VAT Talks - Nazar Paradivskyy



In this episode of VAT Talks we have the honour to speak with Nazar Paradivskyy who is VP Regulatory Affairs at Pagero and CTC Community leader at the OpenPeppol organisation. Therefore Nazar is the perfect person to discuss the latest developments regarding Peppol and CTC. In the article he explains the benefits of e-invoicing and why it is so important for governments to include businesses in discussions around CTC. Furthermore, he gives a bit more information about the status of the Peppol CTC project and explains why he sees “a use case for distributed ledgers as the 5th corner in a Peppol CTC.”

What is your background and how did you end up in the field of e-invoicing and VAT?

“I’m a lawyer by my education, but I haven’t worked as a lawyer a single day. I have always been in hybrid roles. In one of my first roles, I did a bit of financial restructuring for distressed companies. Later, I worked five years for the Swedish online financing and risk assessment company Klarna. This is where I met people from Pagero for the first time. It was during a joint project between Klarna and Pagero. I stayed in touch with the guys at Pagero since then. At some point I decided to move more into the direction of B2B (Klarna is mainly B2C), they asked me to join them to help the invoice compliance team 5 years ago. I have been learning new things about e-invoicing ever since.”

More and more countries are implementing some form of digital reporting requirements (some combining it with e-invoicing) to tackle VAT fraud, what do you think of this development?

“It’s an inevitable process. This becomes clear when you have a look at all the articles and publications about what different governments are doing to close the VAT gap. This trend was kicked off by Latin American countries, but now we see it more and more in Europe, South East Asia and Asia, but also in the GCC region. Although in the GCC they don’t even have a VAT gap yet, they are already thinking about reporting requirements to prevent them. So many governments, either already have or are planning to introduce some sort of CTC.”

What can be considered as good and bad practices regarding the implementation of real-time reporting?

“Unfortunately, often industry professionals are not being involved in the design and development of the relevant regulations and specifications. As an outcome, these become unreasonably burdensome on those businesses who already have been compliant – the honest businesses, which actually are the vast majority. Some examples of where this in my opinion went “wrong” are most of the Latin American countries, Italy, Turkey and India. What I mean with “wrong” is that the regulations have been designed and introduced in a way that wasn’t necessarily beneficial to businesses. It has become an additional reporting obligation. For instance, in India the taxpayers are sending invoices in the tax administration in XML or JSON, but then invoices are distributed in whatever format to your buyer, even paper. So the efficiency component of digitalisation is not realised.

Examples of countries that potentially might be going into the right direction are: Australia, Japan and France. Here there is an open dialogue with stakeholders. In this way the impact of the larger economy is kept in mind.”

Are Australia and Japan also speaking about the implementation of a CTC?

“For the moment, both Japan and Australia will go for the 4-corner model of Peppol, the classic Peppol so to say. When talking to various stakeholders, all parties recognise that purely the fact of businesses going digital can already help in reducing the VAT gap. So even without having the 6-corner model implemented, it can be beneficial for government revenues.

It is important not to underestimate the importance of improving “simple” compliance. One would agree that most of the businesses are prudent, but often, they make honest mistakes because they did not know that something is changed or that something has to be done in a certain way. Having digital tools and mechanisms that support them in this work is already very beneficial. And this can be achieved already in a 4-corner interoperability framework such as Peppol.”

Would you say that there are also benefits of Italy’s approach of using one strict standard as it does provide clarity?

“With every policy or every model, you will always have two positions, there are always pros and cons. What I fancy about the Italian approach is the idea of SME support. Prior to this, SMEs in Italy didn’t have any good e-invoicing tools.

However, the downside of the Italian model is the strict and rigid standard by which invoice from being a business document between trading parties has turned into means of reporting for the government. The content of FatturaPA and the design of SDI do not cover all the needs of the businesses and the scenarios they encounter. So, what one can observe is that businesses are engaging in “parallel invoicing” in Italy, where next to e-invoicing via SDI, businesses are exchanging commercial invoices with additional information or attachments, which is not supported under the existing model. Making the Italian implementation not as future proof as one would wish.”

What document types would you advise to be reported to the tax authority and why?

“I see that certain countries are mixing up accounting/back-end data and transactional/front-end data. Let me give some examples. In the Spanish SII you are required to send both invoice data and your inventory status. In Greece myDATA you are sending synopsis of invoices, which requires you to aggregate invoice data on line items based on the VAT rate, and on top of that you need to send how you classified your incomes and expenses, your depreciation, your amortisations, your bank payments, the interest rates you’re paying and even some other things.

