More countries this year are cooperating on building a common electronic invoicing network that will enable companies to securely exchange invoices, while allowing tax authorities to monitor them, with dozens of companies in the U.S. joining a pilot program to test the network.
Several countries are either implementing mandatory e-invoicing or launching pilot programs on a voluntary basis before wider compulsory adoption, including Egypt, France, Greece, India, Ireland, Italy, Jordan, Netherlands, Norway, Poland, Portugal, Saudi Arabia, Spain, the United Kingdom and Vietnam, according to the tax technology company Avalara. The U.S. is still in the voluntary category, but by joining the E-invoice Exchange Market Pilot, e-invoicing could become mandatory here as well. As of last month, 78 organizations had signed on to participate in the U.S. Market Pilot, an initiative that will build and test a virtual network that will allow U.S. businesses to exchange e-invoices with each other through a secure, open e-invoice delivery framework between providers. Under the pilot, there will be three waves of access point development and delivery, with each successive wave building upon the previous ones. The pilot will run through 2022 to establish an operational B2B invoice exchange framework for the U.S. market in 2023. The e-invoicing trend promises to help international tax authorities with collection of indirect taxes such as value-added taxes and sales taxes.
“We’re seeing more and more tax authorities and governments introducing e-invoicing mandates, making it mandatory for businesses to release invoices in electronic formats normally via a government platform to business customers,” said Alex Baulf, senior director of global indirect tax at Avalara. “That means the governments actually have transactional level detail of every transaction the business is involved in. It’s a move away from the summary VAT return looking at aggregated sales data, and moving to a model where instead they’re looking at every single transaction. Not only is it more granular data, but it’s actually in real time. In some countries, the tax authority receives the invoice and the invoice data, and they approve it before it’s physically routed onto the customer.”
The trend could eventually spell the end of the traditional tax return filing process for companies abroad. “We're already seeing some countries pre-prepare the VAT return with the data they have,” said Baulf. “Some countries are doing that with data they receive electronically on customs declarations. The French are doing that at the moment. The Spanish have pre-populated their annual VAT return with data they get through e-reporting. In January of this year Norway actually got rid of the VAT return. Instead you send your transactional data tagged with the relevant kind of tax code where it would go on a return and then the authorities create the return for you. The return is just the medium for how to visualize the net position. France is introducing e-invoicing in July 2024. Part of the objective set out in their policy documents is they’re going to reduce the compliance burden for French businesses. They say ultimately we will have all the data we need to prepare the VAT returns on behalf of the taxpayers.”
As the U.S. pilot tests the possibilities, the Federal Reserve is helping spearhead the coalition behind the effort. “The pilots are organized by the Business Payments Coalition, the BPC,” said Baulf. “That’s actually a group that’s organized and led by the Federal Reserve Bank of Minneapolis. The initiative they’re looking at is to promote greater B2B electronic payments, remittance data and also invoicing, so they’re looking at all three parts. But because there’s no federal VAT in the U.S. — it's state and local taxes with hundreds of different tax authorities involved — there’s no real driver like the equivalent of the IRS to do this. Instead, they’re looking at it more as process efficiency and helping speed up payment remittance, to reduce costs and just make it easier for businesses to adopt e-invoicing.”
To make the e-invoicing technology work across various technology providers, the coalition has been developing standards that invoices will need to meet in terms of content and format. “For a network of e-invoicing to work, you need to have lots of different e-invoice technology providers like Avalara,” said Baulf. “But to ensure that every invoice that they generate will be accepted and processed by another party and their invoice software, they need interoperability. That’s why these e-invoicing standards are being developed.”
The standards are largely built on European standards such as PEPPOL, a network for free invoicing that grew out of public procurement needs.
Phase one of the pilot program wrapped up at the end of June with approximately 20 businesses involved. “The success story is they have all been able to issue and receive e-invoices,” said Baulf. “They’ve created a directory now where you can search for your customer and then send any invoice document to that counterparty. The idea is there will be cost savings. The French estimate that the typical cost of an invoice in France is 10 euros for a paper invoice, but with an e-invoice it’s less than a postage stamp.”
There are also process efficiencies. Backers of the U.S. pilot program are hoping the network will lead to automatic payment remittance. “It will be easier for that invoice to be received and posted to an ERP system as opposed to a more manual process today where invoices may be sent via a PDF or an email and someone manually reviews it and then sends it to someone else, or a paper invoice is being received by a shared service center, for example,” said Baulf.
