do your teams understand what specifically is changing and do they have a reliable source of information to use as guidance?
• In a situation as dynamic as a CTC rollout, do your teams have the means to monitor new developments and analyse future changes?
• Is there a process in place in your organisation for implementing new changes once they’ve been introduced in law?

Understand how your business and operations are affected

• Which of your business transactions are in scope? When do they need to be compliant?
• How are your intercompany invoices processed today? It’s not uncommon for businesses to overlook compliance requirements for their intercompany invoice flows, but in a clearance system these invoices are almost always in scope.
• How will invoices be sent to the French tax authority under the new system? Can you manage this internally or is a third party involved?
• What information in addition to the invoice information must be sent?
• Where an invoice is not required today e.g. B2C sales, what information must be sent?
• How should these invoices be archived? Are there any specific legal or technical requirements for such storage?

Design or evaluate potential solutions

• Is the CTC reform best solved through an internally developed solution?
  • If yes, talk to IT as soon as possible so they can start planning and allocate both the necessary time and budget for the project.
  • If no, who are the service providers that could help?
• If external providers are used, how will the data go from your source systems to them and ultimately to the tax authority?
• Which of your source systems contain the required data? Is it one or multiple?
• Does the external provider have a ‘ready to go’ extractor for your ERP system/source system? Or, if your organisation relies on an API first strategy, which source systems will you use to send the data on to your provider or the tax authority?

Execute the solution

• How much notice does your IT department need for such a project? Resources from IT will be required, regardless of whether it will be an external or internal project.
• How much will development and implementation cost? Budget will need to be secured regardless of how you plan on implementing your solution of choice, internal or external.
• When does the cost need to be submitted for budget approval?
• When do you need to kick off the project? Once the planning is completed and the time required is known (including testing and training) you can work backwards to achieve a start date. This date should be confirmed with IT as soon as possible.

Once you’ve answered the questions above, you’ll be in a good position to both plan the roadmap to ensure compliant processes in time for the entry into force, as well as to estimate the cost and secure the needed funding for the project.

Norway announced its intentions to introduce a new digital VAT return in late 2020, with an intended launch date of 1 January 2022. Since then, businesses have wondered what this change would mean for them and how IT teams would need to prepare systems to meet this new requirement. Norway has since provided ample guidance so businesses can begin preparations sooner rather than later.

With this new VAT return, the Norwegian Tax Administration (Skatteetaten) seeks to provide simplification in reporting, better administration, and improved compliance.

This new VAT return provides for an additional 11 boxes, increasing the count from 19 to 30 boxes which are based on existing SAF-T codes to allow for more detailed reporting and flexibility. It’s important to note that the obligation to submit a SAF-T file will not change with the introduction of this new VAT return.

This change is for the VAT return only – with the SAF-T codes being re-used and re-purposed to provide additional information. Businesses must still comply with the Norwegian SAF-T mandate where applicable and must also submit this new digital VAT return.

Technical specifications of Norway’s digital VAT return

Skatteetaten has created many web pages with detailed information for businesses to look through over the next few months including the following:

• Implementation Guide – this guide was created to assist developers and businesses in assessing the technical requirements needed to implement upcoming changes
• Validation Rules – this list will be continually updated with more validation rules as needed
• XSD for VAT Return – contains the technical specifications (XSD) for the new VAT return as well as example files and descriptions of the fields contained in the return
• API Submission – contains information on submission and validation of the VAT return including error messages
• Testing Portal Information – contains information on test data and environments
• Questions and Answers – FAQ page for businesses to understand answers to common questions that may come up including registration, submission method, and additional files

Submission method for Norway’s digital VAT return

Norway is encouraging direct ERP submission of the VAT return where possible. However, the tax authorities have announced that manual upload via the Altinn portal will still be available. Login and authentication of the end user or system is carried out via ID-porten.

Additionally, Norway has provided a method for validation for the VAT return file, which should be tested before submission to increase the probability that the file is accepted by the tax authorities. The validator will validate the content of a tax return and should return a response with any errors, deviations, or warnings. This is done by checking the message format and the composition of the elements in the VAT return.

What’s next?

Businesses should begin preparations for the implementation of this new VAT return, as there will likely be challenges along the way.

In addition to the new VAT return, Norway has also announced plans to implement a sales and purchase report, which is currently in an early proposal stage in review with the Ministry of Finance. The next phase is mandatory public consultation which is when a desired launch date will be set. Skatteetaten notes that implementation time will be considered when determining an introduction date for the report.

Sovos recently sponsored a benchmark report with SAP Insider to better understand how SAP customers are adapting their strategies and technology investments to evolve their finance and accounting organizations. This blog hits on some of the key points covered in the report and offers some direct responses made by survey respondents, as well as conclusions made by the report author. To get the full report, please download your complimentary copy of SAP S/4HANA Finance and Central Finance: State of the Market.

In this year’s benchmark report, research found that most companies are focused on reducing complexity and cost as a primary driver of their overall finance and accounting, including tax, strategies. With this reduction, they are working to solve their biggest pain point which continues to be a lack of visibility into financial transactions and reporting.

The survey revealed several key strategies and investments that SAPinsiders are prioritizing to evolve their finance and accounting processes and organizations. The number one driver of finance and accounting strategy in 2021 is to reduce cost and complexity. This was named by 57% of our audience as the top driver of their finance and accounting strategy. This jumped 24% from last year. To support their top drivers, a majority (56%) of the finance and accounting teams in the study plan to increase their use of automation in 2021.

Clean and harmonized data and a centralized single point of truth are the most important requirements that SAPinsiders are prioritizing. 83% of survey respondents report that clean data is important or very important, while 80% highlight the significance of the Universal Journal in centralizing critical information.

How do technology and tax intersect?

Continued complexity within core financial and accounting systems is limiting organizations’ ability to adapt rapidly to changing business conditions and provide real-time visibility into operations. That is why the number one driver of finance and accounting strategy based on this year’s survey is the pressure to cut both cost and complexity.

Survey responses and interviews with customers about their largest sources of pain consistently mention system and process complexity as one of their most significant challenges. Respondents are focused on addressing this obstacle in a variety of ways such as through investments in analytics, automation, centralization, and system consolidation.

This directly impacts how companies approach tax as rapidly changing global tax laws and mandates often have organizations playing catch up to ensure they are charging and remitting the proper amounts of tax to each country in which they operate. Failure to do this can lead to costly audits, potential fines and penalties and damage to brand reputation.

Why move to SAP S/4HANA Finance?

Simplicity, speed, and easy access to data were among the top benefits cited by survey respondents who have completed or nearly completed their move to SAP S/4HANA Finance. Several mentioned the ease with which they can go from high-level reports and drill down to the document or line-item level, making it easier to understand the numbers and perform in-depth analysis quickly. This directly aligns with the pain points that were identified in the benchmark report survey.

Why now?

What is clear from this survey and subsequent report is that complexity across all layers of finance is having a direct impact on a companies’ ability to function at the highest operational level possible and is threating to impact the bottom line.

Accounting for tax early in your migration strategies and technology upgrades is a key component to ensuring that you are prepared to handle the challenges of modern tax on an international scale. For companies that operate on a multi-national basis, having a centralized approach to tax with enhanced visibility and reporting capabilities is imperative to achieving and remaining compliant no matter how many changes to tax law are introduced every year.

Please download the full report for a more detailed explanation of these critical areas of focus.

Six months after Brexit there’s still plenty of confusion. Our VAT Managed Services and Consultancy teams continue to get lots of questions. So here are answers to some of the more common VAT compliance concerns post-Brexit.

How does postponed VAT accounting work?

