At the beginning of May the Group on the Future of VAT (GFV) gathered to discuss e-invoicing in respect to the VAT in the Digital Age project. In a recent blog post we have already shown how complex this topic is. This also becomes apparent from the minutes of the GFVs meeting, which show the many questions raised by the European Commission (EC) to the delegates. In the following we hope to add to the ongoing discussion by providing our view on the questions raised and the answers provided by the delegates. Our main conclusions are:
Centralised clearance does not offer additional benefits in terms of tackling fraud; Mandatory e-invoicing itself does not tackle fraud, combined with real-time reporting (e-reporting) it does; One single European Union (EU) e-invoicing standard is not feasible.
(Centralised) clearance and data collection
The first question posed by the EC is if tax authorities should “clear” the invoice before it arrives at the buyer. In another blog post we already explained why this is actually not necessary. The most important argument to stress is that no clearance model can check the correctness of the data provided on the invoice, but only the correctness of the structure. So, if a Member State wants to have such a check, one could best opt for a decentralised clearance model where (certified) third party service providers perform a clearance. In this way, contrary to a centralised clearance model, the invoice workflow will not be altered. This is in line with the answer that the delegates gave. They stated that: “if a clearance model was to be implemented, it should be limited to formal checks, not substantial checks.”
However, this does not tackle VAT fraud. In order to achieve this, data needs to be collected and analysed by the government. Therefore, the response of the delegates that: “in any case, no clearance should be put in place for invoices on intra-Community transactions” makes perfect sense.
In this regard, the following question of the EC is interesting: “do you think that all the data in the invoice should be sent to the tax authority or only a subset of the data?” This is an excellent question, which we have answered in many different blog posts (e.g. here). We believe that confidentiality of taxpayer’s data is one of the most important aspects in this discussion. Therefore, modern cryptography can help to achieve the goals of the VAT in the Digital Age project without actually storing any sensitive data. Only encrypted data is stored, while this technology allows tax authorities to perform calculations on this encrypted data. In this way, VAT fraud can be tackled while data is optimally protected.
Should e-invoicing become mandatory?
An important first question within this subject is: “Do you agree that the system would only work if the acceptance of electronic invoices by the recipient is made mandatory?”. In case the goal is to tackle VAT fraud and close the VAT gap, then the clear answer is no. We have explained here that e-invoicing is simply exchanging invoices in a computer readable way. Reporting VAT data to the tax authority on the other hand, will result in less VAT fraud and a lower VAT gap. So, we can argue that the system only works if real-time reporting (or e-reporting) is mandatory. Some delegates rightfully pointed towards the importance of a fully automated invoicing process. However, this can also be achieved via EDI and/or by integrating bookkeeping software.
The establishment of an EU-wide e-invoicing standard has been a topic of discussion for years, but has also proven to be extremely complex. In a recent article we tried to provide an overview of different e-invoicing standards and to what extent harmonisation can be achieved. We concluded that the Core Invoice standard, EN 16931, is an excellent standard to come to a certain convergence of standards throughout the EU. However, there will always be local differences, which was proven by the fact that even within countries particular sectors have different needs regarding what needs to be put on an invoice than other sectors. It seems therefore not feasible to create one single standard for the entire EU.
However, it would be an excellent development if all standards are actually based on the EN 16931. Furthermore, the Peppol network (further discussed below), might be an excellent infrastructure to make this a reality.
Tool used for the transmission of electronic invoices
As we mentioned above, invoices don’t need to go through the tax authority in order to tackle fraud. In fact, it would only perform a check on the structure, while in turn it would disrupt the entire invoice workflow. So, if the invoices don’t go via the tax authority, the EC asks, “how electronic invoices are going to be exchanged and [is] the information submitted to the tax authorities?”.
We argue that different options should be allowed to have data transported to the relevant government institutions. While some companies will make use of EDI, others prefer an e-invoicing standard such as Peppol BIS 3.0. For the latter, the Peppol network could be an excellent way to transport invoice information both between companies and to the national authorities. Requiring companies to digitalise and make use of third party service providers (be it a Peppol service provider, or something else) for their invoicing process, might be in general a good development. It would mean that companies can automate their reporting obligations and save money by fully going digital.
What is the role of the recipient of the invoice?
Another essential topic touched upon by the EC is the role of the buyer. It should not be possible that suppliers are reporting invoices to buyers with whom they actually do not do business with. Therefore the EC asks: “should the recipient formally accept the invoice in order to be considered valid for the purpose of reporting by both the supplier and the acquirer?”
We believe that this is not necessary for a real-time reporting system for domestic transactions. In this situation, the buyer will closely monitor what is registered on its account because it has an effect on how much VAT it can deduct. In case it finds invoices that should not have been registered on its VAT number, it can notify the relevant government institution. It might be the case that either businesses or governments prefer to have a formal acceptance before the invoice is actually considered as legal. However, this would increase the administrative burden which therefore did not receive a lot of support from the delegates during the GFV meeting.
Lastly, we argue that it’s not necessary for the buyer to also report its invoice, which was another issue raised by the EC. This is the case because (as we have explained above) the buyer will be either able to check which invoices are registered or will need to formally accept a registration. In this way VAT amounts can be checked against the VAT return and achieve the main goal of real-time reporting: fighting VAT fraud and closing the VAT gap.
It’s great to see that there are ongoing in-depth discussions on the EU level regarding e-invoicing. There are still many open questions, but it seems evident that (1) clearance is not a solution to VAT fraud, (2) mandatory e-invoicing is not a necessity, mandatory real-time reporting is and (3) one single e-invoicing standard will be very difficult to achieve. Soon the discussions will continue.
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