Companies struggling to meet Italy’s electronic invoicing deadline of January 1 will get some relief from financial penalties if they can’t immediately issue invoices at the moment of supply, but it seems the Italian Tax Authority will not delay rolling out the system.

The government had stated that invoices that did not comply with the new mandate after January 1 would be subject to penalties ranging from 90 to 180 percent of the applicable tax. The tax authority will consider invoices not correctly formatted or not issued through the new SDI reporting system to be non-compliant.

But many businesses, especially smaller firms, have had trouble transitioning from their existing processes to the new e-invoicing framework that requires real-time e-invoice clearance through the state-operated Sistema di Interscambio, or SDI, platform.

In response to business concerns, the government is opening up to a grace period of sorts: Instead of postponing the e-invoicing roll-out as such, Italy will waive penalties for delayed clearance transmission. Furthermore, as of July 2019, Italy will loosen the main rule for when an invoice must be issued, which effectively will allow businesses more flexibility in the e-invoicing process.

Businesses get a grace period for Italian electronic invoicing penalties

The new rules on penalties allow for a short grace period. The tax authority will not apply penalties for e-invoices that are issued and cleared by the SDI within the VAT liquidation period to which the invoice belongs – in other words, by the 15th of the following month in which the invoice should be issued and consequently cleared (according to  Decree n. 100 from 1998, updated in 2018). For e-invoices that the SDI issues and clears by the end of the following VAT liquidation period (usually the end of the following month), the tax authority will reduce the penalty by 80 percent.

For example, if a business can’t transmit invoices in compliance on January 1, it can delay the clearance transmission of an invoice that should have been issued to February 15 without any penalties for the delay. If the business still needs more time, it can delay the clearance transmission of invoices through the SDI until March 15 and pay an 80 percent reduction of the regular penalty.

Italy eases timing of electronic invoicing issuance

Italy is also loosening its requirement for the timing of issuing an invoice. Since 1972, Italian VAT law has stated that suppliers must issue invoices to the government at the point of supply. However, beginning in July, suppliers will be able to issue invoices through the SDI platform within 10 days of supply. Invoices not cleared by SDI are not valid for fiscal purposes, so taking 10 days to issue an invoice could cause delays in receiving payment.

For companies doing business in Italy, the relief is welcome, but it is also a sign that Italian e-invoicing is moving forward on schedule. That means companies with Italian operations need to get their systems ready to comply with the new mandate or face penalties by mid-February.

Takeaways: What this means for doing business in Italy

What is also clear from the latest developments is that e-invoicing regulations in Italy can change at any time. The problem becomes exponentially more difficult to solve when businesses figure in similar changes happening all over the world. Adopting a system that automates e-invoicing and provides a single source of truth for data in both accounts payable and accounts receivable is essential.

Companies dealing with complex sales and use tax determination, VAT regulations and other tax challenges across the globe know that SAP alone is not equipped to support the varying requirements from country to country. As SAP sunsets support and updates for ECC and R3, companies must move to HANA to keep their systems up to date. With this inevitable change to S/4HANA or HANA Enterprise Cloud, now is the perfect time to step back and develop a comprehensive strategy to managing tax worldwide.

SAP users must migrate to HANA by 2025, but a majority have not yet started the process. Since the move requires major changes to ERP infrastructure, SAP users with global operations should take advantage of the unique opportunity to be more strategic in their implementation. With the right approach, companies can future-proof their solutions in a way that ensures they can keep pace with constant changes in tax regulations throughout Latin America, Europe and beyond.

Learn how to minimise business disruption during an SAP S/4HANA upgrade project in the wake of modern tax: Read Preparing SAP S/4HANA for Continuous Tax Compliance and don’t let the requirements of modern tax derail your company.

Governments around the world are implementing technology for tax enforcement. In order to keep up, companies must make the digitisation of tax a core pillar of their HANA migrations.

In the move to HANA, companies must consider the new world of tax, which includes:

• Constant change management – Companies must be able to anticipate and quickly adapt to major tax reform legislation and smaller rate and field changes while not disrupting operations or risking non-compliance.
• Internal processes – Compliance often requires changes to basic processes, procedures and technologies employed by global companies. For example, in Latin America, logistics can be impacted by VAT regulations because many countries now require e-invoices to act as a bill of lading, created before products can ship.
• Required automation – Standardisation requirements in Latin America and Europe are designed to quickly identify errors and data discrepancies by eliminating paper-based reports in favour of automated processes. Companies must automate their own operations to avoid errors and audit triggers.