Since Brexit, the UK has changed the way import VAT is accounted for. Before January 2021, you had to pay or defer import VAT at the time the goods entered the UK. Because of the volumes of trade between the UK and the EU, the government have understandably changed this. So, now rather than having to pay import VAT you can choose to postpone it to the VAT return. In practice, this effectively means it’s paid and recovered on the same VAT return. This is a significant cash flow benefit. It’s common among many EU Member States and it was allowed in the UK many years ago. The UK reintroduced it from the start of this year.

There’s no need to be approved to use postponed VAT accounting but an election to use it must be made when completing each customs declaration. It doesn’t happen automatically and the reality is that businesses can choose whether they want to use it or not. The import VAT is then accounted for in box 1 of the UK VAT return and then recovered in box 4. If you’re a fully taxable business and the VAT is recoverable, this will mean that there is no need to make any payment of the import VAT. There are no costs involved in using postponed VAT accounting. The business will have to download a monthly statement from the Customs Declaration Service. The statement shows the postponed amount of VAT.

There are also import VAT accounting mechanisms in place in the EU but they vary from country to country. If you’re a UK business and you’re going to be the importer of the goods into the EU, there is the ability to use postponed accounting in some other countries but the rules on how it applies can vary. In some countries it’s like the UK, so no permission required.

In others you’ll need to make an application and meet the conditions in place. If there is no postponed VAT accounting, there may be the opportunity to defer import VAT which can still provide a cash flow benefit. It’s really important that companies understand how it works in the Member State of import, and if it’s available to them as it can have a big impact on cash flow. It’s good news that the UK have reintroduced postponed VAT accounting as it’s certainly a benefit and applies to all imports, not just those that come from the EU.

I’m shipping my own goods to a third party logistics provider in the Netherlands. I will ship the goods to customers around the EU. How do I value the goods for customs purposes as they remain in my ownership? They’re not of UK origin so customs duty may apply.

This question comes up a lot as customs valuation, like the principle of origin has not arisen for many years for UK companies who have only traded with the EU.

The rules on customs valuation are complex. In this scenario, there is no sale of the goods. So it’s not possible to use the transaction value which is the default valuation method. As customs duty is not recoverable, it’s essential that the correct valuation method is used. This minimises the amount of duty paid and also to remove the possibility of the customs and VAT authorities challenging a valuation. We would recommend seeking  specialist advice.

If I sell B2C to customers in the EU do I need to register for VAT in each Member State?

When goods go from Great Britain to the EU, we’re currently in the transition period between Brexit and the introduction of the EU e-commerce VAT package which comes into play on 1 July 2021. Until then, whether you need to be registered or not in an EU country depends on the arrangements in place with your customer. If you sell on a Delivery Duty Paid (DDP) basis, you’re undertaking to import those goods into the EU. So if you do that, you’ll incur import VAT on entry into each country and then make a local sale. If you do that in every Member State country, you’ll have to register for VAT in every Member State.

It should be noted that these are the rules for GB to EU sales and not those from Northern Ireland. This is because the Northern Ireland protocol treats NI to EU sales under the EU rules. The distance selling rules that were in force before the end of 2020 still apply.

Going forward, the EU has recognised that this isn’t really a manageable system. There has been significant abuse of low value consignment relief. LCVR relieves imports of up to €22 from VAT. So they’re introducing a new concept – the Import One Stop Shop (IOSS). IOSS will be available from 1 July 2021 as part of the EU E-Commerce VAT package. From this point, the principle is that for goods with an intrinsic value of below €15. you can use the IOSS. IOSS accounts for VAT in all the countries to which you deliver. You only need a VAT registration in one country where you then pay all your VAT. You submit one return in that country on a monthly basis. This should simplify VAT compliance and ease the admin burden.

There will also be a One Stop Shop (OSS) for intra-EU transactions. So the simplifications ahead will reduce the burden to businesses. What’s important is making sure you review your options. Make an informed decision as to which is the right scheme for your business. Ensure you can comply with VAT obligations to avoid VAT compliance problems in the future.

In Poland, the Ministry of Finance proposed several changes to the country’s mandatory JPK_V7M/V7K reports. These will take effect on 1 July 2021. The amendments offer administrative relief to taxpayers in some areas but create potential new hurdles elsewhere.

Poland JPK_V7M and V7K Reports

The JPK_V7M/V7K reports – Poland’s attempt to merge the summary reporting of a VAT Return with the detailed information of a SAF-T – have been in effect since October 2020. Taxpayers must submit these reports (V7M for monthly filers, V7K for quarterly filers) in place of the previously-used VAT Return and JPK_VAT files.

The JPK_V7M/V7K reports require taxpayers to designate within each file the invoices subject to special VAT treatment. For example, invoices representing transfers between related parties or invoices for transactions subject to Poland’s split payment regime.

Split payment designations are particularly complex for taxpayers to manage. Poland’s split payment regime is broadly applicable. In some cases can be exercised at the buyer’s option. This makes it difficult for sellers to predict which of their invoices should be marked.

As a result of these complexities, and in response to taxpayer feedback, the draft amendment for 1 July would abolish the split payment designation. This would significantly reduce the administrative burden on taxpayers.

The draft amendment does, however, give rise to an additional complexity in the reporting of bad debts. Under the amended rules, taxpayers need to indicate the original due date of the payment for an unpaid invoice. For which the taxpayer is seeking a VAT relief. This is intended to help the tax authority verify bad debt relief claims. This could potentially present difficulty for taxpayers who do not maintain such information or cannot easily access it in their accounting systems.

Poland and EU One Stop Shop

Finally, the draft amendment would modify reporting of cross-border business to consumer (B2C) supplies of goods. This is as well as similar supplies of electronic services. These supplies are at the heart of the European Union’s One-Stop Shop regime that takes effect 1 July 2021, and as such, the current invoice designations for these supplies in JPK_V7M/V7K would be consolidated into a single, new invoice designation under the amended rules.

Poland’s JPK_V7M/V7K filings are enormously ambitious in scope. It is clear from these latest proposals that the tax authority is willing to make substantial adjustments to the structure of these filings, at very short notice. In such a dynamic landscape, it is critical that businesses stay on top of regulatory developments in order to remain compliant.

As detailed within our annual report VAT Trends: Toward Continuous Transaction Controls, there’s an increasing shift toward destination taxability which applies to certain cross-border trades.

In the old world of paper-based trade and commerce, the enforcement of tax borders, between or within countries, was mostly a matter of physical customs controls. To ease trade and optimise resources, many countries have historically applied ‘de minimis’ rules. These set specific limits (e.g. EUR 10-22 applied in the European Union) below which imported goods had an exemption from VAT.

Cross-border services, which couldn’t, or not easily, be checked at the border would often escape VAT collection altogether or be taxed in the country of the service provider. There has been a huge increase in cross-border trade in low-value goods and digital services over the last decade. As a result, tax administrations are taking significant measures to tax these supplies in the country of consumption/destination.

VAT treatment of B2C digital/electronic supplies by foreign suppliers

Since the 2015 publication of the OECD/G20’s Base Erosion and Profit Shifting (BEPS) Project Action 1 Report on Addressing the Tax Challenges of the Digital Economy, most OECD and G20 countries have adopted rules for the VAT treatment of B2C digital/electronic supplies by foreign suppliers. The International VAT/GST Guidelines issued in conjunction with the Project Action 1 Report recommend the following approaches for collecting VAT/GST on B2C sales of electronic services by foreign suppliers:

• The country of the customer will have the right to levy VAT on the supply
• The foreign seller must register for VAT in the customer’s country under a simplified registration and compliance regime, and
• The foreign seller must collect and remit VAT

Many industrialised and emerging countries have since passed laws on this OECD guidance; most apply to B2C transactions only, although some of these jurisdictions have imposed obligations that apply or could apply to both B2B and B2C transactions.

