It probably goes without saying that electronic invoicing has been around for some time now, but for different reasons it is only just beginning to ‘cross the chasm’ and become a mainstream finance activity.
With many European governments and large corporates adopting e-Invoicing in 2012, some even mandating, there is increasing momentum for companies to update their business-to-business communications and send and receive invoices electronically. However, there are certain rules and regulations in Europe that must be adhered to and companies must be sure their e-Invoices are VAT compliant.
It is surprising to me how many finance teams are not aware that their “EDI” invoices are, in fact, electronic invoices, and that CIOs and EDI program managers are often unaware that their finance teams are looking to capture the same efficiencies that their B2B e-commerce/integration teams have already achieved. It seems that EDI is missing from the e-Invoicing picture.
If you consider that of the 10bn transactions flowing across the GXS network annually, over 500m of these are electronic invoices, it is confusing that EDI is not highlighted as a form of electronic invoicing. Many companies are already sending and receiving electronic invoices through Electronic Data Interchange so the question arises – is EDI an appropriate framework for tax compliant e-Invoicing?
To answer this question it is necessary to clarify the EDI story, and to provide an alternative e-Invoicing landscape that has not been widely discussed.
The EDI Story
This seems an obvious question, but what exactly is Electronic Data Interchange? In its simplest form, EDI is the computer to computer exchange, between two companies, of standard business documents in electronic format.
There are three elements in basic EDI. First, trading counterparties establish an electronic trading relationship. Second, the electronic exchange of documents takes place in a standardised format, within a secure environment. And third, electronic documents replace paper based ones.
EDI is essentially a secure data processing concept which is independent of communication protocols or transmission media. What does this mean? Electronic data interchange is a framework, it is not tied to any single message formats, and there are different methods and protocols for transmitting data.
The physical supply chain, particularly in the “direct materials spend” category, has benefited from multiple efficiency gains including ERP and EDI, but for the financial supply chain, the documentation that ultimately ensures payment for the supplier, this is not yet the case.
EDI messaging started over 40 years ago and blossomed during the eighties and nineties, larger trading partners captured the benefits of removing paper from the process. EDI evolved as a logical outgrowth of the standard electronic communication. Data exchange between departments within a company is extended, to reach out to external trading partners.
In the past this was an expensive project, and only the largest companies participated. However, EDI matured and its reach has extended to SMEs. It is now widely adopted and therefore has become an inexpensive method of electronic B2B communication.
Over the last 10 years EDI companies recognised the need to provide value add B2B services and solutions that overlay their messaging platforms, so they developed software as a service solutions, including e-Procurement and e-Invoicing solutions, to provide business value along the physical and financial supply chains, in both the direct material and indirect spend categories, for all trading partners.
In parallel, the alternative e-invoicing solution providers, many in the form of internet ‘exchanges’ started to appear in the early 2000s, focusing on providing web-based enablement solutions, such as web-forms and PO-flips, which leveraged the internet as a global network. These companies focused on the indirect spend category, which was less developed in most businesses.
Since that time, there has been increasing overlap between the value that the alternative e-invoicing solution providers and EDI solution providers offer.
What is the Big Deal about Compliance?
A key factor in electronic invoicing, and one not clearly understood within EDI circles, is ensuring that each invoice is compliant with local tax authority regulations. Rules were established in 2001, and further clarified in 2006 that gave a clear direction on how e-Invoicing can be tax compliant. But what is all the fuss about?
VAT is the chosen indirect taxing method in Europe. The VAT system ensures a constant flow of tax revenue to government, and while not without fraud issues, discourages tax avoidance. This is a serious matter for tax authorities in Europe as, on average, VAT revenues represent a third of a countries’ GDP.
During a tax audit each invoice can be required to prove a company’s accounts, and it is because of the importance placed on this document that electronic invoicing regulations for VAT are designed to encapsulate an end-to-end compliant process. Each individual company is tasked with ensuring their electronic invoicing program is tax compliant, so which different process elements need to be in place?
First, each invoice data file must meet the requirements for country-specific rules. Each country’s tax authority has a set of minimum fields that are required, and define, exactly what constitutes an electronic invoice. Most data fields are common, but inevitably there are differences for each country and it is important to ensure that the correct fields are used.
Second, the “authenticity of the seller” and the “integrity of the electronic invoice document”, must be guaranteed for each electronic invoice. Currently this is achieved consistently throughout Europe in two ways. The first is through networked EDI, and the second is through digital signatures, where the invoice document is electronically signed and time stamped using digital certificates.
Third, is the archiving and auditability of the electronic invoices for the period defined by the local tax authority. Whether you are sending or receiving invoices you must store them as you would for paper invoices, the length of time they are stored varies by country, and the location of storage must adhere to local rules. Added to this, these stored invoices must be retrievable in a human readable format if a tax authority audit occurs.
So in summary, EDI was the original method of transacting electronic invoices, and when the EU brought in rules around tax compliant e-Invoicing EDI was recommended from the start as a compliant method. In my next blog I will complete this picture and examine how each of these 3 areas can be applied to different EDI frameworks to ensure compliant e-Invoicing.