The move to S/4HANA or HANA Enterprise Cloud requires companies to move all of their processes, customisations and third-party add-ons to the new platform. As such, there are several critical considerations.

What to migrate, and when

Since most companies’ SAP ERP systems have been built and customised over many years, many will benefit from a phased approach to HANA implementation. The less customised modules, such as Financial Accounting (FI) and Controlling (CO) will be easier to move than Materials Management (MM) or Sales and Distribution (SD), which will need a long-term plan for customisations.

What to do with customisations and third-party apps

Many SAP configurations have become a patchwork of customised code and bolt-on applications. This is especially true when it comes to sales and use tax determination, e-invoicing, and VAT compliance and reporting, since requirements are vastly different in every jurisdiction a company operates. The move to HANA gives companies the opportunity to consolidate, eliminating local configurations in favour of a global strategy. Companies that proactively plan can help to ensure that the next 15 years are simplified, without the constantly changing configurations needed in the previous 15 years as governments have gone digital.

Countries within the European Union (EU) are losing billions of euros in value-added tax (VAT) every year because of VAT fraud, VAT evasion, VAT avoidance and inadequate tax collection systems. As of 2016, the VAT gap in the EU was 159.5 billion euros, or 14% of the total expected VAT revenue for the EU. As a result, EU countries have been introducing several measures to increase VAT compliance and make their VAT systems more fraud-proof. One such measure is the split payment mechanism.

What are Split Payments?

The split payment mechanism changes how VAT is generally collected by making the payment for the tax base (i.e., product price net of VAT) separate from that for the VAT amount. There are variations of the split payment mechanism, but generally, an invoice is paid by the customer to two separate accounts: The net amount is paid to the supplier’s business bank account, and the VAT amount is paid directly to a dedicated bank account of the supplier, called a VAT account. In practice, a single payment will be made and it will be divided by the bank.

Split payments are regarded as a measure to combat VAT fraud and non-compliance by removing the opportunity for suppliers to charge VAT and disappear without declaring or paying it to the tax authority (‘missing trader fraud’). It digresses from the mainstream of VAT collection in the EU, which relies on vendor-based collection of VAT and on periodic remittance of VAT by registered traders.

The European Commission completed a comprehensive study of split payments in December 2017 to design and assess legally and technically feasible scenarios for a split payment mechanism as a VAT collection tool. The study found:

“….no strong evidence that the benefits of split payment would outweigh its costs. The main identified effects were that a wider scope of split payment would potentially provide a larger decrease of the VAT gap, but would also significantly increase the related administrative costs.” [source]

EU Countries with Split Payment Mechanism

Despite the European Commission’s inconclusive assessment, split payment mechanisms are currently in place around the world, primarily outside of the EU. In the EU, Italy and Romania have implemented split payment mechanisms while Poland plans to implement it, and the UK has started to consider it.

Italy has employed a split payment mechanism since January 1, 2015 for payments to public authorities under Law 23/12/2014, n. 190 (Stability Law). It has been expanded several times, most recently on January 1, 2018.  Currently, it applies to supplies of goods and services rendered to several categories of public bodies, such as public economic entities, special companies, foundations and their subsidiaries, as well as companies included in the FTSE MIB index. As per the design of the system in Italy, suppliers charge Italian VAT on goods and services made to the entities listed above. These customers then “split” the payment of the invoice: they pay the taxable amount to the suppliers and pay the VAT to an allocated VAT bank account of the treasury.

In Poland, split payments are scheduled to be implemented as of July 1, 2018. Unlike Italy, Poland’s scheme will not require customers to make two separate payments. Instead, Poland will require a single payment executed to the bank who will then split the payment into two separate bank accounts: one account for the amount net of VAT to be paid to the supplier’s business bank account, and the other account for the VAT amount to be paid directly to a dedicated VAT bank account of the supplier.

The scope of Poland’s split payment mandate is much broader than Italy’s as it will apply to all VAT registered businesses. On the other hand, the Polish split payment mechanism will be optional as the buyer may but does not have to apply it.