For low value goods, the OECD has made similar recommendations providing for both a vendor and an intermediary-based collection model. The destination-based taxability trend affects many different areas of consumption tax, including the following examples.

• US sales and use tax – the South Dakota v. Wayfair decision
• The European Commission’s 2018 proposals for a ‘definitive’ VAT system
• EU e-commerce package and digital services
• Latin America

EU E-Commerce VAT Package and Digital Services

The EU has been gradually introducing new rules for VAT on services. This is to ensure more accurately accrues to the country of consumption. From 1 January 2015, and as part of this change, where the supply of digital services is taxed changes. It will be taxed in the private end customer’s EU location, has their permanent address or usually resides. These changes sit beside the introduction of the One Stop Shop (OSS) system which aims to facilitate reporting for taxable persons and their representatives or intermediaries. Under the EU e-commerce VAT package scheduled to take effect from 1 July 2021, all services and all goods including e-commerce based imports are subject to intricate regulations that include changes to the way customs in all Member States operate.

With this shift toward destination taxability for certain cross-border transactions it’s key that companies fully understand the impact. That is not only on their business processes but also comply with changing rules and regulations.

Update: 25 October 2023 by Maria del Carmen

Mexico releases Carta Porte Version 3.0

On 25 September 2023, the Tax Authority in Mexico (SAT) published Version 3.0 of the Carta Porte Supplement on its portal with some adjustments.

The use of Version 2.0 of the Carta Porte became mandatory as of 1 January 2022 in accordance with the Fourth Resolution of modifications to the Miscellaneous Tax Resolution of 2021.

However, the authority established 1 January to 31 December 2023 as a grace period to correctly issue said supplement, without sanctions or fines for non-compliance with any requirement.

Main changes of Carta Porte V3.0

One of the adjustments announced is the introduction of seven catalogues:

• RegimenAduanero
• RegistroISTMO
• SectorCOFEPRIS
• FormaFarmaceutica
• CondicionesEspeciales
• TipoMateria
• DocumentoAduanero

There was also the introduction of fields for foreign trade operations, such as:

• TypeMatter
• DescriptionSubject

The Customs Document replaces the Pedimento Section with the addition of fields to identify the type, Tax ID of the Importer and ID custom document.

Through the anticipated version of the 8^th RMRMF, the SAT has modified Rule 2.7.1.7 relating to the requirements of the printed representations of the CFDI, indicating that in the case of the CFDI to which the Carta Porte is incorporated, the structure of the supplement allows the printed representation of the CFDI and the Carta Porte to be displayed separately.

Likewise, Rules 2.7.7.1.1. and 2.7.7.1.2 for the CFDI of the income type and the transfer type to which the Carta Porte is incorporated, respectively, will serve to prove the legal stay and/or possession of the goods and merchandise of foreign origin during their transfer in national territory, providing the number of the customs request or custom document in said receipt in terms of the applicable customs provisions.

Transition and mandatory terms for Carta Porte 3.0

1. Carta Porte Version 3.0, published on 25 September 2023 on the SAT Portal, must be used as of November 25, 2023
2. Taxpayers obliged to issue CFDIs to which the Bill of Lading complement is incorporated, may continue to issue the complement in Version 2.0, until 31 December 2023.
3. From 1 January 2024, the only valid version of the Bill of Lading supplement will be 3.0

Printed representation

The printed representation introduces a new two-dimensional barcode that will accompany the printed representation of the Carta Porte.

Technical documentation about the latest changes to Carta Porte is available at:

It is important to note that the authority has not yet updated Filling Guide of said complement, so we must be attentive to these regulations.

Want to learn about other tax requirements in Mexico? Read our Mexico tax rules.

For historical information on the initiative, read our dedicated Carta Porte 2.0 blog.

Key information about the Carta Porte Supplement

Update: 31 July 2023 by Maria del Carmen

Updates to the Scope and Definitions of the Carta Porte Supplement

Mexico’s Carta Porte supplement was introduced in May 2021 to ensure the traceability of products moved within the country. Use of the supplement became mandatory on 1 January 2022 but there have been many changes and additions to its requirements.

Taxpayers in scope of the Carta Porte

Section 2.7.7 of the Miscellaneous Tax Resolution (RMF) 2023 regulates the Carta Porte Supplement which specifies that the following must issue a CFDI of Income to which they must incorporate the Carta Porte supplement:

• Taxpayers, intermediaries or transport agents dedicated to the transport service of general and specialised cargo, who circulate by land, rail, air, or navigate by sea.
• Those who provide the parcel and courier service, of towing cranes, towing and salvage cranes and deposit of
• Those who provide transport of funds and values or dangerous materials and waste, among other services that involve the transportation of goods or merchandise.

Owners of goods transporting its own assets via its own transport methods in national territory, including the use of towing cranes and vehicles for the transport of funds and values, can provide proof of transport through the printed or digital representation of the CFDI of Transfer issued by themselves, to which they must incorporate the Carta Porte supplement.

Transport of imported goods

For those within the scope mentioned above, the RMF indicates that the carrier must prove the legal stay and/or possession of foreign goods and merchandise during their transport in national territory. This can be done using the CFDI of Income or Transfer as appropriate, to which the Carta Porte supplement is incorporated if the CFDI contains the import request number.

Types of transport in scope of the Carta Porte

The current RMF includes a specific section for Maritime Transport and Motor Transport, which also establishes the rules for exported goods.

It also establishes specific rules for:

• The provision of dedicated services
• The provision of services for the transport of funds and values
• The provision of services for the transportation of goods by carriers who are resident abroad and without permanent establishment in the national territory

Exceptions to the Carta Porte obligation

The exceptions are applicable to:

• Taxpayers who provide land transport services of general and specialised cargo when the transportdoes not imply transit through any stretch of federal jurisdiction.
• Owners of goods transporting their own assets, when the transport does not imply transit through any stretch of federal jurisdiction.

These taxpayers must prove transport with the printed or digital representation of either the CFDI of Income or Transfer as appropriate without Carta Porte. The CFDI must include the product and service key according to the CFDI Filling Instructions to which the Carta Porte supplement is incorporated. Transport of medicines is not included in this exception, among others.

There is also an exception for the provision of parcel or courier services and consolidated transport of goods, following the corresponding rules.

Looking for a helping hand with VAT compliance in Mexico? Contact our team of experts.

Update: 15 June 2021 by Ramón Frias

Understanding Mexico’s Carta Porte Supplement

On 1 May 2021, the Mexican tax administration (SAT) released one of the most important updates to the electronic invoicing system of the country since 2017.

The update was about the new Bill of Lading Supplement (locally known as Suplemento de Carta Porte) that should be added as an annex to the electronic invoice (CFDI) of Transfer (CFDI de Traslado) or to the CFDI of Revenues (CFDI de Ingresos) that are issued for hauling services.

This supplement is based on the provisions of Articles 29 and 29-A of the Fiscal Code of Mexico, and the rule 2.7.1.9 of the Miscellaneous Fiscal Resolution. The articles of the tax code grant the tax administration the power to define the documents to be used for supporting the legal transportation goods inside that country via specific rules. The mentioned rule describes the specific requirements of the Supplement of Carta Porte.

Why has Mexico introduced the Carta Porte supplement?

Latin American countries have a serious problem with tax evasion, usually made possible by smuggling goods without paying the corresponding taxes. According to the information provided by the SAT, 60% of the goods transported in Mexico have an illegal origin.

