E-invoicing policies in all countries mandate the digital submission of certain documents in certain instances. 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.
Whichever approach is used, the first step toward complying with a country’s e-invoicing requirements is understanding them. 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.
The clearance approach
With the clearance approach, invoices flow between the supplier, the tax administrator, and the buyer and are subject to real-time audits. 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.
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
A growing number of countries are adopting the clearance model because it affords them more power to prevent tax fraud.
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 identified fraud cases and data mismatches in its first few months. 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.
