European tax authorities continue to introduce digital mandates into their value-added tax compliance regulations. Over the next several years, over 50 countries will have implemented similar VAT measures, leading to a series of compliance rules that U.S.-based businesses selling globally may not be familiar with. Organizations in the U.S. selling into countries with e-invoicing and near real-time reporting mandates must be aware of the progression of these new rules and adjust their tax practices and technologies accordingly.
While these rules and legislation continue to evolve in Europe, businesses need to start preparing now to meet the compliance requirements.
How did we get here?
In December 2022, the European Commission proposed a set of "VAT in the Digital Age" or ViDA reforms meant to amend the EU's VAT system as a response to an increasingly digital world.
ViDA, which itself stems from the European Commission's July 15, 2020, action plan for fair and simple taxation, is broken into three pillars. One of these pillars aims at modernizing VAT reporting through mandated e-invoicing, supplemented with real-time reporting.
At the time of the ViDA proposal release, the commission
The commission estimates that the move to e-invoicing will help reduce VAT fraud by up to €11 billion a year and reduce administrative and compliance costs for EU traders by over €4.1 billion per year over the next ten years. Given today's economic volatility, the reduction of VAT fraud and the VAT gap — the difference between expected VAT and what is actually collected — could become an important new source of revenue for jurisdictions.
The measure also paves the way for EU member states to set up national digital reporting systems for domestic trade, according to the commission.
When will this all happen?
The initial ViDA proposal sets out aggressive deadline goals for implementing e-invoicing rules across the EU. By January 2024, member states may begin imposing e-invoicing obligations without authorization by tax authorities, which is currently required in most member states. And by January 2028, the proposal calls for e-invoicing to be the default system for the issuance of invoices.
But the reality of the situation is there are a lot of technical and logistical barriers that member states and businesses will need to overcome before the ViDA e-invoicing rules can be implemented and enforced. Beyond that, member states must unanimously agree on implementation, which will prove to be challenging, especially when some countries have invested heavily in their own e-invoicing and reporting frameworks. Some ViDA timelines are already shifting due to these technical discussions and negotiations — especially the e-invoicing portion of the proposal, which is now expected in 2030 or beyond.
Meanwhile, many EU countries are making their own plans around future e-invoicing mandates, resulting in unharmonized requirements. For example, jurisdictions put in place an invoice reporting or clearance model based on their own specs, so data that feeds into these e-invoicing regimes must guarantee the country's tax authorities have visibility into transactions as they occur. The goal of the ViDA proposal is to ensure a standard e-invoicing data model across the EU.
Where do we go from here?
E-invoicing is a reality that businesses must grapple with — and not only in the EU. In many Latin American countries, e-invoicing is already the standard. Market research specialists Imarc Group
The challenge comes when tax authorities around the world create their own approaches to implementing e-invoicing, each with different rules and technical requirements. Because of this lack of standardization among jurisdictions, businesses need to constantly survey for upcoming changes and start reassessing their tax processes accordingly.
While e-invoicing and real-time reporting could be seen simply as modernizing the way businesses report their indirect tax, there is a lot below the surface that affects how the seemingly simple initiative will have a broader impact on organizations as a whole, especially in the implementation phase. From the start, companies should be investing in a system that supports many models because e-invoicing is core for revenue collection and procurement. Beyond that, the system will likely need to support real-time reporting mandates in the near future.
There will undoubtedly be challenges to implementation, even for the most forward-thinking businesses. This needs to be built into the plan as well. With e-invoicing being mandated, there is no room for errors — invoices need to be right the first time. This requires rethinking key finance and tax controls and automating where possible.
There's no avoiding e-invoicing. Governments are already moving ahead with plans, and we are no longer years away from actionable rules and mandates. Businesses should start their own modernization processes now. This will allow for learnings from already existing mandates and time to lay the proper foundation for their future systems. In fact, with a proper plan in place, companies stand to gain in the areas of governance and business process efficiencies from e-invoicing in the long run.