Therefore, the purpose of enforcing the use of the Carta Porte supplement, whether as an annex to the CFDI of Transfers or the CFDI of Revenues, is to ensure the traceability of the products moved inside the Mexican territory by requiring the provision of additional information about the origin, location, precise destination and routes of transport of the products transferred by roads, rail, water or air in Mexico.

Once this change comes into effect, transporters of goods by road, rail, water or air must have a copy of the Supplement of Carta Porte in the vehicle that proves lawful compliance with this mandate.

Who is required to issue the Carta Porte supplement?

• The owner of goods transporting its own assets:When the owner is moving assets from one location to another without making a sale (i.e. from a warehouse to retail store) or when such owner is shipping the goods on consignment. The same obligation to issue the Carta Porte supplement applies when the seller ships the goods to their customer using their own means of transport or when they are shipping those goods for export. In those cases the Carta Porte supplement will come as part of the CFDI of Transfers.
• The intermediaries and agents of transport:These agents of transport are known in Mexico as ‘Agentes de Carga’ and they act as intermediaries between the owners of the goods and the hauling companies controlling the logistics, legal documentation and other issues necessary for the delivery of products. In these cases, they will be required to issue the Carta Porte supplement as part of a CFDI of Transfers. The same obligation applies to those that provide intermediation services on behalf of the owner of the goods being transported.
• The hauling companies:When they supply services of transportation of goods by whichever means: water, air, road or rail. The suppliers of transportation services should issue a CFDI of Revenues with the Carta Porte supplement.

When will the supplement become mandatory and when should it be issued?

• The new Carta Porte supplement became effective on 1 June 2021, but its use will become mandatory 120 days counted from that effective date (30 September 2021). The Carta Porte supplement, whether as part of a CFDI of Transfer or a CFDI of Revenues, should be issued by any of the three parties indicated above, before the transportation of goods begins.
• The transporter of the product should have with him a copy of the digital CFDI of Transfer or the CFDI of Revenues, properly validated with the SAT via the corresponding authorised provider of certification services (PAC). The tax and transportation authorities will enact random verification checks on the roads, airports, waterways, train stations, and other transportation means, to ensure compliance with this mandate.

The Carta Porte as a supplement of the CFDI of Transfers or the CFDI of Revenues

As we know, the new regulations require the Carta Porte supplement to be added to the CFDI of Transfers or to the CFDI of Revenues, depending on who is transporting the goods.

The Carta Porte supplement will be added to the CFDI of Transfers when the transport of goods is made by the owner (i.e. internal distributions between warehouses and stores, consignment, etc.) or when the seller assumes the shipment of the products to the purchaser.

The Carta Porte supplement will also be added to CFDI of Transfers when the shipping of the goods is made by an intermediary or by an agent of transport as explained before. In such cases the current regulations provide that the CFDI should have zero as a value of the products and the RFC key to be used is the generic key established for transactions carried out with the public. In the field for description, the object of the transfer should be specified.

When the Carta Porte supplement is issued as part of the CFDI of Revenues (CFDI de Ingresos) as a result of the goods being transported by a haulage company, the haulage company should issue the CFDI of Revenues with the Carta Porte supplement. However, different to the previous case where the CFDI had a value of zero, the value to be included in the CFDI of Revenues will be the price of transportation services charged by the haulage company to the client.

It is important to mention that Carta Porte supplement does not substitute other documents necessary to prove the legitimate origin or ownership of products. Other additional documents will be required for this purpose.

Documents accompanying the Carta Porte supplement

While the Carta Porte supplement provides clear information about the transportation of goods being transferred, that document alone does not prove the lawful status of the goods being hauled. That status should be proven by whoever is providing the transportation, with the corresponding documents proving the origin of those hauled products, such as import documents, CFDI of Pagos, registrations and licenses etc.

In the case of transportation of petroleum products, the lawful status of the product will be proven with the printed representation of the supplement established for that type of products (the Complemento de Hidrocarburos y Petroliferos).

Structure of the Carta Porte supplement

According to the technical documentation released by the SAT, the information provided via the Carta Porte supplement will be conveyed via a number of fields (around 215) that will contain optional and mandatory information about the product being transported, type of packaging used, weight, quantity, insurance, the permit of transportation provided to the hauling company by the Secretary of Public transportation, plate and registration of the motor vehicle used, driver, as well as information about the recipient of the products being transported within Mexico.

The information of those fields will be filled via direct input by the taxpayers or in some cases via the specific choices available in a set of catalogs established by the SAT.

Such catalogs can be grouped as follows:

• Catalog of transport: Contains the keys for choosing the means of transport used to move the goods (01 transport by land, 02 Maritime transport, etc.)
• Catalog of station: Describes the place from where merchandise was shipped
• Catalog of waterways ports, airports and train stations: Lists all the ports, airports and stations across Mexico
• Catalog of units of measurements and packaging: Informs the choices about the type of container and the measurements related to the goods being transported.
• Catalog of products and services: Indicates the different codes used to identify the products being transported.
• Catalog of dangerous materials: Lists the options to describe and identify the products considered dangerous, when they are being transported.

Other catalogs included in this supplement are those related to the type of transport and trailers used to transfer the products by land, packaging, the types of permits, the municipalities, neighborhoods, and locations, among others.

Penalties and sanctions

Once the use of the Carta Porte supplement becomes mandatory, noncompliance with this requirement will have several immediate consequences for the violators.

• Seizure of Hauled Goods:The Authority of Roads and Transportation enacts random verification checks of the goods being hauled on public roads in Mexico. If the vehicles transporting goods do not have the proper documentation proving the lawful transportation and origin of those goods, the authority will proceed to seize them until they comply with these requirements.
• Fines:both the haulage company and the owner of the goods will be subject to fines by the SAT. In this case, the sanctions will be applied in proportion to the severity of the infraction. Most of the infractions are contained in Articles 84 and 85 of the Federal Fiscal Code and in Annex 5 of the Miscellaneous Fiscal Resolution. In addition to this, the transportation authority may suspend or cancel the driving permissions of the haulage company.
• Non-Deductible VAT:When the CFDI of Revenues does not have the corresponding Carta Porte supplement, the VAT charged by the hauling company will not be deductible for the owner of the goods being transported.

Additional clarifications about the scope of the Carta Porte supplement:

When the SAT released the new Miscellaneous Fiscal Resolution for 2021 there were several doubts about the scope of this mandate. This was because for the case of land transportation, the rule established that the use of the supplement would be required only when the goods were transported via federal roads. That original release of the Miscellaneous Fiscal Resolution also established compliance with this mandate would be required to owners of national goods that are part of their assets when they haul those assets in Mexico.

To remove those misunderstandings and limitations, the SAT has recently released a new modification specifying that the mandate will be required for all movement of goods, regardless of the road used. The new resolution also excluded the reference to “national goods that are part of their assets”, so that it is clear now that it applies to any goods being transferred, regardless of its origin.

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It’s been more than a few years since Romania first toyed with the idea of introducing a SAF-T obligation to combat its ever-growing VAT gap. Year after year, businesses wondered what the status of this new tax mandate was, with the ANAF continuously promising to give details soon. Well, the time is now.

What is SAF-T?

The Organization for Economic Co-operation and Development (OECD) introduced the Standard Audit File for Tax (SAF-T) in 2005. The goal of the SAF-T digital VAT return is to provide auditors access to reliable accounting data in an easily readable format. Companies can export information from their accounting systems (invoices, payments, general ledger journals in addition to master files).