The issue is: this data would typically be stored in different systems. For example, a company might have some kind of a billing engine where it has the transactional data, while it also has accounting software for the accounting entries. So the problem really lies in the fact that the required data is residing in different systems. When a country then comes with a requirement which requires composition of data from different systems, it becomes a havoc for businesses. Where is the data, and who can find it? This is quite a burden.”

We had an interesting debate around real-time reporting on LinkedIn. One of the discussion points was clearance, what is clearance according to you and why do you think it is important?

“I was actually making a point about the importance of ensuring correctness of the data, which is the most important in any CTC model irrespective of whether real-time reporting or clearance. “Clearance” in its classic meaning where government infrastructure validates the data and assigning some kind of unique identifier, is not the only way to ensure correctness. But sole reporting, without any quality assurance, is definitely not the way forward and is not what the involved parties need.”

When you are saying correctness of the data do you actually mean the correctness of the structure, because the correctness of the data is checked by e.g. tax determination engines?

“Correct. So typically that would mean that the data is there. But, it could be as well that certain data points to be correct. On some invoices, for some countries you want to have the managing directors listed, in other countries you want to have a paid up capital listed.

Of course, a more significant effort would be required, but a tax determination component can be part of the CTC framework. There are different goods and service codes that can be used to determine, or rather to control the correctness of the VAT rates. That could be possible. At the same time, thinking of the complexity of some jurisdictions and some operations, enabling tax determination as part of a CTC framework should really be an evolutionary approach. First, the CTC framework itself must be efficiently deployed and stabilised”

Wouldn’t you argue that the buyer already has to make sure that the structure is correct?

“Yes. However, the question is always: how will the buyer get the data? Each ERP is different. Even if we take SAP or Oracle as an example, each installation of the same ERP is not capable of talking to the other. That’s why there is a need for some standards. Or at least something that sets the minimum standard or minimum common denominator. Without a translation engine or joint language that can be used, exchanging this data between the supplier and buyer and in the end with the tax administration will be challenging.

In the end it is about up front validation that the data is correct. When speaking with some tax administrations one of the greatest concerns for them is: how to get the data right from the beginning. This is what they feel many businesses unintentionally struggle with. They might need help and at least some of the tax administrations also really want to help by providing digital toolkits and mechanisms for the businesses to ensure the data correctness.”

The OpenPeppol organisation has a central position in the debate around e-invoicing/real-time reporting and developed its own CTC model. Could you tell a bit more about how it’s different from already implemented solutions?

“The approach we propose actually combines the best features of several models. When studying our model “decentralised CTC and exchange”, besides finding elements of (1) Peppol interoperability, you will find elements from (2) Delegated Clearance models (Mexico and Peru) and (3) real-time invoice reporting models (Hungary and South Korea). Peppol CTC has many differentiators, but to mention some: the data validation is performed by a network of software providers so that business processes remain uninterrupted, and the data is exchanged in structured formats via secure communication channels. In other CTC models, the exchange is done over email, which is not a very secure or reliable option. It is scalable to other document types, irrespective of whether there is a requirement from the government. And finally, such decentralised approach leaves the model open for further technological innovations, which do not necessarily have to be initiated or driven by the governments.”

What do you exactly mean with ‘scalable to other document types’?

“So Peppol is basically an e-procurement framework. This allows end-users to exchange price catalogues, orders, order confirmations, dispatch advice, invoices, invoice status messages, payment instructions etc. This is where we believe the idea of Peppol CTC really can offer benefits compared to all other proprietary implementations one can observe globally. Let’s compare Peppol CTC with the current model in Chile. They have very strict and old e-invoicing legislation. Due to this legislation, companies currently end up with having one solution for e-invoicing with the government and then another solution for P2P and O2C processes. In Peppol CTC first of all you would typically have a Peppol Authority. This Authority would incorporate some requirements and in case of a CTC deployment they will say: ‘we would like to have a subset of your e-invoice for our control purposes. In Peppol CTC, nothing stops businesses that are already connected to the Peppol network through an access point to use the same technology and framework for exchange of other document types, such as I mentioned earlier. This means that a company can benefit from having the same process, the same solution for the CTC, P2P and O2C process.”

Although Peppol is scalable to other document types, you can only use one e-invoicing standard, is that correct?

