Complexities of global invoice compliance

With a dizzying array of tax laws and varying requirements around invoice receiving and archiving across various countries, multiple currencies, multiple languages, and differing invoice formats and standards, it is easy to see the challenges companies face doing business globally and their concerns over global compliance. On top of that, the compliance rules are frequently changing.

The European Union started building a set of artifacts and specifications enabling cross-border commerce across the EU countries. The initiative was co-funded by the European Commission to enable European-wide exchange of electronic invoices and business documents amongst private and public businesses of any size to foster European-wide commerce opportunities.

PEPPOL is in use in 30 countries in Europe plus Australia, Canada, New Zealand, Singapore and USA with PEPPOL Authorities placed in 13 countries.

Here is a list of countries that follow the EU model and have their own in-country standards authorities:

• Agency for Digital Italy (AGID), Italy
• Beleid en Ondersteuning – Stratégie et Appui (BOSA), Belgium
• Danish Business Authority (ERST), Denmark
• Agency for Public Management and eGovernment (Difi), Norway
• Department of Health and Social Care (NHS), England
• Agency for Digital Government (DIGG), Sweden
• Ministry of Economic Development (MR), Poland
• SimplerInvoicing, The Netherlands
• Office of Government Procurement, Ireland
• Info-communications Media Development Authority (IMDA), Singapore
• Koordinierungsstelle für IT-Standards (KoSIT), Germany
• Ministry of Business Innovation and Employment (MBIE), New Zealand
• Australian Taxation Office (ATO), Australia

Italy mandated business-to-business (B2B) electronic invoicing a few years back. Italy is one of the early adopters of e-invoicing within EU. Way before the deadline set by the European Union (EU) directive to allow e-invoicing, Italy moved to make e-invoicing mandatory for any invoices submitted to government organizations. Starting on January 1, 2017; private companies in Italy were given the option of using electronic invoices. Starting January 2019, the Italian government has made electronic invoicing mandatory for all VAT-registered businesses in Italy. This requires a significant change in ways of doing business if your organization has operations in Italy.

Singapore; which recently opted to embrace the EU e-invoicing standards; is the first Asian country to join the program. Similar initiatives in Latin America have mandated that invoices be sent in an electronic format through federal tax authorities’ electronic systems to help reduce fraud.

We have only touched upon a handful of countries which are leading the push toward compliance. Global enterprises have their work cut out for them with ensuring they are getting invoiced and are invoicing their customers correctly.

Global compliance is critical

The invoice is not only a transaction document, it is also the most affirmative source of truth for government tax departments when it comes to tax collection. Electronic invoices are now recognized as equivalent to paper invoices for the collection of taxes such as value added taxes (VAT), goods and services taxes (GST), or sales and use taxes. For most countries, these taxes constitute a significant source of revenue so it’s not surprising that there is so much emphasis and regulation around the invoice management process.

There are three primary areas in the invoicing process where companies are expected to understand the country rules and comply:

• Invoice document — The invoice is the primary audit document for tax collection, so when it comes to invoice creation, the form, the content, and the method used for creating and exchanging invoices are highly regulated.
• Correct tax rate — The invoicing and receiving entities must ensure that the correct tax rate is applied to the invoice per country jurisdiction.
• Invoice archival — Archiving the invoice is also a critical step in the process to preserve historical data in case of an audit. Even though electronic invoicing rules vary from country to country (e.g., how long a company is required to archive and when it should dispose of old invoices), almost all of them mandate the archival of the “original” invoice.

At a high level, the obligations around invoice compliance exist so that a tax administration can:

• Verify the integrity and authenticity of invoices by guaranteeing that invoices are real and unchanged from the moment an invoice is issued until the end of the mandatory archiving period.
• Confirm that taxes have been correctly administered, reported, and paid by verifying the nature of the supply, the consideration (fee), and relevant business terms of the transaction. Therefore, the content of an invoice must meet certain minimum criteria.
• Interpret the invoices they audit, so legibility of invoices must be guaranteed.
Prove the veracity of business transactions (often referred to as “supplies”) within the scope of tax law.

For multinational organizations, keeping up with the rules and regulations in geographies where they operate is a burden, whether they are exchanging invoices in paper format or electronically. Most compliance models can be classified into two broad categories:

• Post-audit model — This model is primarily used across North America, Europe, and Commonwealth countries. This model requires that electronic invoices be preserved and made available for audit after the invoice has been issued for a specified period of time.
• Clearance models — This model (pioneered by Mexico) is more common across Latin America and some Asia-Pacific countries. It is a validation model where invoice is generated by the relevant tax authority or its agent based on the data provided by the supplier.

The world is constantly changing in terms of which model each country adopts and the complexity of regulations. However, there is one clear trend that has been emerging—an increasing shift away from post audit models to more real-time mandatory controls, or clearance systems. And even clearance systems that have been in place for some time now have not stopped evolving.

To further complicate matters, even when e-invoicing is required, there are variances in those requirements by country. Most countries in Europe follow a common basic approach with varying levels of local specific requirements. On the other hand, Latin America, Russia, Asia, and Middle-East follow fragmented approaches with extremely specific and strict requirements.

Ensuring global compliance

Since taxes are a significant source of revenue for most governments, the consequences of non-compliance can be severe, ranging from administrative fines to sanctions under criminal law, including:

• Administrative fines if veracity of invoices cannot be proven
• Protracted audits that increase risk of more scrutiny
• Spillover effects into other areas of taxation or accounting
• Trading partner audits that negatively impact relationships with business partners
• Loss of right to deduct VAT and obligation to pay VAT over erroneous invoices
• Sanctions under criminal law in some countries where non-compliance is equated with tax evasion

What this means is that compliance can no longer be an afterthought. For any organization operating globally, compliance has become a required part of its global business strategy.

How can technology help?

Most organizations often over-complicate the process of global compliance by trying to manage the complexities of multiple local invoice regulations themselves. But what they really need is an invoice automation solution that will help them comply with local invoicing regulations automatically as part of the global automation solution (see Figure 2). Let’s reiterate here—automatic global compliance means the proper controls, checks, and assurances are happening as part of the established invoice automation process without human intervention or manual processes that eat up valuable time, generate frustration, and pose risk.

There are many benefits to automating your invoice process and ensuring compliance through technology:

• Increased efficiency to lower costs associated with handling global invoice compliance and to free up valuable resources so they can focus on the core business
• Reduced risk from having access to up-to-date tax information and avoiding financial penalties and other sanctions associated with non-compliance of regulations
• More control through comprehensive audit trails including original invoice images, secure data transfer, and additional compliance measures throughout the process

Disclaimer: This document attemps to provide information and best practices about taxes and invoicing globally, but should not be construed as tax advice. Please consult a professional tax advisor or a certified accountant for your specific need.