Proposed e-invoicing could lead to savings

The European Commission has an ambitious action plan for a 25 percent reduction by 2012 in much of the red tape faced by both large and small businesses. As part of this plan, on Jan. 28, 2009, the EC put forward a proposal to promote the use of e-invoicing and e-archiving by harmonizing and simplifying the European value-added tax (VAT) rules.

This proposal is primarily based on recommendations froman independent study carried out by PwC for the European Commission. The study looked at the four most-important aspects of billing: the issuance of invoices, invoice particulars, electronic billing and electronic records.

The results showed a significant rise in electronic billing compared with 2005. Businesses see the most important benefits as being efficiency and cost-savings. The main hurdles continue to be compatibility with customer and supplier IT systems and the want of uniform rules across Europe. As a consequence, businesses lack clarity as to the rules that apply locally.

Most businesses now have double processes for invoicing. Currently, electronic exchanges of invoices in EU are possible with the help of EDI (electronic data interchange) or with the use of an electronic signature. The EU’smember states may also allow other means of communication provided the authenticity and integrity of the invoice are guaranteed. Although this latter option has not been taken up or developed in all member states (e.g. there is insufficient statutory provision to allow this in Belgium), it nonetheless appears to be a very popular invoicing method among businesses.

More than half of those businesses that send their invoices out electronically have a parallel hard-copy process because they are unsure that the electronic solution deployed accords with local legislation. For suppliers, this entails a risk that VAT liabilities could be due twice. And the cost-saving factor is also not achieved as a result. For customers, their VAT-deduction rights could be jeopardized. Ultimately, the customer could be jointly liable for paying the VAT that is due should the supplier fail to do so.

According to PwC’ research, a full switch to electronic billing could deliver some €18 billion in savings for European businesses,merely as a consequence of simplifying the relevant processes.

Aligning electronic and paper invoices

In this context, the study proposes that the playing field for electronic and paper invoices should be leveled. For instance, it is currently so that businesses have to enter into a prior agreement to receive invoices electronically that ideally should be scrapped.

Alignment removes the need for a “parallel invoicing stream,” which leads to significant costsavings. For sending electronic invoices, the study proposes moving away from the three methods of electronic exchange but guaranteeing the authenticity and integrity of invoices by means of good documentation of the underlying processes; this could be based either on technological solutions or other acceptable internal controls. And it would be possible either by using the company’s own invoicing solutions or by outsourcing to a billing platform. The European Commission did not take up this proposal for documenting underlying processes to guarantee strict equality between electronic invoicing and paper invoicing, which does not require such documentation.

Unambiguous VAT legislation

The aim is to achieve harmonization of local VAT laws. For cross-border transactions, it is the VAT legislation in the country where the supplier is established and from where the supply is affected that should apply. This for one removes a great deal of uncertainty. For a supplier from outside the EU, it is the legislation in the country where it is registered for VAT that would apply.

Electronic archiving in the country of choice

The study also proposes leaving it up to businesses to keep their billing records and other relevant documents where they want. This alsomeans it should be possible to contract everything to an outsourcer to process the entire records in the country of one’s choice. Nonetheless, the documentation would still have to be quickly accessible.

The study proposes further changes thatwould lead to simplificationandharmonizing of the VAT-related invoicing processes. Harmonizing the last date for issuing an invoice—goods and services supplied should have to be billed by the 15th of themonth following the service or delivery. For supplies to private individuals, invoices should not be obligatory. TheECdid not take up this proposal but opted to introduce a simplified document (such as a payment demand),which is subject to less formality and thus saves costs. A so-called summary invoice covering services or goods supplied on various dates must be subject to the same conditions as an ordinary VAT invoice. Currently, this is not the case,which again necessitates additional system configurations. Grouping together several services that are provided within a single month, for instance, reduces the number of invoices and thus the processing costs. It will also harmonize the length of time for which invoice records have to be held.

European Commission piloting e-invoicing

PwC is currently assisting the European Commission’s pilot project for implementing e-invoicing and e-ordering for its procurement. A working prototype has been developed and the project will soon enter the test phase with a number of EC suppliers. The most important objective of the project is to collect experience and share it with the outside world in order to stimulate the use of e-invoicing.