How the e-invoicing tornado is shaping the tax compliance landscape

A tornado in this sense refers to the anticipated rapid adoption of a new technology and its consequent changes in the market and business environment. Geoffrey Moore’s ‘Inside the Tornado’ — cited in the report — identifies and explores the stages following adoption of a new technology: Innovators, Early Adopters, Early Majority, Late Majority, and Laggards. 

Because adoption peaks at Early Majority, the cycle forms a bell-curve. Either side of this peak, the curve starts small with Innovators, then declines with Late Majority and Laggards. Within this cycle are three major phases of the technology adoption life cycle:

• The Bowling Alley — a phase of niche adoption when businesses must use their initial customers to attract further niche markets.
• The Tornado — when a product gains rapid mainstream acceptance, and businesses shift their focus to mass market appeal. 
• Main Street — when demand stabilises after the Tornado, and businesses switch focus again to differentiating their product to appeal to niche markets and individual customers.

Despite a large number of countries being unable to implement — or choosing to postpone — their original timelines for mandatory e-invoicing, huge changes in the economic landscape are imminent as we move through the stage of Early Majority. This tornado will be a phase of widespread and global market adoption of e-invoicing and e-invoicing solutions.

The number of corners in e-invoicing models refers to the number of stakeholders involved in the e-invoicing process. Two-corner models involve the direct exchange between two trading partners. Three-corner models involve the exchange between two trading partners and an intermediary — a service provider. In four-corner models, each trading party — the vendor and their customer (or corners one and four) — each use their own service provider (corners two and three), and those providers exchange the documents on behalf of the vendor and customer.

The Billentis report states that the decentralised CTC and exchange model — otherwise known as the five-corner model — will become the dominant model over time. This is because it “satisfies both the fiscal demands of tax authorities and the requirements for business automation”. 

So, what does this mean? Within the five-corner model, the document flow (the exchange of e-invoices) between businesses and their customers is managed between their certified service providers — corners two and three, who must comply with technical and financial standards — using an established interoperability standard. 

Upon the e-invoice exchange between the certified e-invoicing providers, data from the e-invoice is reported to the relevant central tax authority platform — corner five — using this standard, facilitating an uninterrupted trade cycle. Only certified service providers have access to the tax authority platform. Sellers and buyers can interact with their chosen e-invoicing service provider, as long as they have the necessary certification. 

In short, the five-corner model is most effective at satisfying the reporting requirements of tax authorities, while businesses can operate unhindered and retain their choice of partners.

• Modular deployment — the model’s various flows can be implemented in stages, starting with B2B or B2G exchanges for example. Separate flows can be introduced with minimal impact on business partners.
• Tax control customisation — because the reporting requirements of tax authorities vary by country, businesses can customise which subset of data is to be extracted from the issued e-invoices. 
• SME friendly — the five-corner model often incorporates low-cost or complimentary services mandated for service providers as part of the certification process, making it appealing for smaller and medium-sized businesses.
• No single point of failure — because the exchange of e-invoices occurs between certified service providers, the central platform receives only a minimal data set, and therefore only has to maintain and support a limited number of interfaces.

Further predictions for the future of e-invoicing are outlined in the report. These are summarised below. 

Standard e-invoicing will expand its capabilities
The standard e-invoicing service offering may encompass a comprehensive range of capabilities, including data formatting, preparation of e-invoices that comply with domestic tax regulations, as well as their transmission and archival. 

E-invoicing service providers may become specialised
To address global tax compliance needs, and given the distinct compliance requirements across various sectors, some service providers may opt to focus on specific industries such as retail, telecommunications, or automotive. This way, they can better focus on specific requirements for the given industry. 

Preferred payments and e-invoicing
With a wider variety of payment services than ever before, suppliers will want to present their customers with diverse payment alternatives. Payment services are therefore likely to be integrated into embedded finance solutions, including e-invoicing, making e-invoicing and payment services a unified offering. 

New services such as invoice financing
As invoice and payment are connected, suppliers might expand their services to address immediate financial requirements through the financing of individual invoices, and tackle the issue of delayed payments. Their customers would benefit from optimising their working capital management.

Tax-specific solutions will be increasingly integrated with e-invoicing software
As the digitalisation of tax compliance continues, businesses are required more often to submit electronic versions of audit files, invoices, credit notes, debit notes, and payment receipt data to tax authorities. E-invoicing solutions will therefore become central to the tax compliance strategy for businesses of all types and sizes and a new way of reporting tax obligations. 

Processing just e-invoices won’t do anymore
Offering simply an e-invoicing service will become inadequate. Increasing numbers of e-invoicing service providers are expected to offer support for additional business communications, such as the exchange of order confirmations and statements. Some go further by offering validation and correlation services so orders and invoices can be matched. 

Supply chain
In the initial phase of supply chain automation, traditional electronic sourcing solutions and online marketplaces are progressively expanding into the domain of electronic invoicing networks, and conversely, these networks are also extending into the realms of e-sourcing and electronic marketplaces.

E-invoicing will encompass cross-border documentation
A huge number of goods move across borders all over the world, day and night. The volume of documents this generates is vast. As the information within them often overlaps with the data found within commercial and tax invoices, e-invoicing service providers are likely to offer a full suite of services for exporters and importers.

E-invoicing solutions, ERP, and CRM could merge
E-invoicing functionalities are expected to be available in enterprise resource planning (ERP), customer relationship management (CRM), billing, and accounting systems. Service providers currently form partnerships with relevant vendors, but these vendors are progressively incorporating e-invoicing solutions into their portfolios.

The report aligns with the expectations of Avalara that the five-corner model will eventually replace all other models, and that e-invoicing will grow into a broader supply chain solution and/or merge with other business-critical areas such as payments and factoring. 

Businesses continuously seek innovative solutions to improve their efficiency. Concurrently, governments are poised to extend the scope of their e-invoicing mandates to encompass a broader range of documents. Consequently, it’s imperative for e-invoicing service providers to expand their support to include various business documents, such as import, export, customs, and duty documents.

Given that businesses already need comprehensive calculation solutions to complete and submit invoices, it’s both logical and advantageous for e-invoicing solution providers to offer precise tax calculation and filing services. 

To be able to offer a more complete automation service to businesses, it’s expected that e-invoicing service providers will form partnerships with experts in other areas to close any gaps and offer a more holistic solution. 

Avalara and our partners can help your business overcome your e-invoicing and compliance challenges. Speak with us today.