Invoice and Tax Harmony Across Borders
As commerce becomes increasingly global, issues relating to trading across borders become more important to a greater number of companies. But trading laws can vary from country to country meaning organisations may inadvertently fall foul of national legislation.
Take the example of VAT. In the EU there were traditionally 15 separate VAT authorities. This number has now increased as new countries join the EU. They apply VAT at different rates, levy the tax on different goods and services, and have different accounting practices for collection and re-imbursement. If you’re trading across borders, or sell goods and services in multiple territories, you need to be aware of these differences. Which is why, if you are a company over a certain size, you will have sensibly employed a full-time team of VAT specialists to ensure you are trading within the law.
In 2004, seeing the need for greater standardisation of the legal framework across Europe, the European Commission sought to harmonise VAT legislation with a new invoicing Directive (number 2001/115/EC). Broadly speaking the Directive had two aims:
This second point was included because the lack of legislation around e-invoicing was seen as a significant inhibitor to e-commerce.
The European Commission (EC) published a first draft of the Directive, which began a period of consultation. This resulted in a less prescriptive second draft, which leaves decisions about how to implement parts of the directive up to each member state. The way the directive deals with the issue of electronic invoices acts as a good example. Paragraph 3.1.2 of the Directive says: “With regards to the exchange of invoices for goods or services by electronic means, the exchange shall be accepted by member states provided that the authenticity of the origin and integrity of the contents are guaranteed.” However, how each member state guarantees “the authenticity of the origin” is left up to the nation in question.
Recent research from Deloitte & Touche, reveals fewer than 50 per cent of businesses are aware of the changes in legislation. “Lack of standardised VAT invoicing rules has given rise to huge administrative burdens and considerable uncertainty for companies conducting business across EU borders,” comments Jane Curran, VAT partner at Deloitte. She continues: “In order to counter this confusion, the EC has approved the new invoicing Directive, which has the ultimate objective of simplifying and harmonising VAT invoicing requirements throughout the EU. The Directive also allows businesses to issue electronic invoices, which should reduce costs and improve the speed of payment between suppliers and customers within the EU member states.”
So, electronic invoices must be accepted – greatly reducing the administrative overhead that dealing with large amounts of paper burdens large organisations with. However, each member state may well have a different way of assuring itself that e-invoices are genuine. This means that if you’re moving to electronic invoicing (as many large corporations want to) you will need to make sure your electronic invoices comply with different legislative interpretations of the Directive. The UK has accepted electronic invoices for a number of years. Comptacenter, the leading provider of IT infrastructure services, already receives 67 per cent of their UK invoices electronically, LogicaCMG receives 68 per cent of their UK invoices electronically and HP receives 81 per cent of global invoices electronically. As a consequence, only minimum changes will be required for domestic UK invoicing. However, some countries do not readily accept “out of country” processing of invoices. This is something of a headache for organisations that have sought to consolidate back-office processing in shared service centers.
Many organisations believe, sensibly, that automation is a key weapon for ensuring compliance. As Bob Fitzsimmons, worldwide VAT manager for 3Com, notes: “Tax audits are there to raise revenue for the government. Even if you are reclaiming the right amount of tax, but you’re claiming it in the wrong way, you can lose out.” In such an environment it is no exaggeration to say that simple human error can cost your company millions of dollars. Remove manual processes and the risk is reduced. Fitzsimmons continues: “Tax audits vary across Europe. Some authorities have poor commercial awareness or interpret legislation in a very strict manner. They are generally reluctant to authorise or make repayments and have what can only be described as ‘obscure’ appeal procedures”.
The most sensible option when it comes to electronic invoicing therefore is to use a third party, one whose core business is to stay abreast of relevant legislation and take care of legislative compliance for you. This is why the idea of an outsourced electronic invoice delivery service, that comes with compliance with national VAT legislation built in, is becoming ever more popular. Numerous multinational companies are now actively taking up this way of working, using e-invoicing outsourcers who handle all technological and legislative issues for them. Consultancies such as KPMG and LogicaCMG are also promoting the idea – insisting that electronic invoicing is the future, helping companies reduce costs and manage themselves better.
It is clear that cross border legislation will always leave companies with complicated compliance concerns. The good news is that technology, as ever, exists to equip us with the tools for dealing with the situation.