Tax authorities are pushing for real-time access to companies’ sales data using new technology to track value-added tax payments, leaving some businesses scrambling to meet their demands.
Nearly 80 countries already have requirements for companies to use some form of e-invoicing for reporting taxes on business transactions involving sales of goods and services. Several more, such as India, Hungary, and Italy will expand similar requirements in 2020 and beyond.
E-invoicing rules affect all sectors of industry, but retailers will face the most challenges due to the sheer volume of transactions they undergo each day. The rules require companies to send invoice data on sales directly to tax authorities, sometimes in real-time—on or near the time of the transaction.
Tax authorities want to streamline tax administration and curb VAT fraud, which can be rampant amid the millions of daily transactions involving sales of goods and services. The European Union alone accounted for more than 137 billion euros ($152 billion) of uncollected taxes in 2017, according to a study by the European Commission.
The problem is that multinationals are increasingly having to comply with disparate requirements in the absence of a unified approach to e-invoicing, according to practitioners. Some countries are phasing in e-invoicing systems over several years, forcing companies to constantly update their internal IT systems to accommodate the changes.
“It’s actually very problematic because every country is taking baby steps so it’s a moving target across different countries, which for multinationals is really, really painful and expensive,” said Christiaan van der Valk, vice president of strategy at Sovos, a tax software company that helps businesses comply with e-invoicing rules.
Several countries are forging ahead with new requirements over the next few years.
India will make it mandatory for large and mid-sized companies earning more than 1 billion rupees ($14 million) to use e-invoicing starting from April. Its value-added tax is called the goods and services tax.
Companies in India will need to fill 40 new mandatory fields with data such as a GST identification number for shipping and a billing address of traded goods—which they weren’t required to track before. They must send the information to the government’s invoice registration portal, where they will be validated in real-time. The portal will then generate a unique invoice reference number and a code for the company.
But companies don’t currently collect that information, according to practitioners. Companies are scrambling to go back to their vendors to collect the missing data.
The time frame in which they have to update their systems and businesses will be the main challenge, said Jigar Doshi, executive director of indirect tax at Nexdigm (SKP), a tax consulting firm based across India.
The electronic system will help the Indian government ensure companies aren’t double-dipping invoices to claim extra tax credits for overhead costs incurred in providing products and services, Doshi said. Government could ideally use that information to automatically tabulate company tax documents, he said.
Other countries are expanding the reach of their tax data reporting systems.
Hungary first launched its online reporting system in July 2018 for domestic business-to-business sales with a total VAT value of at least 100,000 Hungarian forint ($326). It plans significant expansions of its system this year and next.
First, Hungary will remove the threshold in July. In January 2021, it will expand its online invoice reporting to domestic business-to-consumer sales and for supplies to both EU and non-EU countries.
“At this point, companies may, for example, find it difficult to verify—in a timely manner—their foreign trading partners’ VAT identification numbers,” Gabor Farkas, a tax director at PwC Hungary, said.
Gabor Fajcsak, partner and head of tax services at RSM Hungary Tax Advisory and Financial Services Ltd., said last year’s launch of online invoice reporting was “a big deal” for companies. New companies joining the system next year for the first time “will face the same challenges,” he said. Companies may also get overwhelmed with the number of invoices they have to report once the 100,000-forint threshold is eliminated, he added.
Italy expanded its e-invoicing program in January to collect information in real-time as part of its effort to combating fraud. Businesses must now issue electronic receipts to all customers. Like the e-invoices, e-receipts are automatically transmitted to the tax authority.
Italian e-invoicing introduced an additional step: companies need to register for a “digital address” number with the tax authority and obtain the digital addresses of all their customers and suppliers.
In 2021, the electronic exchange system will track all invoices that are sent out, received, and issued, and then automatically fill out a VAT declaration form based on the differences. As a result, the government will be able to track and monitor individuals’ purchases and consumption.
The patchwork of new rules means companies will have to rework systems across the company. That means integrating the processes and strategies of different departments—from accounting to supply chain management—to create a streamlined system that provides governments with data on day-to-day transactions, including purchases of office supplies and sale of goods and services, technology advisers said.
“It may be challenging for a globally operating company with centralized tax and finance functions to implement all country-specific requirements,” said Aleksandra Bal, senior product manager for EU indirect tax at Vertex Inc., a tax technology provider.
Countries can implement one of two prevalent e-invoicing regimes: the traditional model and the clearance model. Countries typically start with the traditional method of e-invoicing, which involves monthly electronic submissions of tax documents into government portals that are later checked against the tax documents of other companies.
They may later adopt the clearance model as they expand real-time rules. Under the method every sale of a good or service is cleared with the tax office before the transaction is approved—meaning a tax office could essentially recreate the accounting records of any company following this rule.
But even within the two models, there are a myriad of other implementation methods for the government to impose in rules, making it expensive and challenging for companies attempting to assess their compliance options.
Van der Valk said costs can become prohibitive when companies are ill-prepared for a mandate and “either miss deadlines, which can lead to penalties or operational interruptions, or take ad hoc measures which lead to basically re-implementing e-invoicing differently with point solutions for every country.”
He estimates an additional $5 million in annual expenses for a global company going down the path of unreliable, disparate solutions, while it continues to maintain a parallel global billing system.
To comply with reporting requirements, a company operating in Mexico, for example, first needs to develop a strategy based on what the tax administration is hoping to achieve and its relevant functions—like tax, IT, accounting, supply chain, sales, and others, he said.
“Unfortunately, that is not what happens in most cases,” he said. “Mandate deadlines are often short, and companies still resort to ad hoc panic fixing rather than trying to get ahead of the curve with a properly thought-through strategy.”
—With assistance from Janna Brancolini in Milan, Jan Stojaspal in Prague, and Lou Del Bello in Delhi.