The invoice—often referred to as the “queen” of commercial documents—has many different stakeholders to please and can have numerous different functions:
- An invitation to pay: it represents the apotheosis of a commercial transaction, where a supplier that has met its part of a deal formally requests the customer to perform the agreed consideration, normally a payment in money.
- A title to goods and negotiable instrument: in certain circumstances, an invoice can have the same power as, for example, a bill of lading—the physical possession of an invoice can be proof of ownership.
- A security in finance transactions: a financial institution can use an invoice as collateral to advance money to a supplier in, for example, invoice discounting or factoring.
- A logistics and customs document: import-export transactions often rely heavily on commercial invoices, as proof of sale and a detailed fingerprint of a transaction for law enforcement purposes.
- A vehicle for providing constructive notice: it is customary in many sectors for the invoice to spell out a supplier’s general terms and conditions that apply to the transaction documented therein.
- Tax evidence: based on the above, it is not difficult to understand that tax administrations have historically viewed the invoice as the key information platform for documenting and evidencing taxable transactions. To comply with indirect tax requirements in most jurisdictions an invoice must meet certain minimum form and content requirements, including spelling out the tax due for each supply stated on it.
Tax administrations may be viewed as all-powerful by the ordinary citizen, but those who have been on the inside realize just how difficult it is for them to collect taxes that are legally due. Those responsible for designing tax policy often feel they are engaged in a game of chess with an opponent who is always a couple of moves ahead because they are not held back by legislation, politics and public scrutiny.
It is very understandable, therefore, that tax administrations have allowed businesses to use electronic data instead of paper documents for other purposes, but could not afford to lose their “queen” early in the move to a more digitally-based future. For decades, businesses were free to automate their interactions with suppliers and buyers using electronic data interchange and similar technologies, but until recently they were not allowed to use electronic invoices for tax evidence purposes.
It was only after the turn of the millennium that tax administrations gradually allowed businesses to use electronic invoices. The EU was the first to introduce the optional use of invoices in electronic format in 2001: in the years following, cautious experiments in several countries, from Canada to South Africa to Japan, followed suit.
Most of these countries introduced specific conditions such as the use of electronic signatures and secure archiving for such electronic invoices to be recognized as tax evidence. However, these requirements were relatively lightweight compared to the extensive tax process re-engineering that unfolded in parallel in Mexico, Chile, Brazil, and other countries in Latin America. In those countries, electronic invoicing, or “e-invoicing,” became a mandatory process that was subject to extensive end-to-end technical requirements including real-time approval of every invoice by the tax administration.
This revolutionary change to age-old systems, led by Latin America, required business IT and accounting departments to completely overhaul their practices, based on detailed government specifications. Naturally, a side effect of this radical change was that businesses did not have to think about how they would organize their electronic invoicing flow with trading partners. In general, the challenges of automating invoice flows in environments where this is a relatively unregulated option, rather than a scripted obligation, can often be overlooked.
You would think that e-invoicing is a simple and obvious thing to do if governments do not meddle with it. Even experts who know better than to think that any form of electronic data interchange between differing groups of businesses can ever be easy—as no two enterprise backend systems are the same—are convinced that if there is a good enough business case to automate the exchange of, for example, a purchase order, there is an overwhelming business case for automating the invoice process.
IT analyst firms clearly agree. In 2011, Forrester calculated that moving from manual to fully automated invoicing can achieve cost savings of 90% on the accounts payable side and 44% for accounts receivable. In addition, according to this study, invoice errors would be reduced by 37% and electronic archiving could generate between 32–67% in cost savings.
And yet, analyst firm Billentis in its annual market reports consistently finds jurisdictions with low- or medium-level e-invoicing legislation to lag in adoption compared to those with aggressive fiscal mandates.
Estimates vary, but since the EU introduced optional electronic invoicing a decade and a half ago, only around a quarter of invoices there are paperless today, and probably at least half of those invoices are in pdf format which does not present many benefits for process automation. Some would say that these low numbers are probably because the EU does have specific requirements for value-added tax (VAT), and many of its member states’ governments are known to be very formalistic when auditing electronic invoices.
That may well explain some of these surprising results. But consider the U.S., which does not have VAT and consequently no legal constraints on digital invoices. According to Billentis, a shocking 40% of U.S. companies in 2017 were still scanning paper invoices from suppliers. In addition, only 20% of outbound invoices were sent in a structured electronic format while 75% of such invoices were sent by “electronic paper” such as pdf via email or portal upload.
