January 2023: E-Invoicing & VAT compliance updates
Welcome to the January 2023 edition of our regular e-Invoicing newsletter.
Our Hot Topics section is going to focus on the release of the ViDA proposal (Vat in the Digital Age) which we first talked about in our February newsletter and which was published on 8th December. This brings some exciting news which includes a proposed switch for all EU member states to mandatory e-Invoicing by January 2028.
In “Compliance news and updates” we have updates regarding Portugal and Saudi Arabia.
EU ViDA report – proposed amendments to the VAT Directive
As we discussed back in our February newsletter, the EU Commission (‘EC’) has been looking at ways to modernize and simplify VAT legislation, leveraging digital technology to improve VAT collection and reduce tax fraud while at the same time seeking to minimize the burden on businesses in terms of maintaining compliance.
The specific objectives of the ViDA initiative include improving tax reporting and unlocking the opportunities provided by digitalization. Some of these changes focus on simplifying VAT registrations for businesses trading in multiple EU jurisdictions, and others will update rules for the platform economy. Most importantly, there are some significant changes proposed with respect to both e-invoicing and e-reporting requirements which we will focus on in this newsletter.
e-Invoicing amendments proposed by ViDA
Firstly, as from 2024, mandatory e-invoicing will become possible without the need for prior EU approval. At present, countries who have chosen to push for e-Invoicing mandates – such as Italy, France, Poland and so on – have had to first obtain a special derogation from the EU VAT Directive.
Member States would be able to switch to e-Invoicing without consulting the EU as long as their invoices comply with the European Norm – the standard for electronic invoices which was developed initially for use in B2G e-invoicing. A further condition is that the issuance and transmission of e-invoices cannot be subject to a prior mandatory authorization or verification by the tax authorities. So what does that mean in practice?
This proposed change would effectively signal the end of the “clearance model” in the EU such as has been implemented in Italy and is widely used in Latin America. Member States such as Italy that already have this type of system in place would need to align with the new rules by 1 January 2028 and adapt the existing SdI model to remove the obligation for authorization of invoices by the platform prior to issuance/transmission. This will have significant benefits for businesses who may already be exchanging invoices electronically with key trading partners since it means they should not have to completely change their existing process and will be able to simply setup new flows to meet the government e-Reporting requirements (see below).
Secondly, e-invoicing will ultimately become the de facto standard for almost all invoices rather than an exception. The proposal would see issuance and reception of structured electronic invoices become the default from 1 January 2028.
Member States would need to “opt in”, i.e., seek special derogation from the EU, if they wish to allow paper invoices for certain transactions. Cross-border invoices (B2B intra-EU supplies of goods and services) would always require an e-invoice.
Third, the proposal would redefine e-invoices such that only invoices transmitted and received in a structured electronic format suitable for automated electronic processing will be considered to be electronic invoices. This is proposed to take effect as early as 1 January 2024 and could effectively eliminate the use of hybrid PDF formats such as ZUGFeRD/Factur-X (see our April newsletter for more details about this format).
e-Reporting amendments proposed by ViDA
A major focus of the proposal is around electronic reporting of intra-EU transactions. The e-invoicing obligation described above will facilitate such digital reporting requirements (DRR) and this will replace the current EC sales listings for cross-border transactions within the EU as from 1 January 2028.
The prescribed data for this reporting will need to be transmitted electronically, on a transaction-by-transaction basis, within two working days from the issuance date of the invoice. Member states can either use the existing format referred to as the EN (European Norm or European Standard), although Member States will have the freedom to allow the use of a different format as long as they also allow the use of the EN.
Member States will in turn report the data collected using an enhanced version of the VIES return (the system by which companies today report zero rated intra-EU cross border transactions using the free online VAT Information Exchange System). This centrally reported data will be available for analysis for five years.
While cross-border transactions must be reported, the proposal includes the option for Member States to to introduce digital reporting requirements for other transactions (e.g. domestic supplies of goods and services). To ensure harmonization, any such reporting system will need to be similar to the one described above for Intra-EU transactions.
Member States which have already implemented an e-Reporting system for these transactions will have to adapt them to ensure harmonization with the centralized reporting system by 2028 at the latest.
ViDA – Key takeaways
At this point there is no action, this is in proposal stage and needs to be formally adopted by the European Union as an amendment to the existing EU VAT directive which will take some time.
Assuming the proposal is passed into law, it will begin to introduce some much-needed harmonization around both e-Invoicing and e-Reporting which can only be good news.
Compliance news and updates
Portugal – obligation for unique document code (ATCUD) live from January 1st 2023
The Portuguese tax authority (Autoridade Tributaria e Adueneira) have been moving towards the mandatory use of a QR code and unique document code on invoices since at least 2020. While optional use of these has been recommended for some time, the mandate has been postponed several times. The mandatory use of a QR code on paper or signed PDF invoices became mandatory in January 2022.
The obligation to include the ATCUD code finally took effect on 1st January 2023. Unlike the QR code, the ATCUD code is required on both paper and electronic invoices and must be legible on all pages.
Since taxpayers in Portugal are required to use software certified by the tax authority to create their invoices, it is expected that all such software will have been updated to ensure the obligation is met in time but customers should verify this with their certified software provider.
Saudi Arabia – Phase 2 now commencing roll out by company size
The second phase of the roll out of mandatory e-Invoicing in the Kingdom of Saudi Arabia (KSA) began on 1st January 2023.
This phase, referred to as the “integration phase”, will roll out in two waves based on annual revenue. Wave 1 will run from January to June 2023 for the largest enterprises above 3bn SAR, with wave two for companies with more than 0.5bn SAR revenue running from 1st July to 31st December 2023.
More information about the roll-out phases can be found on the tax agency website.