Approximately 80 different business organizations are involved in the wider pilot program. Not all the major ERP companies were in the initial pilot, though ERP giants like Oracle, SAP and Microsoft are part of the overall coalition.
“Even though there’s a smaller subset physically exchanging invoices, there are IT companies and e-invoicing businesses who are involved in the wider consultation and providing some of the technology for the pilot,” said Baulf. “There are some early adopters who are part of this proof of concept pilot. The big ERP cloud software providers are very much focused on countries where e-invoicing is mandated. They have their large road maps of country coverage they need to meet. If they can’t make the necessary changes, in effect, businesses can’t continue to do business in those countries. A lot of them are relying on third parties, working with companies like Avalara to build integrations to their e-invoicing software, just like they would with a tax engine for tax calculation.”
Playing Whac-A-Mole
It’s likely that many businesses will be hesitant to share tax information with the authorities so vendors are treading cautiously, at least in the U.S., where there aren’t any mandates for e-invoicing right now.
“I think a lot of them haven’t joined the U.S. pilot, but most of them are doing something in relation to e-invoicing globally, so they will have some functionality,” said Baulf. “They may have some country coverage, but they are relying on e-invoicing specialists to sometimes provide that last mile, the final filing, the connection to government portals and government platforms. Some of the newer cloud-based ERP companies which have smaller startups and dynamic businesses using their platforms have actually been very quick to adopt e-invoicing. Xero is a great example in Australia. Australia is encouraging e-invoicing. The government is really supporting digitalization out there. They’re adopting the PEPPOL standard as a common standard for businesses to follow, and they’re going to make it compulsory for business-to-government invoicing to be electronic as well. Xero has actually said this is core functionality we’re going to provide to our customers in Australia and they’re providing that out of the box.”
The trend is spreading even more quickly in Europe. “Between 2023 and 2025, there will be over a dozen countries within the EU that implement mandatory invoicing,” said Baulf. “Italy was the first in 2019, but over the next couple of years, you’re going to see France, Spain, Belgium and Poland all introduce the mandate. That’s quite a game changer because suddenly any multinational business with a footprint within the EU is going to have to find a solution. Instead of looking for individual local bits of software, customizing their systems, they’re going to try and look at this holistically and strategically because it is the clear direction of travel. Ultimately in the next few years, every country in Europe will have e-invoicing and e-reporting as a mandatory requirement. We’re talking to a lot of customers and prospective customers, and they say it's like playing Whac-A-Mole at the moment. It’s difficult to keep up with the latest road map of requirements.”
That road map keeps changing, and sometimes the dates for implementation are moving as well. “It’s a moving target,” said Baulf.
Closing the VAT gap
At the same time, the European Commission level is currently working on an initiative called VAT in the Digital Age, which includes e-invoicing and digital reporting, as a way to lessen the tax gap between the amount of taxes that should be collected versus the amount that is actually collected in value-added taxes.
“They’re looking at seeing how they can encourage the increased use of e-invoicing because they obviously see the benefits not only from a business process perspective, but also to reduce VAT fraud,” said Baulf. “The VAT gap in the EU currently stands at 134 billion euros at the last count. That can be explained by fraud and other abuses, but also errors as well. And e-invoicing and e-reporting are seen as the solution to that because there’s suddenly a tax authority that can follow every transaction. They can run analytics, they can run AI exception reports, and they can do that in real time. They suddenly have access to a much broader data set than they currently do. And it also means because they’ve got that data, they can really focus their time, attention and resources on businesses that have a high risk of fraud. They can spot the hallmarks with the data they receive.”
It’s unclear how such a mandate could be imposed in the U.S., however, and whether it would come from Congress, the Treasury Department, the IRS, the Securities and Exchange Commission or state tax authorities, especially when there is so much resistance to raising taxes or imposing tax audits.
