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European VAT E-invoicing Debate—Will Everyone Follow the Italian Example?

March 19, 2021, 7:00 AM

In 2018 EU Member States lost an estimated 140 billion euros ($167 billion) in VAT revenues and this number is predicted to have increased to around 164 billion euros ($195 billion) in 2020 once the final data are collected. A large amount of revenue losses was incurred due to fraud. Traditional VAT compliance mechanisms that rely on periodic reporting of aggregate data and infrequent tax audits have largely proven unsuitable to detect and eliminate fraudulent activities. It became clear that tax collection can be improved if tax administrations receive more granular transaction data on a much frequent basis.

In their attempts to reduce the incidence of VAT fraud, more and more European governments are turning to the invoice clearance model. In contrast to traditional VAT reporting where VAT returns and supporting documentation are submitted to the tax administration some time after business transactions have taken place, under the clearance model, the successful registration of an invoice on a government platform is a precondition for the invoice to be recognized for VAT purposes. This allows tax administrations to receive real-time data on business operations and to detect fraudulent transactions in a timely manner.

The European Commission announced its intention to present a legislative proposal to modernize VAT reporting obligations in 2022. It is currently considering different options (including mandatory e-invoicing) that could provide tax administrations with more detailed and real-time information. However, some countries do not want to wait for a uniform European proposal and are designing their own initiatives to permit real-time monitoring of business operations. France and Poland have already taken the first steps to implement an invoice clearance system, and e-invoicing discussions have also recently begun in the German Parliament.


Italy was the first EU country to introduce mandatory e-invoicing in business-to-business (B2B) transactions. A new approach to VAT compliance seemed necessary as for many years in a row Italy had been consistently recording the largest VAT gaps in the EU. In 2018, it lost EUR 35.4 billion in VAT revenue, which accounted for 25% of the entire European VAT gap.

The e-invoicing obligation mandated by the Budget Law 2018 took effect on Jan. 1, 2019. It requires all Italian businesses to issue electronic invoices in a specific XML format (FatturaPA) and exchange them through a state-operated exchange platform (Sistema di Interscambio, SdI). These rules apply to Italian residents and foreign businesses that have a fixed establishment in Italy. Italian businesses that benefit from the special scheme for small businesses fall outside the scope of the new obligations. Initially, the Budget Law 2018 extended the e-invoicing requirements to non-residents that have an Italian VAT number. However, the EU Council authorized Italy to introduce mandatory e-invoicing exclusively for enterprises established in the Italian territory (other than those who benefit from the exemption for small enterprises).

If an invoice is issued in a format different from the FatturaPA, or if the business does not transmit it using the SdI, the Italian authorities will find that the invoice is “not valid.” The SdI performs some formal checks at the time of invoice submission. If the invoice passes these checks, the platform delivers the e-invoice to the recipient and sends a delivery report to the supplier; otherwise a rejection report is issued. If the system cannot deliver an e-invoice to the recipient, the SdI will make the e-invoice available to the recipient on the tax authority’s platform and informs the supplier accordingly.

To implement mandatory e-invoicing, Italy had to obtain permission from the European Commission to deviate from the provisions of the VAT Directive. The authorization was obtained for the period July 1, 2018, to Dec. 31, 2021. An extension is possible provided that Italy submits a request evaluating the effectiveness of the measure and its impact on taxable persons.


On Feb. 5, 2021, the Polish Ministry of Finance published a draft law on the voluntary use of structured e-invoicing in B2B transactions. The draft law defines a structured e-invoice (e-faktura or faktura ustrukturyzowana) as a type of an electronic invoice that will follow a prescribed format and will be issued, received and exchanged through a centralized government-operated platform—the National E-invoicing System (Krajowy System e-Faktur, KSeF).

Under the proposed system, taxpayers will prepare invoices in their own ERP systems and send them via an API to the KSeF. In the KSeF, each invoice will be timestamped and assigned a number. For small businesses, there will also be a possibility to issue invoices in a government portal called e-Mikrofirma. As the new system is voluntary, the supplier will need to obtain the customer’s approval to issue structured e-invoices.

In addition to consistency and standardization, there will be two benefits for taxpayers who opt to use the new system. They will no longer be obliged to submit a JPK_FA file to the tax administration (JPK_FA is an electronic file containing the details of sales invoices and must be presented to the tax administration upon request) and may obtain a VAT refund within 40 days (instead of 60 days). The latter benefit is however subject to quite strict conditions: the refund amount cannot exceed PLN 3000, the taxpayer must have been registered for VAT for at least a year and all invoices in a tax period must be issued via the new system.

If approved by the parliament, the draft law will take effect in October 2021. The Ministry estimates that 10% of taxpayers will opt to use the new e-invoicing system in 2021 and this number will increase by 10% the following year. The ultimate goal of the Polish government is to implement mandatory e-invoicing in B2B situations in 2023. To do so, Poland will have to obtain an authorization from the EC as an obligation to issue invoices exclusively in a predefined electronic format constitutes a deviation from the provisions of the VAT Directive.

In Poland, over 75% of businesses are currently using electronic invoicing. If the proposed system becomes mandatory and the KSeF will be the only valid way to exchange invoices, businesses will no longer be able to rely on their existing e-invoicing formats and transmission processes. Therefore, many businesses do not see any commercial value in the new e-invoicing requirements and point out that the only beneficiary will be the tax administration as it will obtain more granular and real-time data on taxpayers’ operations.