As a result, audits should be more efficient and effective based on the standardized format set by the OECD. As countries can require a different format for capturing data, no two country implementations of SAF-T are exactly the same.

How is Romania implementing their SAF-T?

From 1 January 2022, the new Romania SAF-T mandate comes into effect for large taxpayers. The digital VAT return submissions are via XML with over 800 fields.

It appears Romania is looking to follow the format prescribed by the OECD (SAF-T OECD Scheme version 2.0 – OECD standard format). The technical specifications have been released and can be found on the ANAF portal.

The documents which are available include:

• SAF-T_Romania_SchemaDefinitionCodes.xlsx – describes in a tabular organization format the structure of the SAF-T scheme for Romania SAF-T tax reporting
• Romanian_SAF-T_Financial_Schema.xsd – describes the SAF-T scheme to be used in Romania for SAF-T reporting. The description format is XML Scheme Definition (XSD) and is useful for companies that develop applications for automatic generation of SAF-T reports
• Annex SAF-T – Structura_D.docx – contains the annex of the declaration and describes all validation rules in ANAF’s own format
• SAF-T OECD Scheme version 2.0 – standard OECD format

Now that the specifications are available, Romania will soon move into the testing phase of implementation; where taxpayers can take advantage of submitting test data to the ANAF. This is in order to become familiar with the process, understand the requirements, and if necessary, adjust their ERP systems. As a result, this should ensure full compliance for January. Details on how to participate in the test phase are forthcoming and will be available on the portal once finalized.

What’s next?

Sources close to the Romania SAF-T implementation project indicated the hope is to eliminate certain declarations. To possibly provide pre-filled returns based on SAF-T information once the project is in full swing. This would align with the pre-population trend that is slowly making its way across the EU; with Italy, Spain, and Hungary paving the way for pre-populated VAT returns.

The Turkish Revenue Administration (TRA) has published updated guidelines on the cancellation and objection of e-fatura and e-arsiv invoice. Two different guidelines are updated: guidelines on the notification of cancellation and objection of e-fatura and guidelines on the notification of cancellation and objection of e-arsiv.

The updated guidelines inform taxable persons about the new procedures for objection against an issued e-fatura and e-arsiv invoice. And how this must be notified to the TRA. Due to changes in the objection procedure, the e-arsiv schema has also changed. There has not yet been a change in the e-fatura schema, however it could also change in the near future. The updated guidelines state that the TRA platform can be used to notify the TRA about objection requests made against an issued e-fatura and e-arsiv invoice.

Why are the updated guidelines important?

From July 2021, electronically issued documents won’t be mentioned in the so called ‘BA and BS forms’. The BA and BS forms are generated to periodically report issued or received invoices when a total invoice amount is 5.000 TRY or more. All limited liability and joint stock companies are obliged to create and submit the forms to the TRA even if they don’t have any invoices to report.

The TRA recently published a new provision stating that electronically issued documents will not be shown in BA and BS forms and instead will be reported directly to the TRA in the clearance (e-fatura) and reporting(e-arsiv) process. Considering that the TRA receives the invoice data for electronically issued invoices in real-time, relieving taxpayers from reporting invoices through BA and BS forms creates a more efficient system in which the relevant data will be collected only once from taxpayers.

At its current stage, e-documents won’t be mentioned in these forms. However, in order for the TRA to have accurate invoice data about each taxpayer, it needs to be notified which are the final invoices and disregard any objected or cancelled documents when evaluating taxpayer data.

Although the cancellation process is already performed through the TRA platform for basic e-fatura and e-arsiv, objection requests are made externally (through a notary, registered letter or registered e-mail system), meaning the TRA does not have visibility of all objections. There could therefore be a risk that the TRA considers a cancelled document (due to objection) as issued which could result in discrepancies between the taxpayer records and the data that the TRA considers relevant for tax collection.

Therefore, taxpayers must now notify the TRA about objection requests to avoid any discrepancies between their records and BA and BS forms. The final goal of this application is that the BA and BS forms will be completely auto populated by the TRA in future.

How will the new process work?

According to the Turkish Commercial Code, any objections or cancellation requests must be made within eight days. Suppliers and buyers can raise an objection request which must be made externally (through a notary, registered letter or registered e-mail system) and registered in the TRA system.

For e-arsiv application, there are two ways for suppliers to notify the TRA about the objection request. They can either use the e-arsiv schema (automated) or register the request in the TRA portal. Buyers can see this request on the TRA platform and may respond, although they are not obliged to. Because e-self-employment receipts are also reported through e-arsiv application, the same objection rules apply.

For e-fatura, since there is no change in the schema, it is not possible for suppliers or buyers to notify the TRA using e-fatura schema. Currently, they can only notify the TRA about e-fatura objections through the TRA platform. Taxpayers can also respond to objection requests only through the platform.

What’s next?

The TRA has taken a step towards the digitalization of cancellation and objection requests. However, there is still not an automated way to perform these actions. Before the digitized objection process becomes reality in the country, the authorities must take a more sophisticated approach towards automating the process as well as introducing or amending applicable legislation.

An amendment in the General Communiqué No. 509 has announced healthcare service providers and taxpayers providing medical supplies and medicines or active substances must use the e-invoice application from 1 July 2021.

The mandated scope for transition to e-invoice and e-arşiv invoice applications in the healthcare industry

Published in the Official Gazette the implementation will cover healthcare service providers who have signed contracts with the Social Security Institution (SSI) and all taxpayers providing medicines and active substances and medical supplies.

This includes:

• Hospitals, medical centres, branch centres, dialysis facilities
• Other specialised treatment centers licensed by the Ministry of Health
• Diagnosis, medical examination and imaging centres
• Laboratories, pharmacies, medical device and material suppliers
• Optometry organisations, auditory centres, spas
• Private legal entities providing or producing human medicinal products, in addition to their unincorporated branches and pharmaceutical warehouses.

The transition process to e-invoice and e-arşiv invoice applications in the healthcare industry

Within this scope, organisations must use the e-invoice application as of 1 July. Organisations signing contracts with SSI after this date must use e-invoice prior to their issue of invoices to SSI.

From 1 January 2020 all organisations included in the e-invoice application scope have to apply the e-arşiv invoice on the date of e-invoice application. Any healthcare organisations included in the amendment will then have to apply the e-arşiv invoice on 1 July.

What are the benefits of e-invoice and e-arşiv invoice transition to the healthcare industry?

The digitisation process will minimise physical contact, a significant benefit following the Covid-19 outbreak. Furthermore, organisations will no longer have to prepare or store physical documents as they are stored electronically.

For organisations that issue invoices to SSI, transactions such as payment terms will become faster and more efficient via the e-invoice and e-arşiv invoice applications. In addition to the transfer of all invoice-related processes to the digital environment.

Organisations that carry out the e-issuance process via the TRA Portal or via a third-party integrator will benefit from easy access to documents, improved efficiency, and business continuity as a result.

Italy postpones e-document legislation until 2022. In September 2020, Italy introduced major changes to the country’s rules on the creation and preservation of electronic documents. These new requirements were expected to be enforced on 7 June 2021 however the Agency for Digital Italy (AGID) has now decided to postpone the introduction of the new rules until 1 January 2022.

The new ‘Guidelines for the creation, management, and preservation of electronic documents’ (“Guidelines”) regulate different aspects of an electronic document. By following the Guidelines, businesses benefit from the presumption that their electronic documents will provide full evidence in court.

The postponement of the introduction of the Guidelines is a reaction from the AGID to claims of local organizations who have particularly expressed concern about the obligation to associate metadata with e-documents. The Guidelines set forth an extensive list of metadata fields for keeping alongside e-documents in a way that will enable interoperability.