“Because there’s no federal VAT or federal sales tax, it’s very difficult for tax to be the main driver for the mandate,” said Baulf. “Where could the catalyst come in relation to tax? It could come from state tax authorities. Potentially we could see a drive to more digital reporting or e-invoicing or sharing of the invoice data with the individual tax authorities. Could we see that scaled through something like the Streamlined Sales Tax Initiative? But you’ve also got the complication in the U.S. of intrastate versus interstate, and who has the power to regulate that. I think that’s the issue with e-invoicing because your customer could be anywhere. They could be across the street, or they could be in a different state or overseas. That’s the complication in the U.S. Maybe it won’t come through a mandate. Maybe it will come more through a combination of businesses just wanting to transform their finance function for process efficiency. But it may also be that businesses are having to implement the invoicing across the globe, and that’s the clear direction of travel. And if they’re doing that for the rest of the world, why wouldn’t they automate in the U.S. at home? If they’re making that investment at an IT level in shared service centers, maybe they want to realize some of the process benefits locally.”
He also sees some governments trying to incentivize businesses rather than require them to implement e-invoicing. “Maybe it’s not mandated, but we could see campaigns like we’re seeing in Australia and New Zealand where the government really promotes the standard,” said Baulf. “They try to educate businesses on the advantages. Could we see changes in procurement rules? That’s been the first step a lot of countries in the EU made, making it mandatory for public procurement to be in a digital format, everything from the submission of a tender offer to raising your invoice for payments.”
B2B and B2C
The e-invoicing technology is mostly being used for business transactions, but consumers can also see their tax transactions reported as well.
“Within Europe, most of the legislation on e-invoicing only applies to business-to-business invoices and sales to other businesses,” said Baulf. “But of course, the tax authority also wants the data on B2C sales to private consumers. They also, for VAT, see details on purchases and cross-border activity because we have a credit mechanism within the VAT system where businesses can recover VAT they incur. What they’re also doing, as well as mandating e-invoicing for B2B domestically, is introducing a parallel e-reporting requirement normally for the same e-invoicing platform. But instead of having to raise the invoice to a consumer, you merely report a mandated subset of data to the government platform. That means the tax authority has a holistic picture. They now have visibility on every single transaction the business is involved in: all revenue streams, domestic, cross-border, B2B, B2C, as well as cross-border purchase data. That gives them all the data they need to not only audit the business but also pre-prepare the VAT returns. If e-invoicing doesn’t have a natural tax catalyst moment in the U.S. because of the lack of a federal VAT and the issues around interstate and intrastate, you can pass legislation in relation to that. Maybe it's e-reporting that we could see thrive in the U.S., and we could start seeing state tax authorities bring in a reporting mandate. It’s not how you do business, but it’s a parallel process, sharing a subset of that invoice data electronically, either in real time or periodically to a state tax authority.”
Some companies may be able to get a competitive advantage by becoming early adopters of the technology in markets where e-invoicing has yet to catch on heavily.
“There are advantages for early adopters, businesses that issue and receive invoices,” said Baulf. “There should be lower costs on a per invoice basis. Maybe the payment cycle is reduced and they get paid quickly, which is better for cash flow, as well as increased spend visibility. Because there’s a lot of powerful data if you’re receiving that electronically, you can run analytics and a quite powerful visualization. That’s feedback we’re getting from our customers within Europe who have adopted e-invoicing. Suddenly the tax department becomes kind of a fountain of all knowledge. They’ve got great insights into the supply chain, into sales and purchase data because they need that for tax reporting. They’re then sharing that for management reporting, for wider procurement strategy and things like that. With e-invoicing, there’s always at least two parties because you’ve got the vendor and the customer. Therefore there are going to be advantages where your peers, your customers, your vendors all join that digital journey and are a part of that e-invoicing network.”
The timeline for the rollout in the U.S. looks uncertain right now, but the pilot test is nearing completion at least.
“The last wave of this pilot will finish at the end of this year, Dec. 31,” said Baulf. “At that point it’s anticipated there will be at least 31 participants actively sharing e-invoices on this network that’s being created. At the end of that wave, they would have been building on all the feedback they’ve received in the earlier two waves, making slight tweaks and starting to roll out more infrastructure. Then the plan is next year, 2023, the pilots are over and now we just encourage more businesses to join this network. There’s real hope and optimism that there will be organic growth. It’s not a mandate, but there’s this proof that businesses can share e-invoices, they can receive them, they’re getting paid quicker, and there are process advantages. And this is then something that moves from a pilot to an actual go-live system community of businesses deciding to streamline their procurement and invoicing function.”