“That’s actually a very common misunderstanding. Peppol Network already today supports several format standards and can be extended to more. So if we take Germany as an example. The default standard in Peppol is the Peppol BIS standard, but Germany is using XRechnung which is a national ruleset. Netherlands have their own standard SI UBL used within the network. So you can have other XML standards. Each Peppol Authority has the possibility to introduce local standards, next to Peppol BIS, which is the common standard for all jurisdictions. The data exchange via Peppol Network is done through the AS/4 communication protocol and is payload agnostic. The latter means that also other business documents can be accepted, as long as they are structured formats and defined and approved.”

In which countries is Peppol widely used at the moment?

“It started in B2G, but it is moving more and more into the B2B space. Norway is a good example. Currently more than 50% of all invoices in Norway (including paper) are exchanged via Peppol. 80% of the businesses are registered in the SMP. Another example would be Australia. Obviously, they have started with the B2G framework first. However, they have now started a round of public consultations regarding the introduction of a legal mechanism whereby if a buyer requests an electronic invoice (Peppol based) the supplier may not send any other format to them. So they are slowly getting into B2B. Japan is also heading towards Peppol. They actually don’t speak about either B2G or B2B. Japan is introducing a new qualified invoice framework and Peppol will be the promoted standard for it. And finally, Belgium seems to become the first country to implement a country-wide Peppol-based e-invoicing obligation”

Why did France and Italy not go for Peppol?

“I can only speculate at this point. Italy has had the SdI platform since 2014, while Peppol started only in 2012. So my guess would be that when they were considering B2G and B2B mandates, Peppol was not recognized that much yet. But do note that the Italian e-ordering mandate is Peppol-based.

Regarding France, they also rolled out their platform Chorus Pro quite early. In the new Y-model, they will allow for a variety of standards: UBL, CII and Factur-X. Although Peppol BIS is not listed as one of those standards, you can actually also send Peppol BIS invoices to Chorus Pro today for B2G transactions. If you look carefully at the French regulation it doesn’t regulate the interoperability between the service providers. It sets the minimum format standards, but it doesn’t stipulate how you do the exchange. I believe that the French regulator wants the community to agree, maybe within the French e-invoicing forum (FNFE-MPE), how they prefer to interact with each other and exchange invoices. Peppol is actually one of the discussed standards, so there is an initiative coming from the industry to potentially agree to Peppol as the standard for the exchange between these accredited platforms. In other words, technically and conceptually, nothing is blocking adoption of Peppol in France under the new Y-model.”

For some the French Y-model is already quite complex. Next to the mentioned standards, there is also a role for EDI and now Peppol also remains an option. Do you agree that it is becoming quite complex?

“It is true that it might seem a bit complex at first glance, but that is the result of DGFIP offering options for businesses to select among: the central platform or the accredited platforms. A business should therefore first assess which is these to pick, depending on their needs. When taking the country specific context into account, you’ll notice that France has quite a big portion of SMEs. Therefore, DGFiP has in mind that small businesses will be using this public platform, while larger businesses will be using the accredited platforms (PDPs).

Additionally, EDI can coexist in order to keep the existing EDI invoice flows in France. For this, the EDI provider needs to become a PDP. The current documentation states that there are a minimum of three formats, but that others can be used upon mutual agreement. This is the opening for EDI. I think here you can hear quite a lot of similarities with the Peppol CTC approach.”

How far in the development is the Peppol CTC and are there already countries participating in e.g. a pilot?

“There is already a playground environment available that can be tested by relevant parties. Tax administrations from several jurisdictions have participated in the design of the model. However, due to confidentiality undertakings I cannot disclose any further information.”

Lastly, what would you say to the readers to make them just as enthusiastic about e-invoicing, CTCs and real-time reporting as us?

“Bad data leads to bad decisions, increased costs and decreased efficiencies. If CTC is implemented in an intelligent way, it can be embedded within the existing P2P and O2C processes instead of replacing them fully or partially. This would be beneficial not only for the governments, but also for businesses, especially for the good ones out there. I am only enthusiastic about CTCs that will catch the bad behaviour, without imposing additional burden on or creating additional benefits for the good businesses. Anything else is counterproductive.

Additionally I definitely see a use case for distributed ledgers as for instance the 5th or 6th corner in Peppol CTC. That is an example of a new technology that fits well. It’s really about identifying the right technology for the right use case. Who says that only tax administrations need the collected data? There is the pandemic situation, supply shortages and maybe some other government agency would also need to run some other analytics, but requiring only part of the data. So, one could imagine distributed ledger technology being used as (part) of corner 5 infrastructure, where everyone could access the data instead of building individual infrastructures for the same purpose.”

We would like to thank Nazar again for his time and for giving his perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via