Metadata requirements modified

In addition to delaying the introduction of the new e-document legislation, the AGID has also modified metadata requirements. They included new pieces of metadata and changing the description of some fields. The AGID has also corrected references – especially to standards – and rephrased statements to clarify some obligations.

The updated Guidelines and their corresponding Appendices are available on the AGID website.

This blog is an excerpt from Sovos’ Annual VAT Trends report. Please click here to download your complimentary copy in full.

VAT requirements and their relative importance for businesses have changed significantly in recent years. For data that is transactional in nature, the overall VAT trend is clearly toward various forms of continuous transaction controls (CTCs).

The first steps toward this radically different mode of enforcement, known as the “clearance model”, began in Latin America in the early 2000s. Other emerging economies, such as Turkey, followed suit a decade later. And today, many countries in the Latin American region now have stable CTC systems where a significant amount of the data required for VAT enforcement is based on invoices. Other key data is harvested and pre-approved directly at the time of the transaction.

Common clearance system features

There are several high-level features and processes that many clearance systems have in common.

However, many variations exist on this reference model in practice; many countries with a clearance system have implemented extensions and variations on these “standard” processes:

1. OK TO ISSUE: Typically, the process starts with the supplier sending the invoice in a specified format to the tax authorities or a state agent licensed to act on its behalf. This invoice is ordinarily signed with a secret private key corresponding to a public certificate issued to the supplier.

2. OK/NOT OK: The tax authority or state agent (for example, an accredited or licensed operator) will typically verify the signed supplier invoice and clear it by registering it under a unique identification number in its internal platform. In some countries, a proof of clearance is returned, which can be as simple as a unique transaction ID, possibly with a timestamp. In some cases, it’s digitally signed by the tax authority/state agent. The proof of clearance may be detached from the invoice or added to it.

3. VALID: Upon receipt of the invoice, the buyer is often obligated or encouraged to check with the tax authority or its agent that the invoice received was issued in compliance with applicable requirements. In general, the buyer usually handles integrity and authenticity control using crypto tools, also used to verify a signed proof of clearance. In other cases, the tax authority or agent completes the clearance check online.

4. OK/NOT OK: If the buyer has used an online system to perform the validation described in the previous step, the tax authority or state agent will re-turn an OK/not OK response to the buyer.

The first “clearance” implementations were in countries like Chile, Mexico and Brazil between 2000 and 2010. They were inspired by this high-level process template. Countries that subsequently introduced similar systems, in Latin America and worldwide, take greater liberties with this basic process model.

Global expansion of CTCs

Europe and other countries passed through a stage allowing original VAT invoices to be electronic. This is without changing the basics of the VAT law enforcement model. This phase of voluntary e-invoicing without process re-engineering is “post audit” e-invoicing. The moment a tax administration audit comes into play is post-transaction. In a post audit system, the tax authority has no operational role in the invoicing process. It relies heavily on periodic reports transmitted by the taxpayer.

Largely due to the staggering improvements in revenue collection and economic transparency demonstrated by countries with existing CTC regimes, countries in Europe, Asia and Africa have also started moving away from post audit regulation to adopting CTC-inspired approaches.

Many EU Member States, for example, are moving toward CTCs not by imposing “clearance” e-invoicing but by making existing VAT reporting processes more granular and more frequent via CTC reporting. These countries will eventually adopt requirements for real-time or near-real-time invoice transmission. This is as well as electronic transmission of other transaction and accounting data to the tax authority. However, it’s not a foregone conclusion that they’ll all take these regimes to the extreme of invoice clearance.

CTC reporting from a purely technical perspective often looks like clearance e-invoicing, but these regimes are separate from invoicing rules. In addition, they don’t necessarily require the invoice as exchanged between the supplier and the buyer to be electronic.

The impact of CTCs on business

The VAT trend towards CTCs is obvious, but situations in individual countries and regions remain fluid. It’s important to align your company with local expertise that understands the nuances of your business and what regulations and rules you’re subject to.

On 22 March 2021 the EU Council approved DAC7, which establishes EU-wide rules meant to improve administrative cooperation in taxation. In addition, the Directive addresses additional challenges posed by a growing digital platform economy.

What is DAC7?

In 2011, the EU adopted Directive 2011/16/EU on administrative cooperation in the field of taxation in the EU (‘DAC’). The aim of the Directive is to establish a system for secure cooperation between EU countries’ national tax authorities. The Directive also sets out the rules and procedures EU countries must apply when exchanging information for tax purposes. DAC7 is the seventh set of amendments to the Directive.

What are the new rules under DAC7?

The new DAC7 tax rules will require digital platforms to report the income earned by sellers on their platforms to EU tax authorities. As a result, reportable activities will include:

• The sale of goods
• The provision of personal services
• The rental of immovable property
• The rental of any mode of transport

Reportable information will include tax identification numbers, VAT registration numbers, in addition to other demographic information for sellers. The new rules extend the scope of automatic exchange of information among EU tax officials to the information reported by the digital platform operators.

The object of these new rules is to address the challenges posed by an ever-expanding global digital platform economy. Each year, more and more individuals and businesses use digital platforms to sell goods or provide services. Sales made online have become an even larger share of total global sales in the last year due to the COVID-19 pandemic.

Income earned through these digital platforms is often unreported and tax is not paid, which causes loss of tax revenue for Member States and gives an unfair advantage to suppliers on digital platforms over their traditional business competitors. The new amendments should address these issues, enabling national tax authorities to detect income earned through digital platforms and determine the relevant tax obligations.

Other rules included within the amendments will improve the exchange of information and cooperation between Member States’ tax authorities. It will now be easier than ever to obtain information on groups of taxpayers. Lastly, the new rules set up a framework for authorities of two or more Member States to conduct joint audits.

When will DAC7 apply?

The new DAC7 tax rules will apply to digital platforms operating both inside and outside the EU from 1 January 2023. The framework for authorities of two or more Member States to conduct joint audits will be operational by 2024 at the latest.

Update: 25 August 2023 by Carolina Silva

Croatia to Introduce E-Invoicing and CTC Reporting System

According to official sources from the Ministry of Finance, the Croatian tax authority will introduce a decentralised e-invoicing model alongside a continuous transaction control (CTC) real-time reporting system of invoice data to the tax authority. This move is part of the Fiscalization 2.0 project the authority announced earlier this year.

This is the outcome of a recent project where the tax authority analysed CTC clearance and reporting systems from multiple jurisdictions within the EU – i.e. Spain, France, Italy and Hungary – which all have the common purpose of combating VAT fraud. Further examination of the efficacy of such systems revealed that these procedures are successful in this fight and increase VAT revenue.

Upcoming obligations in Croatia

According to recent news, there will be a phased implementation of two obligations:

• Mandatory electronic invoicing in the B2B sector
• The fiscalization process, consisting of a requirement to perform real-time reporting of a certain set of data to the tax authority

These are two independent obligations for taxpayers and take place separately.

Trading parties will issue and exchange e-invoices and, in parallel, each party will deliver certain invoice data to the fiscalization system within a two-day deadline. The e-invoicing process and data reporting to the fiscalization system can both be performed through service provider access points.

Companies will not perform the e-invoice exchange through a centralised platform but through access points; they can outsource their e-invoicing and real-time reporting processes to service provider access points. To this end, the tax authority will make a directory of access points available.

The Croatian tax authority will use data obtained from the fiscalization of invoices to simplify and facilitate the existing VAT reporting obligations (i.e. forms, records and tax returns), ultimately replacing some of the current returns. Measures proposed are:

• Pre-filled forms for small and medium taxpayers
• Abolishing a certain number of forms and extending deadlines
• Digitalisation of the submission and processing of VAT returns

What is next?