In Romania, a split payment mechanism has been implemented since January 1, 2018 for companies which exceed certain thresholds for outstanding VAT liabilities. Under the Romanian split payment mechanism, obligated VAT registrants are required to open separate bank accounts for the collection and payment of VAT. The VAT split payment applies to all their taxable supplies of goods and services, for which the place of supply is in Romania. Similar to Italy but unlike Poland, the split payment mechanism is mandatory. The suppliers charge Romanian VAT on goods and services, then the split payment is made by the business customer, who transfers the VAT directly to the VAT bank account of the supplier. The VAT bank account of the supplier can only be used for output and input VAT payments.

The UK has held a public consultation on adopting anti-VAT fraud split payment mechanism for eCommerce. The split payment mechanism would require the VAT due on online supplies to be paid directly to the UK tax authorities at the time of purchase. The UK is debating several issues:

• Which party in the transaction is best placed to identify and pay the VAT directly to the tax authorities;
• The role of online marketplaces in determining the VAT and split payment calculations;
• How to calculate the VAT due;
• A timetable to build the necessary IT infrastructure for all parties.

HMRC has made an initial proposal with respect to how the split payment mechanism would function, titled “Alternative method of VAT collection – split payment,” and is seeking public comment until June 29, 2018. HMRC’s proposal would have the merchant identify and make the split payment for transactions relating to UK residents, and have payment service providers identify and fulfill the split payment for transactions relating to non-UK residents. There would be an approved register of payment companies (both merchants and payment service providers) who could split payments. With respect to overseas sellers, for each payment, the card issuer would check if an approved payment company will be responsible for splitting that payment. If so, the card issuer would pass the payment in full to the payment company. The payment company would then split out the VAT, pay it directly to the HMRC, and pass on the balance to the overseas seller’s bank account. If not, then the card issuer would have to split out the VAT, pay it directly to the HMRC, and pass on the balance to the unapproved payment company which would then pass on that amount to the overseas seller’s bank. Finally, the HMRC would credit the seller’s UK VAT bank account with the output VAT thus collected.

Impact of Split Payment on Companies

Under a split payment mechanism, suppliers may suffer negative cash flow. Although funds within the VAT account belong to the supplier, the supplier will not be able to use them freely. Such funds may be spent only in specific ways prescribed by the regulatory regime. In Poland, businesses can use the funds only to pay invoiced VAT to the VAT account of the invoice issuer, and to pay VAT to the tax authorities.

In Italy, a large delay has been observed on processing refunds to businesses (up to 90 days after quarterly VAT refund request). This hiatus allows authorities to hold input VAT for a longer period of time, earning interest for the government, while affecting the cash flow of Italian businesses. To fully estimate the cash flow implications of a split payment system, one must consider the costs of borrowing for the businesses and for the government.

The European Commission considered a variety of factors and models of split payment mechanism to determine impacts on businesses. The impact of split payments on different types of businesses varies depending on a number of factors, including the type of transaction, where the liability lies for the payment, whether the transaction is cross-border, and compliance costs that businesses will bear to implement split payment best practices.

By Andy Hovancik – President & CEO

Today, we announced the acquisition of Stockholm-based TrustWeaver to create a clear leader in modern tax software.

TrustWeaver has become a seal of approval for the world’s largest procure-to-pay and AP systems. This is a testament not only to the effectiveness of its e-invoicing software and integrations, but also to its ability to monitor and interpret regulatory change around the world.

With the acquisition, we are poised to do three big things together:

1. Create the first complete solution for global e-invoicing, handling both post-audit and clearance models in 60 countries.
2. Combine the talented teams that pioneered e-invoicing software — and in the process, shape the future of digital tax compliance worldwide.
3. Deliver a complete tax solution, including tax determination and reporting, in the world’s leading purchasing and AP systems, including SAP Ariba, IBM and Coupa.

We’ve reached a tipping point in modern taxation.

Governments are quickly adopting digital models to better collect every type of transactional tax, including VAT, GST and sales & use tax. As a result, businesses are faced with mounting complexity, rising costs and unparalleled risks.

Last month, the European Commission granted Italy permission to mandate e-invoicing, making it the first country in the European Union to do so. Italy’s move paves the way for rapid expansion of real-time, transaction-level reporting in Europe.

The game is changing

Here at Sovos, we’ve assembled the only solution capable of dealing with the complexities of modern tax, a complete software platform with global tax determination, complete e-invoicing compliance and a full range of tax reporting solutions including e-accounting and e-ledger.

