We are living in exciting times when it comes to the digitisation agenda and financial supply chains. From January 2019, electronic invoicing, or e-invoicing, will be compulsory for all companies in Italy and in April 2019, the UK Government’s Making Tax Digital programme will come into force. These could be defining moments for the paper-free, e-invoicing movement across Europe as other countries take note and follow suit.
While automating finance departments and moving suppliers to online payment networks has been gathering pace, for those watching closely, it has been a painstakingly slow journey. Our friends in Latin America are much further ahead in the adoption of e-invoicing, primarily because authorities there have made e-invoicing mandatory across all business-to-government and business-to-business transactions. Although Chile was one of the first to introduce e-invoicing, others such as Brazil and Mexico have overtaken Chile due to strict mandates for usage.
Despite the journey to invoicing digitisation kicking off at a seemingly slower rate in the UK, the wheels are definitely in motion and we are only at the beginning of a sweeping European trend. So, what will this all mean for technology as we currently know it?
Mind the gap
The main motivation for governments in Latin America (and Italy) has been stopping VAT leakages due to fraud and the existence of inadequate tax collection systems. Establishing real-time or near real-time invoicing controls as opposed to the post-audit model which currently dominates Europe means the tax administration can get involved at a much earlier stage and reduce tax fraud, evasion and avoidance.
In Europe in 2016, the VAT gap was 12% of what should be collected and amounted to €147bn. Italy had the largest VAT gap among the EU Member States. In 2015, the difference between the expected VAT revenue and the amount actually collected in Italy was an incredible €35bn. It’s not surprising therefore that governments have decided to take action.
A watershed moment?
As well as Latin America, real-time clearance models have already been implemented in Russia and parts of Asia and Italy’s decision to join the movement will no doubt lead others in Europe to follow suit, particularly when they see a tangible reduction in Italy’s VAT gap.
According to Trustweaver, by 2025 most of the world will be using some sort of clearance model to regulate invoicing and achieve a tighter control over VAT. The next six years are clearly going to be extremely significant for the e-invoicing industry - the big question is whether 2019 is going to be the catalyst for the revolution? Will Italy’s change in approach trigger a domino effect across Europe? Spain, Portugal, Hungary, Poland, Austria and France are already working on their own models suggesting that 2019 could be a key year for the industry.
The death of the pan-European model?
A big concern is that these countries are setting up their own market-specific and country-specific systems rather than developing a pan-European model. The vision of a unified European standard is fading and once countries do their own thing it will be very difficult to harmonise afterwards. The existence of dozens of slightly different systems could become quite a headache for global companies as they try to ensure compliancy.
This of course is where a business-like Tungsten Network can be a lifeline for companies trading across multiple borders. We make it our mission to work alongside governments as they develop their systems and work tirelessly to guarantee all invoices going through our electronic network are compliant worldwide. To date, we are tax compliant in 48 countries, more than any other trading network in the world.
Most recently, we have been working with the Italian government to understand their requirements. We are now a conduit to the Italian governmental e-invoicing platform Sistema di Interscambio and our Italian customers are able to route all their invoices, both inbound and outbound, via Tungsten Network and don’t need to worry about whether they are compliant or not. This is just one example of how we have worked with global tax authorities to stay ahead of statutory changes. If other European countries mandate e-invoicing this year, we will adapt our system accordingly so that organisations are always on the right side of the law.
Governmental pressure to adopt e-invoicing is good as it usually results in other efficiencies such as more accurate and timely payment of suppliers and a reduction in fraud, duplication and error. In fact, according to Billentis, e-invoicing reduces the costs of handling invoices by more than 50%.
While the UK Government is not mandating e-invoicing, it is moving in the right direction. Its Making Tax Digital programme is aimed to help individuals and businesses handle their tax more effectively and efficiently. HMRC wants to become “one of the most digitally advanced tax administrations in the world” and to transform tax administration so that it is easier for taxpayers to get their tax right.
By April 2019, it will expect VAT-registered businesses with a taxable turnover above the VAT threshold to use the Making Tax Digital service to keep records digitally and use software to submit their VAT returns. This should help UK businesses begin the move from paper to digital records.
Getting European countries to adopt e-invoicing has been a bit like pushing a rock up a hill. But as we look ahead, it feels like we are now at the summit and momentum is on our side with Spain, Greece and Portugal predicted to follow Italy’s lead. The next year should herald some key developments in the digital revolution and we believe businesses and governments will never look back. As always, we are on hand.
By Ruud Van-Hilten, SVP Commercial Operations EMEA at Tungsten Network.