06 Aug Tax-compliant global electronic invoice lifecycle management
Worldwide, Value Added Tax (VAT) represents 15 to 40% of all public revenue. On average, however, 20% (in e.g. the European Union) to over 30% (in e.g. Latin America) of VAT is never collected due to fraud and malpractice. In many countries, this “VAT gap” is big enough to significantly impact the economy.
Tax administrations therefore constantly look for new ways to make VAT collection more effective. Considerable attention goes to improving controls around invoicing processes – if invoices can be trusted, transactions can be audited more efficiently. For this reason, the invoice is often the only extensively regulated document in countries with VAT.
Many governments have in recent years concluded that allowing or requiring businesses to invoice electronically can help tighten VAT controls.
There are currently two types of legal regimes for electronic invoicing. In Europe and many Commonwealth countries the “post audit” approach translates requirements from paper-based invoicing to electronic flows, allowing the free exchange of invoices between trading partners but requiring them to prove the veracity of archived invoices for up to a decade later. In countries that have chosen the “clearance” approach, the tax administration has reengineered this traditional control method by requiring each invoice to be authorized electronically by them before or during the exchange process.
These two systems have some common features such as requirements for invoice integrity, authenticity and archiving. However, there are also many types of requirements that are specific to each category.
These high-level categories can be broken down into many more country-specific requirements. In practice, no two countries have the exact same requirements. Few countries have more than 50% of requirements in common. In our experience and interpretation, there are on average some 65 discrete requirements relating to the processing and archiving of electronic invoices per country.
The challenges created because of varying country requirements are compounded by the relatively high rate of change amongst them. A multinational enterprise that wants to meet all these requirements will soon end up managing extremely complex and ever-changing requirement matrices. Since legal changes follow a different rhythm from the typical evolution of enterprises, it is difficult to reconcile change management for VAT compliance purposes with the imperatives of business change management.
A thorough analysis of the means available to achieve this often leads to the conclusion that long-term auditability and compliance with hard requirements should be managed through a single compliance layer that can handle compliance across global markets and that is no more than loosely coupled with core business processes. This approach allows optimization of change management in response to ever-changing rules on primary long-term invoice auditability, while permitting business-to-business, financial and administrative processes to remain responsive to general business developments. Indeed, multiplying compliance approaches across different business processes can significantly increase total cost of ownership of a company’s tax compliance control framework and heighten the risk of non-compliance and security breaches.
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