What does it take to create a compliant invoicing process?

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In today’s rapidly moving modern world, the surge in automation is well adopted, but is also generating the need for further scrutiny and regulations to govern how organisations manage digital processes. There are plenty of regulations already in place, however, a business needs its digital systems to meet these regulations, particularly when it comes to core operations like global invoicing.

 

This issue with compliance

It’s easy to see how businesses are faced with major challenges and concerns over risk when it comes to global compliance. Ever-changing criteria like tax laws, varying requirements around invoice receiving and archiving across various countries, multiple currencies, languages and different invoice formats and standards raise several concerns over the risks of compliance. Just when your business thinks it meets the measure, the mandates change, and it takes a while to implement any processes needed. The process of adaptation begins all over again.

Global enterprises are certainly faced with a huge challenge to comply, just to ensure they’re invoicing customers in the correct manner. Latin America, amongst many other countries, have recently opted to embrace invoices being sent electronically through federal authorities’ electronic systems to help reduce fraud. You can read more about this here (https://www.cloud-trade.com/blogs/how-to-solve-the-e-invoicing-challenge-in-latin-america).

One of the biggest issues for businesses is ensuring legal compliance when invoicing projects globally, as each country is different. As a result of this unharmonized and very complex landscape, companies that operate on a global scale quite often incur significant IT and project management costs while setting up to meet local requirements and the ongoing management.

You might see e-invoicing and e-document compliance as a necessary evil, and it’s essential, nonetheless. Correctly handling country specific taxes reduces the risk of incurring fines or other penalties; it also ensures businesses receive refunds (such as VAT) correctly and on time.

But there are still plenty of businesses that are simply unsure that government requirements are adhered to – tax requirements are significant and vary considerably.

 

Differing regulations for e-invoicing compliance

The e-invoicing landscape is not harmonized across the globe, in terms of the technical aspects as well as the legal requirements. There are differing regulations depending on whether you are a supplier or a buyer, such as:

  • A government validated invoice number
  • A means of guaranteeing authenticity & integrity of the invoice
  • Electronic Data Interchange (EDI)
  • Digital signatures
  • Government mandated systems
  • Minimum invoice data fields
  • Both VAT and commercial fields
  • Long-term archival of the invoice
  • Within an appropriate geographic location
  • Under appropriate data protection laws

 

There are also differing regulations between countries that your business will need to be aware of for electronic invoicing:

  • USA: Liberal regulations on e-invoicing, no specific directives in place.
  • EU: There are specific regulations in member states here. Implemented e-invoicing regulations since 2001. Latest EU directive ensures both electronic and paper-based invoices are treated equally. No particular e-invoicing technology can be imposed, but the requirement for authenticity and integrity remains. This was implemented in all EU states on Jan 1st
  • Latin America: Latin American countries have mandated government-controlled e-invoicing systems that are focused on tax collection. The key driver for change was due to the VAT gap. Find out more about it here.
  • Japan and China: Have not previously permitted electronic invoicing.
  • India: Mandatory e-invoicing started from 1st January 2021 for Indian businesses with an annual turnover exceeding Rs. 100 crore. According to the regulations, e-invoices must be issued to the IRP in JSON format.
  • Singapore: Recently opted to embrace the PEPPOL (Pan-European Public Procurement On-Line) e-invoicing standard.

Some countries mandate the use of e-invoices, while others let organisations choose how they want to invoice. Most compliance models can be classified into two categories.

  • Clearance approach
  • Post-audit approach

Some countries are using the clearance approach, like Latin America. While others, like many European countries, have adopted the post-audit approach. The below table provides an overview of both:

 

Clearance approach

Post-audit approach

Invoices are exchanged between the supplier, tax administration and the buyer

Invoices are exchanged between the buyer a supplier (directly via service providers)

Invoices are subject to real-time audit as they are submitted to tax authorities

Invoices serve as evidence of the sales process

Shorter archiving periods in comparison to post-audit countries, thanks to the real-time controls

As an audit can be executed up to a decade post-transaction, invoices must be archived for long periods of time

India adopted the clearance model too, while Egypt and Vietnam also took on the same approach.