TrustWeaver is our third e-invoicing acquisition in two years, and it’s one of the most important acquisitions in our history.

TrustWeaver has built up coverage across Europe, the Middle East, Africa and Asia Pacific regions, complementing our strength in Latin America. And, it adds support for “post-audit” compliance, including e-signatures in compliance with the eIDAS Regulation, which is an onerous set of standards for electronic trust and identification in Europe.

With the addition of TrustWeaver, we’re one step closer to our mission, which is to reduce the friction between businesses and governments so commerce can grow faster and communities can thrive by simply collecting the tax they’re already owed.

Read the IDC Link: Sovos Acquires TrustWeaver, Strengthening its Market Position, May 17, 2018 by Kevin Permenter.

Find the Sovos E-Invoicing solutions here.

The Common Reporting Standard (CRS) is fast becoming the global standard for tax information reporting outside the United States. As more countries adopt CRS, and as penalties for late, incorrect or missed CRS filings become more severe, financial institutions need to know what their compliance requirements are. The following are clarification and detail about what insurers need to know about CRS reporting obligations.

Establishing Key Terms

Under the CRS, the term “Financial Institution” means a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company.  (CRS, Section VIII: Defined Terms, A.3).

A “Specified Insurance Company” is “any Entity that is an insurance company (or the holding company of an insurance company) that issues, or is obligated to make payments with respect to, A Cash Value Insurance Contract or an Annuity Contract.” (Section VIII, A.8).  Insurance companies that only provide general insurance or term life insurance will not be specified insurance companies, nor will reinsurance companies that only provide indemnity reinsurance contracts.

Typically, an insurance company meets the criteria of a Specified Insurance Company if:

• It’s regulated as an insurance business in the country where it does business
• More than 50% of the company’s gross income in the past calendar year came from insurance, reinsurance, and annuity contracts
• At any time in the last calendar year, the combined value of the entity’s assets associated with insurance, reinsurance and annuity contracts was more than 50% of its total assets for that year.
• The entity issues cash value insurance or annuity contracts

Insurance companies that provide only general insurance or term life insurance are typically not classified as FIs; likewise, reinsurance companies which provide only indemnity reinsurance contracts and insurance brokers are typically not considered to be FIs.

Of the five types of financial accounts that must be reported under CRS, two relate to insurance companies: annuity contracts and cash value insurance contracts.

Reporting Requirements

Under the CRS, all reporting FIs have the obligation to report the following:

• Name, address, jurisdiction(s) of residence, TIN(s), date of birth, and place of birth of each reportable person that is an account holder
  • For insurers, reportable TINs may include insurance contract numbers.
• The account number
• Name and identifying number of the reporting FI
• Account balance or value at the end of the relevant calendar year or other appropriate reporting period

The CRS does note that in reporting account balances or values, that Cash Value Insurance Contracts and Annuity Contracts, FIs should report the Cash Value or surrender value of the contracts.  (Section I, A.4).

In order to meet the requirement to report residence of the account owner, insurers who provide Cash Value Insurance Contracts may rely on the current residence address in its records until  1) there is a change of circumstances that causes the FI to know or have reason to know that the residence address is incorrect or unreliable, or 2) that the time of pay-out (whether full or partial)  or maturity of the Cash Value Insurance Contract.

Insurance companies do not have to report, review, or identify a pre-existing individual account that is a Cash Value Insurance Contract or an Annuity Contract provided that the FI’s jurisdiction prevents FIs from selling contracts to residents of that jurisdiction.

Due Diligence Requirements

The CRS establishes an alternative due diligence procedure for Cash Value Insurance Contracts and Annuity Contracts in Paragraph B of the Special Due Diligence Rules.  The CRS advises that a reporting FI may presume that an individual beneficiary (other than the owner) of a Cash Value Insurance Contract or Annuity Contract receiving a death benefit is not a reportable person, and that FIs may treat such accounts as other than a reportable account unless the reporting FI has actual knowledge or reason to know that the beneficiary is a reportable person. If the beneficiary is a reportable person, the FI is required to follow the procedures established in paragraph B of Section III.