The proposed system should be implemented by the end of 2024, giving time for the necessary adjustments of the current legal framework to be made and for publishing further CTC documentation and specifications before the implementation begins.

Need help preparing for these upcoming changes in Croatia? Sovos can help.

Update: 13 February 2023 by Carolina Silva

Croatia’s Proposed CTC System

The Croatian Tax Administration has announced a new project called “Fiscalization 2.0”, which would implement a broad CTC system that combines e-reporting, mandatory e-invoicing, e-archiving and e-bookkeeping obligations.

Fiscalization 2.0

Fiscalization 2.0 seems to be an extension of Croatia’s current fiscalization system for cash transactions, called online fiscalization. The government is looking at other CTC systems in Europe, and specifically mandatory B2B e-invoicing, as the vehicle to achieve business automation and tax autonomation in the Croatian economy.

Based on the announcement, it is not clear yet what form of CTC system may be implemented and what the requirements will be.

Croatia’s proposed measures are:

• The introduction of a system for reporting non-cash transactions to the tax authority. However, the scope of the obligation – if it covers the whole sector for B2B, B2G and B2C or not – is still unclear.
• The potential introduction of a B2B e-invoicing mandate, combined with e-archiving and e-bookkeeping requirements.
• The introduction of a free e-invoicing platform for small taxpayers.
• The simplification of reporting obligations by reducing the number of forms the tax authority requires and pre-filling tax returns.

The project should be implemented by the end of 2024, giving the authorities enough time to produce necessary CTC legislation and documentation and prepare businesses to comply with the new requirements.

What is next?

Expect the Croatian Tax Administration to publish further documentation and specifications before implementation.

Currently, the tax administration is forming working groups to jointly study the best practices and find the right solutions for the new CTC system. Additionally, the tax authority is conducting a survey on the current state of e-invoicing in the country and expectations for the future.

For more information on Croatia’s evolving fiscalization system, speak to our expert team.

Update: 8 April 2021 by Joanna Hysi

Croatia was one of the first countries in the world to introduce a real-time reporting system for cash transactions to the tax authority. Known as the online fiscalization system, new requirements have been introduced to improve tax controls for cash transactions.

Croatia’s online fiscalization system

The system aims to combat retailer fraud by providing the tax authority with visibility of cash transactions in real-time and encouraging citizens to play a part in tax controls by validating the fiscal receipt through the tax authority’s web application.

Previously, the online fiscalization system required issuers to send invoice data to the tax authority for approval and include a unique invoice identifier code (JIR) provided by the tax authority in the final receipt issued to the customer. Registration of the sale could be verified by entering the JIR code through the tax authority’s web application.

What’s new for Croatia’s online fiscalization system?

The government has introduced a new requirement for fiscal receipts to make citizen participation easier and increase the level of control of tax records and evidence.

As of 1 January 2021 a QR code must be included in fiscalized receipts for cash transactions. Consumers can now validate their receipts by entering the JIR via the web application or by scanning the QR code.

As part of the tax reform, a new procedure for fiscalization of sales via self-service devices came into force on 1 January 2021.

To implement the fiscalization procedure via self-service devices, the taxpayer must enable the use of software for electronic signing of sales messages and provide internet connection for electronic data exchange with the tax administration.

When implementing the fiscalization of self-service devices only the sale is fiscalized and sent to the tax administration, no invoice is issued to the customer.

Secondary legislation specifying the process and measures for data security and exchange has still not been published despite the requirement having gone live, but is expected in the near term.

VAT accounts for 15-40% of all public revenue globally. We estimate that the global VAT gap – i.e. lost VAT revenue due to errors and fraud – could be as high as half a trillion Euros. The GDP of countries like Norway, Austria or Nigeria are at a similar level and this VAT gap is big enough to significantly impact the economy of many countries. For this reason, tax authorities globally are taking steps to boost lost revenue through VAT digitization.

Up until recently, VAT requirements have traditionally followed three broad categories.

1. Invoice and storage requirements

At a high level, the requirements that apply during the processing of business transactions break down into requirements related to:

• The form of invoices: Most countries no longer have such requirements but in some cases businesses still use pre-printed paper invoices from the tax authority. This gives the tax authority tight control over invoice numbering and integrity.
• Minimum content requirements: Most VAT countries only recognise an invoice for VAT purposes if it contains certain information. This would include name of the supplier and buyer, type of supply etc. In addition to VAT and other indirect tax laws, commercial and other laws can also dictate invoice content.
• Tax determination: For every invoice, suppliers must determine the applicable law and, on that basis, decide the applicable tax rate. Application of certain tax rates also requires reference to an article in the VAT law to be stated on the invoice.
• Timing: The moment an invoice must be issued is often set by the VAT law.
• Record keeping: An “original” invoice should be archived by each trading partner. This evidences the underlying supply. Archiving requirements often further specify how long it should be kept, location and specific features – such as human readability – that must be present to ensure auditability.

2. Periodic reporting requirements

These are reports for business transaction data in summary or aggregate form or full data from individual invoices. Historically such reporting requirements have often been monthly, with certain less-common reports being quarterly or yearly.

3. Audit requirements

These occur when, during the mandatory retention period for invoices and other records and books, which is typically seven to ten years, a tax authority request access to such records to assess their correspondence to reports.

The trend toward continuous transaction controls (CTCs)

The requirement types listed above, and their relative importance for both business and tax authorities, have changed significantly in recent years. The overall trend is clearly toward various forms of CTCs.

This radically different mode of enforcement, known as the “clearance model” began in Latin America over 15 years ago. Other emerging economies, like Turkey, followed a decade later. Many countries in Latin America now have stable CTC systems where a large amount of the data required for VAT enforcement is based on invoices and other key data is harvested (and often pre-approved) directly at the time of the transaction.

Europe and other countries went through a stage where original VAT invoices could be electronic without changing the basics of the VAT law enforcement model. This phase of voluntary e-invoicing without process re-engineering is often known as “post-audit” e-invoicing. In a post-audit system, the tax authority has no operational role in the invoicing process relying heavily on periodic reports transmitted by the taxpayer. Being able to demonstrate the integrity and authenticity of e-invoices from the moment of issuance until the end of the mandatory storage period is key for trading partners in post audit regimes.

Largely due to the staggering improvements in revenue collection and economic transparency from countries with existing CTC regimes, countries in Europe, Asia and Africa have also started adopting similar schemes. This rapid adoption of CTCs in many additional countries doesn’t follow the same simple path of quick migration of the early adopters. In fact, as the trend spreads around the world, it’s becoming increasingly clear there will be many different models adding to the complexity and challenges faced by multinational companies today.

Given the complexity of international VAT and the potential risk, pitfalls and associated costs, finance directors face a predicament. Unlike direct taxes, which tend to be retrospectively determined, VAT is effectively calculated in real-time. It’s linked to various aspects of the supply chain. If the related transaction has incorrect VAT calculations or erroneous codes, these errors can result in unintended financial consequences. These include fines, loss of the right to deduct input VAT etc.

For most finance departments their first and only involvement with VAT is when they are processing sales or purchase invoices. In the absence of a customer purchase order, there is often little, or no appreciation of what sales invoices are coming through until they need raising. However this may be too late. The transaction completing crystalises the VAT liability and the taxpayer cannot make any retrospective changes.

Incoterms and VAT

One component of VAT determination for goods is an understanding of if they are moving across a border and if yes, who is responsible for moving them – supplier or customer.

