Top 10 tax invoicing issues and pitfalls
The tax invoice is arguably the most important element in a VAT or GST system – underpins the ability for a business to reclaim the VAT on its purchases, as well as the basis for tax calculation, reporting, posting to the ERP and auditing by tax authorities. While the direction of travel is clear – it is e-invoicing and real-time digital reporting of transactional level data, there are lots of unique invoicing requirements around the globe, including in relation to contents, storage, language and currency. We have set out our top ten tax invoicing pitfalls to be aware of if you do business internationally.
In the European Union (EU), the invoicing legislation does not prescribe the mandatory use of any specific local language and where a business issues an invoice in a language other than a national language, the relevant EU country can’t restrict VAT recovery solely due to this. However, businesses should be aware that tax authorities are within their rights to request translations of specific invoices during an audit. In addition, there could be other non-tax legislation that mandates the use of a local language, for example the Polish Language Act can mandate the issuing of invoices, bills and receipts to Polish consumers in Polish. Other challenging language requirements for multinational businesses include mandatory Arabic invoicing in the Kingdom of Saudi Arabia and issuing invoices in Cyrillic. Many businesses are now issuing bilingual invoices to meet both local tax invoicing requirements and support shared service functions that may ultimately approve, post and pay the invoice.
2. Sequential numbering
The majority of countries with a VAT or GST regime require tax invoices to have a unique sequential number. This can be a challenge for businesses that operate across separate business units or divisions or use a single shared service centre or ERP instance which centrally issues invoices from one series covering several group companies. Another trend is for tax authorities to allocate a specific series of invoice numbers to taxpayers, for example in Portugal, businesses must obtain an ATCUD number from the tax authority, a unique document number that identifies the invoice and confirms its validity.
3. Digital signatures
A digital signature is often mandated where electronic invoicing is used. This is used to identify and validate both the authenticity of the issuer and the integrity of contents of the invoice. While there is often a choice of digital signature standards or providers to use, some countries will also mandate this or actually issue the digital signature themselves under a pre-clearance e-invoicing model. Some countries also have requirements around using digital signatures as part of the archiving process, for example, Italy.
4. PDF is generally not an electronic invoice for VAT purposes
In terms of mandatory e-invoicing as defined by numerous governments, PDF invoices do not generally qualify as e-invoices. However, where a business issues or receives invoices in PDF formats, they may find themselves subject to specific rules around their storage and archiving. However, please note that some national e-invoicing formats do actually use PDF format but with additional embedded XML providing machine-readable structured data, for example Germany’s ZUGFeRD and France’s Factur-X.
5. Supplier and customer VAT numbers
It is a mandatory requirement for the supplier to clearly show its VAT registration number (or GST/TIN number in some jurisdictions). Where an invoice is missing this number, generally the invoice will not be a valid tax invoice for VAT/GST purposes and the customer can’t generally recover the VAT as input tax. Indeed, in Australia, if the invoice is missing the seller’s ABN number, the customer must withhold 47% of the sale and pay this directly to the tax authority. Failure to show the IOSS registration number on a low value import into the EU can also lead to delays at customs and even double taxation. However, there are also some countries and business scenarios where the customer’s VAT registration must also be shown on the invoice. This has master data issues for a business, as it needs to first obtain the number from customers, validate it, store it in the ERP or billing system and then include it on the tax invoice. This is further complicated where the customer has multiple VAT/GST registration numbers and the number used can influence the tax calculation (for example under the EU’s Quick Fixes relating to chain transactions or where the number drives a tax shift to the customer under the reverse charge mechanism). In the EU, where goods or services are provided cross-border to a counterparty in another EU member state, the customer’s valid VAT number together with the two-digit country ISO code must be shown on the invoice as well as on the EC Sales List. There are also countries that require this even for domestic transactions, for example in Belgium.
6. Storage and archiving
Invoices must be retained by the business for at least the minimum retention period set by national tax authorities. This is typically up to ten years but does vary by country. Some countries also have specific rules on whether invoices must be kept in-country or at least within a region (for example within the EU). Archiving requirements for e-invoices can be much more onerous, for example in Italy, archived e-invoices cannot be altered and are required to be grouped into archived packets and have a digital signature and a time stamp applied. There are also formal requirements in relation to appointing a Conservation Manager and producing a Conservation Manual.
7. Currency and exchange rates
Generally, most countries allow invoices to be raised and paid in any currency as this is a commercial decision for the business. However, where a VAT or GST is charged, there is generally a requirement to show this is the local reporting currency on the tax invoice. Tax authorities will often mandate the use of a specific exchange rate e.g., a daily rate from the local national bank or a monthly rate for VAT and customs purposes published by the tax authority. In the EU, it is possible to use the European Central Bank’s day rate for currency conversion for VAT invoicing purposes in every EU member state. A common pitfall is that accounts payable teams in the country, or within a regional shared service centre, may not be aware of this requirement and simply enter the tax amount into the ERP system using the company’s chosen exchange rate rather than the one used by the supplier. The amounts should match, so there is symmetry between the VAT reported on the sale (the output tax) and the VAT recovered on the purchase (the input tax). This can lead to issues upon audit or when tax authorities attempt to match the amounts in countries with digital reporting or e-invoicing systems.
8. Description of the goods or services
Invoices must have a clear description of the goods or services provided. The granularity and detail of this description can vary depending on the country. Some tax authorities, for example, do not simply accept a SKU or material number. South Africa has recently updated its invoicing requirements for foreign digital service providers, stating that the description on the invoice of the electronic services supplied must now be “full and proper”. Businesses should be aware of a local requirement in Hungary which mandates businesses to show the relevant HS code for each item on the invoice if a non-standard VAT rate is charged.
9. Commercial and legal requirements
While most country guides to invoicing requirements focus on the specific tax related requirements, businesses entering new markets should ensure that they are also aware of any broader commercial and legal invoicing requirements. For example, France recently introduced a law which requires the billing address of the buyer and the seller to be shown on the invoice if they are different from the main business address shown. In addition, where a purchase order has been issued by the customer, this must be included on the invoice. Failure to meet these requirements can lead to significant penalties and fines. Other local legal requirements often include the company’s incorporation number from the trade register, the registered office, the legal form of the company, names of directors and the amount of share capital.
Self-billing is an arrangement between a supplier and a customer where the customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment. This arrangement is often used between department stores and concessions or by digital platforms and marketplaces with their sellers. Not only must self-billed invoices meet all the usual invoicing requirements in that country, but there are generally additional requirements to make them valid for VAT purposes. For example, in the EU and UK, there must be a valid self-billing agreement in place. While self-billing can be an efficient way of doing business, there is risk involved if requirements are not fully understood or met.
To find out more about how we can help with your global tax compliance requirements, get in touch today and speak to one of our experts.
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