The results? Regulatory confusion about legal compliance for global businesses. Despite the mound of countries who have embraced e-invoicing, the waters are still muddied when technology comes into play, for example EDI to exchange data, or the use of electronic signatures. E-invoices must be archived and stored for a certain amount of time in many countries, but then this length of time varies depending on local regulations. So, if you don’t have exert support at hand to understand the regulations for each country, you could find yourself running into compliance issues.

Why e-invoicing compliance is critical to your AP processes

The invoice is an important truth for governments when it comes to tax collection. Electronic invoices are recognized as equivalent to paper invoices for the collection of taxes, such as value added taxes (VAT), goods and services taxes (GST), or sales and use taxes.

There are three primary areas in the Accounts Payable process where companies must comply:

  • Invoice receipt: The invoice is the prime audit source for tax collection, so when it comes to invoice receipt, the form, the content, and the method used for creating and exchanging invoices are highly regulated.
  • Invoice archiving: Archiving the invoice is also a critical component, as it is a base requirement almost everywhere. It is the common denominator for tax compliance across countries. Even though electronic invoicing rules vary from country to country, almost all of them mandate the archival of the “original” invoice.
  • Capture of tax rate on the invoice: Companies must properly note and calculate the tax rate by country on the invoice.

 

What’s the risk of noncompliance?

For any company that fails to meet the various country-specific requirements for e-invoicing compliance, there are several risks it can lead to, including sanctions, fines and repayments. Sanctions can be very severe, for example, the entire deducted VAT amount over a number of years may have to be repaid. When VAT and sales tax can account for as much 25% of the price of a product or service this could prove to be very damaging to any business.

Other administrative fines under criminal law could include:

  • Administrative fines if veracity of invoices cannot be proven
  • Protracted audits that increase risk of more scrutiny
  • Spillover effects into other areas of taxation or accounting
  • Trading partner audits that negatively impact relationships with business partners
  • Loss of right to deduct VAT and obligation to pay VAT over erroneous invoices
  • Sanctions under criminal law in some countries where noncompliance is equated with tax evasion

So for many businesses, compliance can no longer be an afterthought – any organisation operating globally must have compliance at the heart of their procedures as a minimum requirement.

 

How can you meet the measure with very little fuss?

Don’t wait for a government mandate to modernise your processes. A provider with global expertise can guide you in the right direction, or in CloudTrade’s case, we can build the necessary rules and regulations into the software we provide you with to automate your document processing and data capture.

Compliance is a difficult and time-consuming process. Our team has extensive knowledge of building automation rules for e-invoicing regulations by country and can quickly adjust the rules we implement for you to meet any new mandates to rid you of any compliance challenges.

With the right automation solution, you can rid your business of the compliance risks it might see without the right software in place and provider to advise.

Download Whitepaper

 

Sources:

  • https://www.comarch.com/trade-and-services/data-management/resources/p2p-research/
  • https://www.marketplanet.pl/2015/10/13/how-to-control-the-invoices-and-orders-compliance/?lang=en
  • https://www.gpminstitute.com/publications-resources/Global-Payroll-Magazine/december-2018/it's-a-small-world-the-complexities-of-global-invoicing-compliance
  • https://www.theglobaltreasurer.com/2020/09/30/what-compliance-means-for-electronic-invoicing/
  • https://www.einvoicingbasics.co.uk/what-is-e-invoicing/the-issue-of-compliance/
  • https://www.pagero.co.uk/blog/e-invoice-e-document-compliance/
  • https://hub.tradeshift.com/accounts-payable/ensuring-e-invoicing-compliance-efficiency/
  • https://www.ibm.com/docs/en/scbn?topic=einvoicing-overview-e-invoicing-compliance