Within international trade the Incoterms issued by the International Chamber of Commerce are used to determine which party has responsibility for which aspect of the movement.

Within the EU the Incoterm used doesn’t determine the correct VAT treatment of a movement of goods. Although it can help to understand the intention of the parties. Most contracts for the supply of goods within the EU do, nevertheless, mention incoterms. In many cases contracts quote “Delivery Duty Paid” (DDP) even though it is often inappropriate. If a French company sells goods DDP to a German customer then the incoterm implies that the French supplier is responsible for all taxes due on the delivery. But if this is a B2B transaction, meeting the exemption conditions, then it’s the German customer who accounts for the acquisition tax.

While the UK was a member of the EU, incoterms weren’t really relevant for VAT. It also had little impact on the ability to move goods within the EU. It also had little impact on the need for EU VAT registrations since in many cases the customer would account for acquisition tax.

Unintended Consequences

But now, post-Brexit, UK companies may have “DDP” contracts with EU customers where there are potentially unintended consequences:

• DDP requires the UK seller to export the goods from the UK and then import them into the EU. This gives rise to import VAT and possibly duty which may not be catered for in the budget.
• DDP also requires the UK seller to account for local VAT unless the extended reverse charge applies – and for this, a local VAT registration may be required resulting in yet more cost and possibly a delay in delivery.

Renegotiate Incoterms

Now the only possible course of action is to renegotiate incoterms. This will take time and will only work if the goods haven’t already been delivered.

If the goods have been delivered but the required VAT registration is not in place there is the possibility of penalties and interest for late registration and late payment of VAT.

Automation can help here. A tax engine can process order information and determine the correct tax code. This is when placing the order and not when raising the invoice.

If this gives an unintended result, there may be time to renegotiate the incoterms or arrange the relevant VAT registration.

It’s good to see light at the end of the tunnel. Nonetheless, it’s too little, too late for many smaller – but also plenty of larger – companies. Thousands couldn’t weather the storm because they were particularly dependent on human contact. Others were affected disproportionally simply because COVID-19 hit them just as they traversed a difficult period in their life cycle. As we see the first successes of anti-COVID-19 vaccines, businesses and markets are gaining confidence that by the last quarter of 2021, countries will be back at a new cruising speed. With a few notable exceptions, many of the world’s strongest economies will take years to recover from the aftermath.

Internet to the rescue – but flaws remain

As with all crises, the past year has accentuated weaknesses and accelerated failures. Whilst it must be acknowledged that the COVID-19 crisis would have been far worse without the internet and the current state of technology adoption worldwide, remaining pockets of legacy processes where companies were lagging in their digital transformation have become highlighted as employees struggled to balance health concerns with the imperative to keep things running in deserted offices and data centers.

One area where inefficiencies have been exposed is on-premises software. Many companies have started adopting cloud-based software to support different categories of workflows and connections with trading partners; however, many larger companies have been reluctant to move core enterprise systems – such as ERPs, logistics or reservation systems – to the cloud. The reason behind this reluctance is often that legacy systems have been highly customized. Whilst many enterprise software vendors offer public-cloud versions that present many benefits over on-premises deployment in theory, the practical challenges of adapting organizations and processes to ‘canned’ workflows designed around standard best practices have often outweighed them.

Another set of challenges are more intricate. Manual processes still dominate in order and invoice management across companies of all sizes globally. Where workflow software allows accounting personnel to access the system remotely, approvals and postings could be managed from home offices, but the prevalence of paper in many vendor and customer relationships still required people to manage scanning, printing, and mailing or – yes – faxing key documents from offices with limited access.

These problems will be harder to overcome, as expensive industrial-strength machines for the processing of paper documents cannot easily be put in home offices. The answer to this challenge doesn’t lie in creative ways to convert people’s kitchens into scan or print centers, but in finally taking the big leap towards end-to-end data integration.

The good, the bad and the ugly of tax as an automation driver

Interestingly, if COVID-19 isn’t enough of a reason to take that automation leap, businesses can expect a helping hand from tax administrations. Many countries had already started large-scale programs to push continuous transaction controls (CTCs). Such as mandatory real-time clearance of digital invoices. The current global health crisis is pushing tax administrations to accelerate these programs. We have seen announcements of plans towards such compulsory e-invoicing or digital reporting of accounting data in countries like France, Jordan and Saudi Arabia. In addition to several countries including Poland and Slovakia who stated their intent to follow in the footsteps of countries in Latin America and also European frontrunners like Italy and Turkey. Even in Germany, which has long resisted the call of CTCs, a significant political party has proposed decisive action in this direction.

These initiatives are still often motivated by the need to close tax gaps. However the need for resilience in revenue collection is clearly another driver. Also, examples from countries like Brazil have shown that CTCs massively improve governments’ ability to track and monitor the economic effects of a crisis down to the smallest sectoral detail. This gives them granular data that can be used for surgical fiscal policy intervention to guide the most severely affected activities through a crisis.

With all circumstances conspiring to give businesses a reason to get across that last mile towards full automation – the interface between their and their trading partners’ sales and purchasing operations – you would think that companies are now putting plans in place to get ready for a fully digital, much more resilient set of processes and organizational structures.

Unfortunately, the way that CTC mandates get rolled out and the way that companies respond to them have historically rather slowed down investment in business process automation and the adoption of modern cloud-based enterprise software.

CTC mandates are unbelievably diverse, ranging from a full online second set of accounting books to be maintained through – among other things – additional classification of supplies in the government-hosted system in Greece, to a completely different setup including service providers and transaction payment reporting being designed in France. Representatives from China are talking about blockchain-based invoicing controls, whilst countries like Poland and Saudi Arabia prepare for centralized, government-run invoice exchange networks. Mandate deadlines tend to be too short, and tax administrations make countless structural adjustments – each typically also with short deadlines and only available in local language – during implementation periods and for years thereafter.

Tax administrations could however claim with some legitimacy that deadlines are always too short, almost regardless of how much transition time taxpayers are granted, because many businesses structurally prepare too late. The global trend towards CTCs, SAF-T and similar mandates has been apparent to companies for years, yet many are ill-prepared; particularly many multinational businesses continue to consider that VAT compliance is a matter to be resolved by local subsidiaries, which step by step creates a massive web of localized procedures which rather than corresponding to corporate best practices were designed by tax administration offices.

Creating a virtuous circle towards tax automation during Covid-19

Which brings us back to why companies aren’t adopting flashy new releases of enterprise software packages in public cloud mode. Or further automating their trading partner exchanges, more quickly. All parties in this equation want the same thing. That is seamless and secure sharing of relevant data among businesses, and between businesses and tax administrations. However kneejerk reactions to regulatory mandates by businesses, and lack of tax administrations’ familiarity with modern enterprise systems, are creating the opposite effect. Companies panic-fix local mandates without a sufficient understanding of the impact of their decisions. Neither on their future ability to innovate and standardize. The enterprise resources come first to put systems in place post-haste. They then manage the problems stemming from adopting a patchwork of local tax-driven financial and physical supply chain data integration approaches. This comes from IT budgets that then don’t get spent on proper automation.

Several things can break this vicious circle. Businesses should change their way of addressing these VAT digitization changes as revolutionary rather than evolutionary. By being well informed and well prepared, it is possible to adopt a strategic approach to take advantage of CTC mandates rather than suffer from them. Tax administrations must do their part by adopting existing good practices in designing, implementing, and operating digital platforms for mandatory business data interchange purposes. The ICC CTC Principles are an excellent way to give the world economy that much-needed immunity boost, allowing businesses and governments to improve resilience while freeing up resources locked up in inefficient manual business and tax compliance processes.