In a previous blog, I looked at how governments are now driving eInvoicing adoption around the world. Now, Italy is set to be the first country in Europe to mandate eInvoicing for all B2G and B2B transactions. Regardless of whether or not you do business in Italy, this is a major development that will have implications for organizations everywhere. In this blog, I’ll explain why.
January 2019 is the date the Italian government has set for all companies to use eInvoicing for all B2B transactions for the supply of goods and taxable services. To achieve this, Italy is moving to real-time tax reporting – often called the ‘clearance model’ – where all invoices are submitted to the tax authority prior to their issue to the supplier.
By ensuring that invoices can’t be sent directly between buyer and seller, the clearance model allows the government or tax authority to control and authorize the transaction before and during the invoice exchange process. The advantages for government are clear: they can dramatically reduce tax fraud and increase revenue collection.
Italy’s move sees the government attempting to emulate the successful clearance regimes in Latin America – especially Mexico and Brazil. It will be the first country in Europe to fully embrace this approach.
Although Europe has been at the forefront of eInvoicing for many years – with eInvoicing becoming mandatory for B2G transactions in 2018 – it has adopted the ‘post-audit’ model where the buyer and seller exchange eInvoices and the tax authority conducts an audit after the transaction is completed. This model is vulnerable to fraud and corruption, leading to what has become known as the ‘VAT gap’.
Closing the VAT gap
The VAT gap is the gap between what a tax authority is owed and what it actually collects. And that gap is huge. In Europe, this gap is estimated to account of between $185-$310 billion each year. It’s thought that the global VAT gap may be as much as 30 percent of total global revenue.
Italy has one of the largest VAT gaps in Europe, standing at around $42 billion in 2015. A quick glance at how other governments around the world were gaining visibility and transparency into invoice data would have convinced the Italian authorities of the benefits of this move. Mexico is an excellent example.
Mexico: The exemplar of the clearance model
Mexico is seen as a pioneer of eInvoicing and the clearance model – and with good reason. The immediate effects that the country has seen from moving to real time tax reporting is stunning. Today, the government handles over 10 billion eInvoices annually and has increased tax collection by 34%. The country reports that it has reduced the shadow economy by 4% and closed its VAT gap by an amount that is, astonishingly, equivalent to 21% of its annual budget.
The clearance model makes this possible as it places the tax authority – or its agents – at the heart of the transaction. The government is now in a position to levy and enforce stringent fines, loss of trading privileges and even criminal prosecutions. Mexico, for example, is able to exclude suppliers from raising invoices. Effectively, they’re out of business until they comply.
But, Mexico doesn’t just exemplify the benefits to the government, it also shines a light on how eInvoicing can transform business for private organizations. Mexico and Brazil have begun to work on ways to facilitate friction-less, cross-border trade. The concept is that, if the clearance systems in each country can talk to each other, the private companies attached to these systems will not need any customs documentation for these transaction.
Mexico and Brazil have also begun a pilot to extend this approach to cross-border trade with Spain and Portugal.
The rise and rise of the clearance model
The announcement of the Italian government is only another step along the road towards worldwide adoption of the clearance model. Global eInvoicing compliance experts TrustWeaver suggest that, by 2025, it will be the norm for tax authorities across the globe. This is a trend of which all organizations have to be aware. Increasingly, you will have to be able to deliver compliant eInvoicing in all of your markets worldwide.
That’s hugely complex as there is no such thing as a single clearance model. As TrustWeaver explains: ‘Clearance models continue to spread across the globe, with countries learning from each other but making local decisions, resulting in clearance flavors that add compliance complexity, especially for multi-national companies. But there is one common crucial enabler – confidence and reliance on electronic signatures as the only feasible mechanism for ensuring integrity and authenticity for real-time tax controls’.
The pivotal role of the eInvoicing service provider
The complexity of the clearance model means that it has always been envisaged that organizations would work with service providers to ensure the effective operation of the process. However, selecting the correct service provider is even more important today. More many countries, pure eInvoicing services are no longer enough. Government are beginning to demand support for additional documents, services and processes to gain even more control and visibility of all business transactions.
Compliance may have to be considered not just at an eInvoicing but a complete supply chain level. The move to compliant eInvoicing – especially cross-border – should best be seen in the context of improving all your supply chain processes. Large multi-national companies require global service providers – such as OpenText™ – that can combine the experience of eInvoicing compliance in all your markets with services encompassing e-procurement, accounts payable and enterprise application integration into a single solution.
Learn about how OpenText eInvoicing solutions can benefit your business.