The increased push toward e-invoicing and e-reporting mandates are partly to increase ways to help combat VAT-related fraud
Adopting electronic invoicing (e-invoicing) across various regions, particularly in the European Union, is part of a strategic move being undertaken by government tax authorities to improve compliance and combat value-added tax (VAT) fraud, with varying levels of implementation among member states.
While the transition to e-invoicing may require upfront investment from businesses, it ultimately promises to streamline operations, enhance financial management, and equalize the playing field by standardizing transaction tracking. Government tax authorities benefit from the increased transparency and real-time data that e-invoicing provides, which aids in more efficient revenue collection and the fight against tax evasion.
The evolution of technology is reshaping various industries, and taxation is no exception. With economic transactions digitalizing, tax authorities worldwide are moving towards more efficient and transparent systems. Clearly, the future of tax compliance will contain a strong focus on the emergence of e-invoicing and other digital innovations that are poised to revolutionize how businesses and individuals comply with government tax regulations.
The rise of e-invoicing
E-invoicing can be defined as the digital transaction process that an invoice goes through between a buyer and seller. An e-invoice is a document that exchanges invoice information between a supplier and a buyer, differing from a standard invoice (even a PDF shared digitally), in that an e-invoice is issued, transmitted, received, processed, and stored using specific data formats that can be quickly processed through an enterprise resource planning (ERP) system.
Again, one of the major reasons governments are pushing e-invoicing now is to combat VAT fraud that they’ve experienced. Indeed, tax authorities globally, but more specifically in the EU, have encountered losses in what they’re collecting in VAT. In 2021, for example, the EU Commission reported a €60 billion gap in their VAT collection, based on information reported by member states that had estimated a loss of more than €90 billion in 2020. Some estimate that more than one-third of the losses could be attributed to VAT fraud linked to intra-EU trade.
To remedy and recoup the gap in VAT, the EU Commission in December 2022 sought to create a system that allowed for ease of use, more transparency, and real-time digital reporting. Building upon a previous tax scheme to manage payment and collection of VAT — VAT Mini One Stop Shop (MOSS), which launched in November 2015 — the EU Commission developed a new version of the One-Stop Shop, which allowed businesses selling goods across the region to pay VAT to a single tax authority on sales in all EU member states.
E-invoicing, while not a new concept, has been adopted by the EU Commission to make it the standard for e-commerce business transactions.
Global adoption and standards
Now, the adoption of e-invoicing is gaining momentum globally as businesses and governments seek to streamline processes and reduce costs. Ultimately, the EU Commission wants any company doing business within its member states to comply with e-invoicing and e-reporting regulations. However, to date, the adoption throughout the region has been spotty.
For example, France was scheduled to start on July 1, 2024, but has since moved the date back to September 1, 2026, for large and midsize businesses, and September 1, 2027, for small businesses. The United Kingdom, despite Brexit, continues to align with EU standards to maintain compatibility for business transactions. And Spain and Italy have rolled out their e-reporting and e-invoicing, while Germany and Portugal are scheduled to start in January 2025.
The United States has not federally mandated an adaptation of e-invoicing, however, the U.S. Federal Reserve has been involved in facilitating discussions on standards and interoperability, resulting in frameworks like the Business Payments Coalition’s e-invoicing Exchange Market Pilot, which hopes to boost the use of e-invoicing in transatlantic trade.
Impact on businesses and tax authorities
Introducing mandatory e-invoicing could represent a transformative shift for businesses and tax authorities. For businesses, this transition may include incurring initial setup costs and requiring changes to existing accounting systems. However, e-invoicing also can lead to significant long-term benefits, including enhancing operational efficiencies and seeing potential cost savings. The digitization of invoices would facilitate better invoice tracking and management, possibly leading to improved financial planning and analysis.
For government tax authorities, e-invoicing will increase the visibility and traceability of all transactions, which will help the fight against tax fraud and evasion. The real-time or near-real-time reporting capabilities of e-invoicing allow tax authorities to collect tax revenue faster and perform more effective audits.
The bottom line is that e-invoicing and e-reporting will promote the standardization of how e-commerce business transactions are tracked, making it easier for companies involved to comply with global tax requirements. E-invoicing can also level the playing field, as all businesses must adhere to the same standards, reducing the competitive advantage that might arise from non-compliance.
While the shift to e-invoicing may present initial challenges, it promises considerable benefits to both companies and government tax authorities for the efficiency and integrity of business transactions and tax systems.
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