VAT in the Digital Age (VIDA) Update: E-invoicing and Digital Reporting

The EU has announced that from January 1, 2028, EU Digital Reporting Requirements (DRR) will become mandatory for all businesses that conduct intra-EU supplies of goods and services.

This means that all businesses undertaking intra-EU B2B supplies will be required to issue and receive e-invoices. They will also be required to report these transactions within two days of issuing the VAT invoice.

This, it is hoped, will deliver standardisation across the EU as well as higher data quality, availability, accessibility, and bring standards into increased focus. Any member states that currently mandate the use of e-invoicing (for example, Hungary and Spain) will need to ensure their process compatibility with a longer-term vision of complete convergence.

Ultimately the vision is that DRR will replace other filings such as EC Sales Lists, formally known as ‘recapitulative statements’.

The new mandate will represent a number of challenges for businesses, these include:

• Keeping up to date with ever more complex reporting requirements.
• The maintenance of multiple reporting tools across numerous territories will be both complex and expensive.
• Potential exposure to reputational and fiscal damage in the event of non-compliance and fines.
• Understanding and specifying which e-invoicing solution is the best fit for their business now and in the future.
• Amending established business processes to meet the new data requirements for e-invoicing and reporting.

The Cross Border B2B European Union Proposal

According to the proposal published by the EU, the e-invoice becomes the default method of invoicing in EU trade. In addition, companies are expected to issue their respective e-invoices within two days of the supply, which brings the DRR rules much closer to real-time reporting of tax information. In that line, businesses will no longer have the option to issue the so-called ‘summary invoices’ which cover the supplies made in a calendar month – as this will contradict the new purpose of almost real-time digital reporting.

In a practical example of a cross-border sale of goods from one EU Member state to another, the following rules should be observed:

1. The supplier in Member State 1 issues an e-invoice to the buyer in Member State 2.
2. The supplier in Member State 1 is then expected to report the transaction to their local Tax Authority within 2 days of its issuance.
3. The Buyer in Member State 2 is expected to report the transaction to their local Tax Authority within 2 days of its receipt.
4. The local tax authority in Member State 1 provides details of the transaction to the EU VIES system.
5. The local Tax Authority in Member State 2 also provides details to the EU VIES system to correlate and corroborate the transaction.

What is next?

In terms of the next formal steps, the EU proposal will be submitted to the Council of the EU for approval. It will also be sent to the European Parliament and the Economic and Social Committee for consultations.

Once the main proposal is approved, the EU is to publish more detailed instructions, technical information, etc. This is to facilitate the practical implementation of the new e-invoice rules, which are planned to come into force on January 1, 2028.

Existing e-invoicing systems and the EU proposal

The new rules outlined in the EU proposal would apply to all EU Member States. EU countries with current e-invoicing requirements will need to be compliant with the new EU-wide rules as well. EU Member States can still adopt their own domestically applicable DRR rules on the basis that these are compatible with the EU-wide DRR proposed.

Great examples of EU countries that have had e-invoicing on their agenda for quite a while are Italy and France – especially because their planned e-invoice models differ significantly from the EU proposal:

The centralised exchange and clearance model in Italy

Italy provides for a fully-centralized e-invoicing model where the government plays a key role in all B2C and B2B domestic supplies:

1. The supplier should submit their e-invoice to the Government.
2. The Government would then validate the transaction to the supplier.
3. The Government would provide the e-invoice to the buyer.

The de-centralised exchange and clearance model proposal by France

In France, the domestically proposed model (to come into force in 2024) is a bit more complex and provides for a key role of a certified third-party solution provider (TPS):

1. The supplier provides transaction data to an approved and certified TPS.
2. The supplier's TPS carries out data validation, formatting, conversion, and electronic signatures.
3. The supplier's TPS sends the e-document to a central platform, receives a clearance notification from the central platform, and sends the e-invoice to the buyer's TPS.
4. The buyer's TPS sends the e-invoice to the central platform for validation, receives clearance from the central platform, and forwards the cleared e-invoice to the buyer.

EU DRR and Global e-invoicing trends – strategy considerations

The EU proposal on e-invoicing and e-reporting is certainly not a stand-alone project. E-invoicing has been a hot topic for quite a while now in the global VAT landscape. There are more and more countries introducing their own DRR rules globally, starting with some of the pioneers in the field, South America, and moving to Asia, Africa, and Australia.

While such automation may have its clear advantages, the non-synchronized way of adopting e-invoicing requirements around the globe can be frustrating for multinational companies operating in more than one part of the world. Many professionals struggle with their understanding of the e-invoicing rules that are planned or already put in place in different countries, acknowledging this as one of their main challenges in the VAT compliance world.

In view of this, here are a few basic steps for businesses to best prepare for the new DRR requirements:

1. Education: Learn the exact requirements which come into force and their mandatory and optional features – have trusted tax partners, tax news sources, etc.
2. Strategy: Define a clear strategy to cope with the long-term requirements – the more time you spend carefully planning in the beginning, the less time and cost you will need to spend on last-minute changes.
3. Processes: Put processes in place to improve ERP data quality. Here are some important areas to consider in the data strategy:

• Capture - Your systems and processes should capture all of the required data fields.
• Quality - There should be no gaps or incorrect details in your data.
• Standardisation – You need a standard tax data model supported by data definitions. This will allow for consistency and easier maintenance and updates.
• Monitoring – You need to keep performing regular checks and improvements (where necessary) on your data to prevent the accumulation of issues and tax risk.

For more information on any of the topics covered in this edition of Taxually News please contact: thomas.maas@taxually.com