Bloomberg Tax
Dec. 11, 2019, 8:00 AM

INSIGHT: Continuous VAT Reporting—Continental Chaos

Christiaan van der Valk
Christiaan van der Valk

In 2001, harmonizing payments was front of mind for the European Commission. However, the backlash that followed the subsequent imposition of mild technical controls for the process triggering most payments—the invoice—arguably led to an uncoordinated use of heavy tax digitization today. Why was this, and what can be done to change this potentially destructive course?

As mentioned above, the European Commission’s interest in electronic invoicing began back in 2001. Recent successes in harmonizing payments via the Single Electronic Payment Area (SEPA) market led to efforts aimed at accelerating the adoption of e-invoicing in a bid to free up the more than 40 billion euros ($44.1 billion) thought to be locked up each year in inefficient paper-based invoice processing.

The initial focus was on the business-to-business aspects of e-invoicing, primarily the removal of legislative obstacles that had arisen as a result of varying transpositions of changes made to the VAT Directive in 2001, which required EU member states to accept e-invoices as evidence of supplies.

At the same time, these changes offered too much freedom to implement technical controls as a pre-condition. Many member states from the south and east of the EU favored qualified electronic signatures and a somewhat prescriptive form of electronic data interchange (EDI).

However, the imposition of such specific controls was condemned by trade associations and civil servants from the north and north-west of the EU. Indeed, the controls were described as ridiculous and discriminatory, on the basis they could not be applied to paper invoices and therefore raised the requirements for something the EU was supposed to promote, not complicate. A consensus was soon reached among these more economically and fiscally advanced member states that if these constraints were lifted, e-invoicing would rapidly be adopted, and the billions of euros of savings unlocked.

Differences and Disagreements

Ignoring any opposition, a subset of countries pushed through changes to the VAT Directive. Taxable persons were still required to guarantee the integrity and authenticity of invoices—in both paper and electronic form—but, unlike previously, the process was now form-free, and there was no longer any ability for individual country transpositions to impose specific requirements.

However, while northern Europe celebrated these changes, member states around the Mediterranean and eastern regions of the EU were less happy. Suffering from proportionally larger VAT gaps than their northern neighbors, their business communities would be less easily persuaded to move to e-invoicing under a legal framework that did not offer 100% certainty that tax administrations could not challenge invoices just because they were presented in an electronic format. What’s more, as it is forbidden to impose more requirements than those already set out in the VAT Directive, these member states could no longer use invoicing rules to increase controls based on modern digital technologies.

Real-time Reporting

In 2015, countries in Latin America began sharing statistics that showed staggering increases in tax collection following the introduction of mandatory e-invoicing with real-time tax administration controls.

Companies were legally required to submit authenticated invoice data to an online platform in a structured format defined by their home country’s tax administration; often the tax administration’s approval was needed before the invoice could be issued or booked. As a result, these countries created a de facto standard that businesses could use to automate their data exchanges in an easily inter-operable manner.

The idea of mandatory e-invoicing piqued the interest of many southern and eastern EU member states, especially because, at the same time, recently available statistics contradicted the previously held European belief that e-invoicing would quickly be adopted voluntarily if there were no administrative barriers.

Nevertheless, the restrictive VAT Directive made it very challenging for EU member states to replicate the real-time e-invoicing mandates employed in Latin America.

Instead, the member states came up with an alternative. Mandatory e-invoicing would require a change to the VAT Directive or an EU derogation; so they used their period VAT reporting and tax audit rules as a basis for receiving more granular taxpayer data on a more frequent basis. This allowed each country to introduce, in complete isolation, its own unique combination of technological requirements for real-time “push” submission of invoice data and/or obligations for taxpayers to provide transaction and accounting data on demand.

Time for a Change

There are drawbacks to the use of reporting as a legal construct to introduce continuous controls on invoice data.

When controls are real-time, or near to, it may be architecturally more convenient to transmit invoices to the government using the software with which a company automates its business-to-business data exchanges rather than its enterprise resource planning (ERP) system.

However, as such software is rarely used for all of a taxpayer’s sales and purchasing transactions, it is practically impossible to coordinate several systems, each reporting a specific subset of a company’s total transactions. By taking the reporting route, tax administrations are therefore inadvertently introducing constraints around the adoption of cloud-based transaction software and business networks.

If every EU member state were to design its own continuous controls and e-audit methods, it could severely impact the competitiveness of European businesses. The burden of compliance would be untenable, for one thing, and as long as businesses have to allocate IT and process transformation budgets to stay on top of diverse reporting and e-audit mandates, the 40 billion euros that could be saved by e-invoicing would remain little more than a pipe dream.

The fact is, the main reason different EU continuous reporting regimes exist is not because member states think they are the best possible instrument available, but rather because the law does not allow them to go straight to the ideal position—mandatory e-invoicing with real-time controls. With businesses generally having the same preference, a policy change could represent a win for tax administrations and businesses alike.

Rescinding Article 232 of the VAT Directive, which states that “the use of an electronic invoice shall be subject to acceptance by the recipient,” would be one way out of this conundrum. Or the European Commission could signal a willingness to grant more member states the kind of exemption that allowed Italy to become the only EU country to introduce “clearance” e-invoicing.

For the time being, though, Brussels seems to be keeping its head buried firmly in the sand, with those responsible for tax policy hiding behind the formal scope of the VAT Directive. While much has changed in the last two decades, many in the EU would argue that when it comes to tax administration, it is nowhere near enough yet.

Christiaan van der Valk is VP of Strategy, Sovos

The author may be contacted at:

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

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