France took its first step towards mandatory e-invoicing in 2019 with the enactment of the Budget Law 2020. Article 135 of the Budget Law 2020 stipulates that “invoices in transactions between taxable persons shall be issued in the electronic format and the data contained therein shall be transmitted to the tax administration for the purpose of modernizing the collection and control of VAT.” The intention of the French government is to implement a system where VAT returns would be pre-filled with data gathered from invoices exchanged between companies, and the tax authorities would be able to compare purchase and sales data automatically.

Last October the Directorate General of Public Finance (Direction Générale des Finances Publiques , DGFiP) presented a report “VAT is the digital era” (La tva à l'ère du digital) in which it provided more details on the government plans regarding mandatory e-invoicing. The report considered two e-invoicing solutions:

V model: invoices are exchanged via a public platform which will extract the relevant data and forward it to the information systems of the tax administration. Y model: taxpayers exchange invoices using certified private service providers of their choice. These providers extract invoice data required by the tax administration and forward it to the public platform, which will communicate with the information systems of the tax authorities. In this model, taxpayers can still use their own invoice formats as the standardization of data will occur at the level of service providers.
The DGFiP report clearly favored the Y model given its lower costs of implementation and flexibility. It pointed out some of the risks and disadvantages of using the first option: a single point of failure (invoice data transmission will be interrupted if the government system fails) and potential constitutional problems caused by creating a state monopoly for the exchange of invoice data.

According to the DGFiP report, the e-invoicing obligation will be limited to domestic B2B transactions. There is currently no obligation to issue invoices in business-to-consumer (B2C) transactions and international transactions must remain outside of scope given the lack of harmonization of e-invoicing rules at EU and global level. Taxable persons not established in France will not be subject to the new obligations.

As the mandatory e-invoicing will not be extended to all transactions, the tax administration must have other means to obtain data that it cannot obtain via this system. Therefore, the e-invoicing system will be accompanied by an obligation to report data on B2C and international B2B transactions (e-reporting). The scope of the e-reporting obligation is not clear yet: it remains to be determined whether it will apply to all registered taxable persons or only to the resident ones.

The e-invoicing reform will be rolled out in phases:

In 2023 all companies must be able to receive electronic invoices. Large companies must also be able to issue invoices. In 2024 the obligation to issue invoices will be extended to intermediate companies. As from 2025 small and medium-sized enterprises will be subject to the new obligations.
On Nov. 6, 2020, as part of the review of the Budget Law 2021, the French Parliament approved an amendment authorizing the government to take the necessary measures to introduce:

mandatory electronic invoicing for domestic B2B transactions between companies; an obligation to transmit invoicing and payment data for cross-border B2B and B2C situations (e-reporting).
The government must issue the relevant regulations by September 2021. These regulations should clarify some of the key issues that are still outstanding, such as the frequency of data transmission, the scope of the e-reporting obligation, the conditions for certifying private service providers, and the type of invoice validations to be performed.


In 2018, Germany lost 22 billion euros ($26 billion) in VAT revenue and was accountable for almost 16% of the entire European VAT gap (in absolute terms, higher revenue losses were recorded only in the U.K. and in Italy). Although a reform of the German VAT compliance obligations seems to be very much needed, the government has not taken any steps in this direction yet.

On Feb. 9, 2021, some members of parliament representing the Free Democratic Party (FDP) asked the German Parliament to consider the introduction of an invoice clearance model similar to the Italian system. To justify the motion, they refer to a recent report by the German Court of Audit (Bundesrechnungshof), which concluded that Germany is not able to effectively fight VAT fraud. The Court of Audit observed that in 2018 only 1.4% companies were subject to a VAT audit, meaning that in Germany a company is likely to be checked by the tax administration once every 71 years. The Court recommended greater reliance on digital technologies as the current fraud detection methods seem to be insufficient.


Everyone realizes that changes to the EU VAT legislation are very much needed. The current fragmented EU VAT compliance landscape acts as a trade barrier by causing high costs for businesses and fails to effectively fight VAT fraud. The Covid-19 crisis has clearly demonstrated that the VAT gap must be closed quickly as cash-strapped governments of the Member States need extra revenue to finance their massive stimulus programs. The crisis has also shown that compliance must be made simpler—businesses cutting costs to survive the aftermath of the pandemic can hardly afford the growing costs of the frequently changing country-specific VAT reporting requirements.

Immediate electronic reporting of transaction data provides the tax authorities with a complete picture of all transactions occurring within their territory, thus helping to combat VAT fraud and improve tax collection. In the first year of the SdI operation, the Italian VAT revenue from domestic transactions increased by 3,623 million euros ($4.311 million) (which equals to 3%) compared to 2018. Given the apparent success of the Italian model, more and more countries are willing to follow the Italian example.

However, a proper independent evaluation of the Italian system is still missing. Before other countries start copying the Italian solution, it would be reasonable to get more insight into both the revenue and cost impact of this measure. One question that warrants careful consideration is whether a centralized invoice exchange model relying on a government-operated platform with one pre-determined invoice format is superior to a system resembling the French Y model where different invoice formats are allowed and certified private provides take care of invoice exchange.

Countries intending to implement mandatory e-invoicing should also consider the compatibility of their e-invoicing systems with a potential EU-wide solution. The European Commission is currently working on legislative proposals to modernize VAT compliance obligations across the EU. A system where one government-operated platform must validate all e-invoices according to local specifications can hardly form part of a harmonized EU-wide consistent compliance framework. The Commission proposals should become available in 2022; however, even if approved, they are not likely to take effect before 2025.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Aleksandra Bal, PhD, MBA is an indirect tax technology specialist based in the Netherlands. Email: The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.

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