What is electronic invoicing (e-invoicing)?

Electronic invoicing, or e-invoicing, is the process of exchanging invoices in a structured digital format.

An electronic invoice, or e-invoice, contains the same information as a paper invoice: credit notes, line items, payment terms, purchase order, purchase amount, shipping address, and so on. However, e-invoices are issued, transmitted, and received in a structured electronic format, such as XML, that is designed to be read by machines.

An e-invoice is not the same as a paper invoice that’s been uploaded into a digital format like a PDF. As digital files, e-invoices contain structured data designed to be automatically exchanged and processed by accounting and ERP systems. 

It’s the structured data that differentiates an e-invoice from a PDF or digitally transmitted scanned paper invoice.

E-invoices typically use one of many structured data formats, which control how the invoice can be sent, viewed, and accepted. In general, there are two groups:

• A ‘pure’ structured e-invoice format for electronic data interchange (EDI) is machine readable but cannot be read by humans
• A hybrid e-invoice format contains structured data readable by machines and a visual format that can be read by humans

Electronic invoices can be sent through an open network like Peppol (Pan-European Public Procurement Online), via a government portal or private EDI connection, or via a service provider such as Avalara. Note that customers must be able to receive e-invoices, so typically you cannot send an e-invoice without first communicating with your customers. Everyone will have to be on board, so it’s best to start the conversation early.

When you send an e-invoice, structured data such as ANSI X12, CSV, EDIFACT, XML, VDA or another machine-readable format is transferred directly into the buyer’s accounting or ERP system.

A growing number of countries require the use of e-invoices for business-to-government (B2G) or business-to-business (B2B) transactions. This process automation can lead to great savings and, in many cases, give tax authorities detailed insight into business transactions.

Where there are e-invoicing mandates for business-to-consumer (B2C) transactions, live reporting of issued invoices is also required because consumers cannot read structured data.

Many countries that don’t already have e-invoicing or live reporting mandates are moving in that direction. “E-invoicing is the clear direction of travel for governments and tax authorities around the globe," notes Alex Baulf, Senior Director of Global Indirect Tax at Avalara.

Some jurisdictions take the post-audit model, meaning the e-invoice is sent to tax authorities only after the transaction has been completed.

In other jurisdictions, the tax authority sits in between the seller and the buyer. “Businesses are being forced to submit transaction-level details directly to the tax authority, in close to real time or real time.”

The principal reason for this shift to mandatory use of electronic invoicing is to improve tax compliance. The European Union has a staggering value-added tax (VAT) gap — the difference between the expected and actual VAT collections.

E-invoicing helps reduce tax errors as well as tax fraud by giving tax authorities visibility into transactional tax data. In some countries, including Brazil and Italy, the tax authority must approve all e-invoices before they can be transmitted to the customer, or get directly involved in the invoicing process and issue the final invoices itself. Such real-time reporting cannot be achieved without e-invoicing.

The European Commission considers e-invoicing critical to fighting VAT fraud and reducing administrative and compliance costs for businesses. Because of how government is structured in the U.S., and because the U.S. doesn’t suffer from the same degree of sales tax fraud, there are no e-invoicing mandates in the U.S. at this time.

However, the Federal Reserve and the Business Payments Coalition launched an e-invoicing exchange market pilot program in September 2021; the resulting electronic exchange network, now overseen by the Digital Business Networks Alliance, allows businesses to securely share electronic supply chain documents with one another.

E-invoicing can greatly increase efficiency in your finance departments by automating the invoicing process end to end.

In addition, you may not be able to do business in certain countries if your business doesn’t have the ability to issue and/or receive electronic invoices. The more jurisdictions implement e-invoicing mandates, the more you’ll feel constrained unless you can comply with them. This list of new and proposed e-invoicing requirements by country shows what you’re up against.

Government mandates aside, there are benefits to implementing electronic invoices.

E-invoicing can:

• Accelerate invoice payment by reducing lag time
• Decrease administrative delays
• Enhance security due to encrypted file transfer, digital signatures, and secure networks
• Improve efficiency by streamlining AP/AR processes
• Lessen manual work, decrease human errors, and improve invoice data accuracy
• Promote transparency
• Reduce costs associated with printing, posting, processing, and archiving paper invoices

E-invoicing can improve your cash flow by shrinking the lag between billing and payment. Electronic invoices won’t be sent to the wrong person or get lost in the mail. On the other side of the transaction, businesses that receive e-invoices save on processing and handling because they save human work.

Businesses that implement e-invoicing may also be able to spend less on labor and supplies. According to a report by Billentis, automated e-invoicing can result in cost savings of 60–80%, as compared to conventional paper invoice processing.

Switching to an e-invoicing system requires planning. It’s important to consider your current invoicing as well as your future invoicing needs (e.g., invoice volume and customer location) so you implement a system that can handle existing and anticipated regulatory requirements. This is complicated by ever-evolving (and multiplying) e-invoicing mandates.

E-invoicing platforms range from the simple to the sophisticated. Unless you plan on doing a complete IT overhaul, you’ll want a platform that’s compatible with existing systems and software. Reliability and security should also be considered.

Using an e-invoicing service provider is a good way to transition to e-invoicing, especially if you do business in several countries. Avalara E-Invoicing and Live Reporting offers support for multiple countries with only one integration. It integrates into your existing ERP or accounting systems and connects with those of your business associates, allowing you to comply with mandates without completely revamping your systems. It also accounts for changing e-invoice exchange and tax reporting regulations in multiple countries and helps you maintain compliance with new e-invoicing laws.

Want to know more about e-invoicing?

• Watch our on-demand webinar about e-invoicing in the U.S.
• Check out Avalara E-Invoicing and Live Reporting