The Commentary to the CRS notes that an alternative procedure similar to the above may be necessary for certain employer-sponsored group insurance contracts or annuity contracts.  In such cases, the Commentary suggests adding a provision to account for group insurance contracts. In cases where such group insurance plans exist, the Commentary advises a provision to state something similar to the following: “A Reporting Financial Institution may treat a Financial Account that is a member’s interest in a Group Cash Value Insurance Contract or Group Annuity Contract as a Financial Account that is not a Reportable Account until the date on which an amount is payable to the employee/certificate holder or beneficiary, if the Financial Account that is a member’s interest in a Group Cash Value Insurance Contract or Group Annuity Contract meets the following requirements:

• The group cash value insurance contract or group annuity contract is issued to an employer and covers twenty-five or more employees/certificate holders;
• The employees/certificate holders are entitled to receive any contract value related to their interest and to name beneficiaries for the benefit payable upon the employee’s death; and
• The aggregate amount payable to any employee/certificate holder or beneficiary does not exceed $1 million.

(Commentary on Section VII, paragraph 13; pg. 153). The last provision is provided if the Financial Institution does not have a direct relationship with the employee/certificate holder at inception of the contract and thus may not be able to obtain documentation regarding their residence.

Conclusion

Insurers who fall under the definition of Financial Institution provided by the CRS are obligated to report on Cash Value Contracts and Annuity Contracts, so long as such contracts are allowed in the jurisdiction the FI is reporting from. These FIs have an obligation to comply with the due diligence requirements that the CRS imposes on them, and can make use of an alternate procedure to comply.

Earlier today, we announced that Sovos has acquired U.K.-based FiscalReps, Europe’s leading solution for Insurance Premium Tax (IPT) compliance. The acquisition does a few important things for our clients and the market as a whole: 

1. It adds IPT to our global solution for insurance companies, helping those businesses consolidate solutions on a single platform with a single source of data.
2. It automates another critical indirect tax solution, combining a market-leading solution with the Sovos software platform to help clients prepare for the digital future of IPT compliance.
3. It expands our team in Europe to support increased demand for tax and reporting automation in the region.

Here’s what Sovos CEO Andy Hovancik had to say about the news:

“Insurers across Europe trust FiscalReps because the solution safeguards their businesses from mounting risks from governments looking to close longstanding gaps in IPT compliance. The addition of FiscalReps presents an opportunity to better prepare insurers for the digital future of tax compliance and reporting, while at the same time adding a talented team to support our clients in the region.”

A Changing Regulatory Environment. A New Risk to Already-Thin Profit Margins in Insurance

Similar to other indirect tax regulations, IPT compliance has become increasingly burdensome in recent years, requiring insurers to comply with 90 unique taxes and more than 500 complex forms in the European region alone. As governments turn to technology to clamp down on non-compliance, businesses have quickly turned to automation.

Through a combination of managed services and software, FiscalReps helps more than 400 businesses — including 20 of the top 50 insurance companies in Europe — calculate and file IPT in 27 European countries. FiscalReps gives those businesses a more automated and more accurate solution for filing thousands of IPT reports each year.

The Future of IPT Compliance Will Be Built on Global Software

The addition of FiscalReps to Sovos’ cloud software platform takes the solution one step further, according to FiscalReps CEO Mike Stalley, setting the stage for a unique global solution for the insurance market and accelerating software innovation in IPT compliance.

“The acquisition by Sovos is a great opportunity for our insurance clients, who will now have a truly global solution for all of their premium tax and regulatory reporting needs,” Stalley said. “With a proven track record in delivering tax technology solutions globally, the Sovos strategy aligns perfectly with FiscalReps’ ambitions to remain the market leader in this increasingly complex and challenging environment. We look forward to being part of the Sovos team and contributing to the success story.”

Another Step Closer to a Single Global Platform for Tax Compliance and Reporting

The FiscalReps acquisition is the second major deal in three months for Sovos, following the acquisition of Paperless, a leading software solution for a similar compliance challenge, real-time VAT reporting. For the past few years, we have been actively acquiring leading software businesses around the globe and integrating them into our Intelligent Compliance Cloud, an approach that is critical to keeping businesses ahead of disruptive tax and regulatory reporting requirements.

“The IPT market is another great example of governments pushing businesses toward global software automation by getting aggressive on enforcement of regulations to collect tax revenue,” Gledhill said. “As that trend continues to accelerate, Sovos is committed to adding market-leading solutions, like FiscalReps, to solve our clients’ biggest compliance challenges on a single platform and from a single source of data.”

Learn more about Sovos IPT Determination and Sovos IPT Managed Services here. You want to learn more about IPT? Read this guide about Insurance Premium Tax.