What US sellers need to know about e-invoicing
While electronic invoicing mandates have been around for well over a decade, their adoption has surged throughout the globe in recent years. Thus, even though e-invoices aren’t yet mandatory in the United States, it’s important for U.S. sellers to understand e-invoicing: what it is, how it works, where it’s required, and the benefits of swapping paper for digital invoices.
What is e-invoicing?
As the name suggests, e-invoicing refers to the electronic transmission of digital invoices and related documents (e.g., credit notes, payment terms, and purchase orders). Electronic invoices contain the same information as their paper counterparts; creating, sending, and storing invoices electronically simply takes paper out of the equation, saving companies time, resources, and labor.
E-invoices generally are processed automatically and electronically in one of two formats:
Structured invoice format: The e-invoice is transferred to a customer’s ERP via a structured electronic data interchange (EDI), which can’t be seen by the human eye. EDIs are typically held electronically until internally approved, at which point they’re filed.
Hybrid invoice format: The hybrid invoice format is the most commonly used type of e-invoice in some countries. The invoices are generally issued both as PDF-A/3 files, which are visible to humans in a readable format, and structured invoices (XML files, for computers).
The format dictates how an invoice can be sent (by EDI or XML), viewed, and accepted. One great benefit of e-invoices is that they can be read without any manual intervention. In fact, the manual manipulation of data in some instances is actually prohibited.
How does e-invoicing work?
E-invoicing policies in all countries mandate the digital submission of certain documents in certain instances, but beyond that, each country’s e-invoicing requirements are unique. Variable components include not only the format (see above), but also who’s authorized to submit them, who must approve them, record-keeping requirements, and more.
Broadly speaking, there are two approaches: the clearance approach favored in the Americas and the post-audit approach more commonly used in Europe. Though both share certain features, such as authentication requirements, there’s a key difference between the two.
The clearance approach
With the clearance approach, invoices flow between the supplier, the tax administrator, and the buyer and are subject to real-time audit by the tax authorities. The tax authorities act as a gatekeeper of sorts, reviewing all invoices submitted by a supplier. If anything looks amiss, the invoice can be rejected and the transaction paused or stopped.
A growing number of countries are adopting the clearance model because it affords them more power to nip tax fraud in the bud.
In Mexico, for example, a government-certified agent must approve an invoice before it can be passed to buyers. The supplier submits the invoice to the tax authority for review. If the invoice is approved, the tax authority adds a digital signature and passes the signed invoice back to the supplier, who then transmits it to the customer.
Under Italy’s similar-but-different e-invoicing mandate, all relevant invoices must flow through the Italian Revenue Agency’s e-invoicing platform, Sistema di Interscambio (Sdl). Sdl verifies, in real time, that the proper tax is applied to each taxable transaction, and adds a digital signature to approved invoices. In most instances, Sdl then makes the invoice available to the buyer, though in some circumstances, it sends it to the supplier to send it on to the buyer.
The e-invoicing system being implemented in India also electronically authenticates invoices. India’s system has already identified fraud cases and data mismatches in the few months it’s been in use. Other countries using the clearance approach are also finding it’s helping to reduce errors and fraud, and thus the tax gap.
The post-audit approach
Tax authorities aren’t directly involved in the transaction with the post-audit approach — they don’t need to approve an invoice in order for it to be passed to the customer. However, the post-audit approach does provide tax officials greater visibility into business transactions.
With this system, digital or electronic invoices flow between the supplier and the buyer (directly or through a service provider) as they do when paper invoices are used. Yet the e-invoice must also be sent to the tax authorities. Transaction records must be kept for a set period of time, which tends to be longer than the requirements for documents accepted through the clearance approach.
Whichever approach is used, the first step toward complying with a country’s e-invoicing requirements is understanding what they are. Is use of an electronic data interchange (EDI) mandated? Is it necessary to obtain an electronic signature? How long must e-invoicing records be kept? Businesses must know the answer to these and other relevant questions.
There are a few general rules of thumb for the widely used clearance approach:
The supplier’s ERP generates the e-invoice per the reporting country’s specifications
The e-invoice is sent directly to the tax authority portal and the buyer’s accounts payable system
The portal electronically authenticates the e-invoice
The buyer approves or rejects the e-invoice
The buyer pays the supplier for approved and authenticated invoices
The supplier generates tax returns and submits tax to the tax authority as required
Which countries require e-invoices?
Countries implementing e-invoicing mandates include, but aren’t limited to Egypt, France, Greece, India, Ireland, Italy, Jordan, Netherlands, Norway, Poland, Portugal, Saudi Arabia, Spain, United Kingdom, and Vietnam. See this list of e-invoicing countries for more information and country-specific details.
It’s common for countries to phase in e-invoicing requirements to allow businesses and government agencies time to take the steps necessary to comply with them. Many start by mandating e-invoicing for business-to-government (B2G) transactions; business-to-business (B2B) and business-to-consumer (B2C) transactions usually follow. Some countries are even imposing e-invoicing requirements on transactions between businesses and things (B2T), referring to the Internet of Things (IoT).
For example, e-invoicing requirements in France are being implemented as follows:
- January 2017: Certain B2G transactions
- January 2023: B2B and B2C (domestic and international) invoicing for large enterprises
- January 2024: B2B and B2C (domestic and international) invoicing for midsize companies
- January 2025: B2B and B2C (domestic and international) invoicing for small companies
India is also phasing in mandatory e-invoicing requirements. Companies with an annual turnover of more than 100 crore had certain e-invoice obligations for B2C transactions starting January 1, 2021. On April 1, 2021, the obligation extended to B2B transactions.
The United States Office of Management and Budget (OMB) Memorandum 15-19 directed agencies to manage invoices for federal procurements entirely electronically by 2018. According to the directive, doing so would promote efficiency and transparency, reduce waste, and make it easier for vendors to do business with the government.
While this ambitious goal hasn’t yet been realized, an estimated 40–45% of invoices processed by the U.S. government are electronic — and the tide continues to flow in that direction.
The benefits of e-invoicing
Countries establish electronic invoicing requirements for a variety of reasons, including to:
- Enhance cash flow (faster invoice delivery time and payment)
- Increase efficiency
- Improve security
- Reduce fraud
- Reduce waste (paper)
The appeal of e-invoicing may be particularly strong for countries with large tax gaps (aka, high levels of tax evasion and fraud). Involving tax authorities from the outset, as with the clearance approach can help countries identify and reduce tax fraud.
Businesses can also benefit from switching to e-invoicing, even in areas where it isn’t yet required. Benefits to businesses include increased savings, because companies devote less time and fewer resources (time and materials) toward invoicing. According to Inposia, switching from paper invoices to e-invoices can reduce costs by up to 80%.
Automating the creation and submission of electronic invoices can also reduce manual errors. And since electronic invoices are delivered with the push of a button, the lag between issuing an invoice and marking it paid can be greatly reduced. E-invoicing also enhances security and provides greater flexibility than paper.
Accurate and timely data is paramount with e-invoicing. As KPMG notes, “In a digital age, the speed of reporting increases the speed of error.” Tax authorities checking e-invoices in real time will validate acceptable documents and reject those with visible errors.
Avalara and Inposia can help. Get in touch with us to:
- Understand your specific business scenario
- Assess your e-invoicing requirements
- Evaluate your ERP updates and integration needs
- Determine the best approach for your business
- Set up your e-invoicing solution
- Automate tax returns and e-way bills
- Simplify invoice reconciliation
- Learn more about our e-invoicing solutions
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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