Why the Delay?
The reasons for this paradox include:
- Complexity: as the “queen” of documents, the invoice is among the most complex documents to automate even without tax considerations. Automation is great to optimize processes and generate savings, but reducing friction means shorter time periods between process steps, and converting age-old manual and complex processes such as digitizing approval criteria is not an easy task.
- Lack of industry standards: the old joke that the great thing about standards is that there are so many of them is especially true in e-invoicing. No-one keeps count, but there are certainly hundreds of different industry-specific, country-specific and other standards that require detailed field mapping based on extensive context expertise spanning different islands of trading practice.
- Lack of an accounts receivable business case for smaller companies: while larger companies have the scale to initiate automation projects across accounts payable and accounts receivable, small companies generally have much better things to do with their money than to automate their relatively few invoices. Even in cases where large companies threaten their small suppliers with contract termination if they do not send digital invoices, the road towards 100% accounts payable automation is long and winding.
It is not historically a popular thought, but it is clear that governments can play a positive role in accelerating the adoption of electronic invoicing, so that the economic and societal benefits of 100% business automation become available more quickly than if businesses simply rolled out e-invoicing programs on their economic merits alone.
Benefits of E-invoicing for Governments
In any event, the question is purely theoretical: whether businesses like it or not, governments have plenty of reasons to promote electronic invoicing—and they are increasingly aggressive in doing so, for multiple reasons.
In addition to fiscal benefits, so-called “clearance” e-invoicing systems generate spectacular opportunities for statistics offices. But even without such ambitious tax programs, quicker e-invoice adoption would support green policies and can serve as a basis for fighting late payments to small and medium-sized companies.
In Europe, public authorities, until recently, have been reluctant to follow Latin American-style tax mandates but rather focus on public sector procurement as a policy vehicle to encourage e-invoice adoption. That is now changing, with Italy and other EU member states launching real-time invoice controls.
Governments are, and will remain, major stakeholders in this “last mile” of business process automation. Businesses that stay in denial about this simple fact do so at their own risk and peril.
The issues of complexity—specifically regarding legislation across the globe from differing legal regimes—may seem daunting. Most businesses believe that it is not possible to meet all local government rules and at the same time obtain the economic benefits of e-invoicing.
But in parallel, developments in enterprise software such as cloud deployment and the increased use of standardized and more flexible application programming interfaces (APIs) have created a new generation of tax technology that can change this equation; today the tools are available to help you centrally manage local compliance while reaping the business benefits of automation in all your trading partner relationships.
One key component that must be considered is technology that can automatically update and process the legislation from different countries, ensuring that electronic invoices within and between these jurisdictions are accurate and contain all of the necessary information, formatting and approvals requested. By implementing software that focuses on this, the burden of manually dealing with new mandates is removed from employees, allowing them to avoid becoming bogged down in the details.
Particular attention needs to be given to seamless integration of any systems brought in to aid e-invoicing, and to require a “compliant by design” approach from application vendors and IT departments.
Previous-generation tax compliance tools were often awkward and required significant adjustment of business systems to function properly, leading to clunky business processes and risks of data being under-utilized, corrupted or siloed when passing within and between organizations. A large part of that is implementing tax technology tools that have been designed to integrate with each type of system to ensure that the full extent of the system is being used and that they are delivering exactly what is needed for the business—because no two businesses work in the same way.
As many companies are being forced to upgrade to modern cloud-enabled versions of their enterprise resource planning systems anyway, an opportunity will arise in the coming years to throw out old manual and bolt-on software approaches to tax compliance and build in a single modern platform that maintains indirect tax compliance—from reporting to e-invoicing to determining transaction tax rates—and ensures peace of mind, transparently and seamlessly “under the hood” throughout a company’s ever-evolving application and systems landscape.
There needs to be a sea change in the way that e-invoicing and the more general digitalization of tax is perceived. As it is not looking likely that it will ebb away, from its origins in the early 2000s through to implementation and considerations in for example Italy and India this year, this shift in tax grows ever stronger. Businesses can trail after it, or can look to get ahead of its momentum and future-proof for a world of ever-shifting tax legislation.
Christiaan van der Valk is VP of Strategy, Sovos
The author may be contacted at: email@example.com
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