As governments across the globe continue to roll-out I2P (invoice-to-payment) mandates, businesses ranging from small boutiques to large multinationals are increasingly worried about the complexities this will bring to their invoicing processes. So, what is the driving force behind these regulations and can businesses expect further changes to be implemented over the next 12 months?
This article will look at what’s fuelling these mandates and what the future may look like for e-invoicing compliance, with insights from Ruud van Hilten, SVP Country Compliance at Kofax.
A brief history of I2P mandates
Prior to 2012, the invoice-to-payment process required little to no government intervention. Suppliers would invoice the buyers, buyers processed the invoices, suppliers settled the tax and buyers paid the tax to the supplier. There might have been an audit at some point for VAT compliance, but this could often be years after the transaction was complete.
Then, in 2012/13, things began changing rapidly. Across Latin America, where tax evasion was considered a huge problem, governments decided they now needed to see invoices (including invoice data and tax payable information) before goods were even sent to the buyer.
Ruud says: ‘This data allowed governments to forecast more accurately the tax they’re going to receive. And in doing so, making it really difficult to avoid or evade taxes. While it's a very logical approach, it required huge infrastructure, massive investments and it put a lot of momentum into e-invoicing adoption.’
Following the success of I2P mandates in Latin America, European countries would soon jump on the bandwagon. Turkey was the first European adopter in 2013, but it was Italy’s mandate rollout in 2019 which really drew attention.
Italy managed to reduce their VAT gap by €11 billion within the first two years. The success of this rollout sparked a mandate movement across the rest of Europe.
Closing the VAT gap
One of the key motivations for implementing I2P mandates is to close the VAT gap. This is the difference between the VAT revenue that is projected by a member state and the amount which is actually collected by its tax authorities. In 2021, the VAT gap in Europe sat at €134 billion. Governments are unsurprisingly eager to close this gap to provide vital funds needed for key areas such as infrastructure, healthcare and education.
Romania currently has Europe’s largest VAT gap of 34.9%, meaning that roughly 1 out of every €3 of VAT goes unpaid. In July 2022, Romania rolled out a partial I2P mandate requiring that high tax-risk products be reported via an e-invoicing platform.
Ruud cautions: ’Another factor to consider here is that if your country has a large VAT gap, your ability to borrow money from the markets or deal with the IMF or the World Bank is compromised. This means that governments have got real reasons to do something about it.’
I2P and Europe
Three years after Italy’s successful I2P mandate rollout, there’s now an influx of European countries looking to implement similar legislation. Countries such as France, Poland, Denmark, Spain and Belgium have all announced upcoming mandates. However, an ongoing problem is that each country is implementing different rules and regulations around I2P, adding further difficulty for businesses.
Business owners could be asking why the EU isn’t stepping in to direct how a mandate must be done. Ruud believes that now three years have passed since Italy’s rollout, ‘that train has left the station for now’. However, he does predict that Europe will implement some level of legislation in the not-too-distant future:
‘There was a very public consultation earlier this year called ‘ VAT in the Digital Age ’ where the European Commission wanted to understand what major stakeholders believe are the real sticking points for mandates, how these need to work, and how VAT needs to look in the near future. I think this will lead to legislation in the next few years. What that legislation is going to look like, I don't know. But, I suspect that Europe will look to regulate intra-community traffic transactions between EU countries.’
Disruption for multinational businesses
For businesses trading in multiple countries, the disparate legislations being implemented by each country could be highly disruptive. Navigating these changes and ensuring your business is following the correct process for each country requires a huge amount of time and resources, especially when further changes are predicted.
Ruud says: ‘Another trend we’ve noticed in the likes of Italy and Latin America, is that once the government has gone down the path of implementing mandates, they keep making changes.
‘So whereas previously you might’ve had one change every three years in a country, you now might have three changes in the year. If you’re trading in 10 countries, you're actually looking at 30 changes in a year. So it almost becomes a complete distraction from business if you don’t get the right third-party on board to help you manage these adjustments.’
The impact of I2P mandates on small businesses
Small businesses could also be hit hard by these mandates, particularly those with an international supply chain or those which need to provide goods to a different country. Small business owners without an IT department or financial systems could also feel the pressure as they’ll still need to comply with the law despite a lack of resources.
‘If you’re a one-man band such as a window cleaner or run your own online business, you’re going to struggle to keep up with the changes’ says Ruud. ‘Employing a third party to manage these matters for you will generally always work out cheaper and could save a lot of time.’
The economic crisis and the drive for I2P mandates
The global economy is currently in a state of crisis with rising inflation, energy prices at an all-time high and a recession looming. This follows a worldwide pandemic for which governments spent trillions of dollars on COVID relief programs. Pressure is rising to claw back the costs, and indirect taxation is one of the most effective ways to raise the much needed funds.
Another element is ESG taxation. This plays into the pledges that were made in COP26 climate summit in 2021, where a commitment was made to impose taxes for pollution and anything which harms environmental sustainability. Ruud explains: ‘If you look at how these taxes work, they usually become part of the taxable base of an invoice. So you pay tax on tax, adding another level of complexity.’
These factors are propelling the speed at which I2P mandates are being implemented. Governments are spending money they weren’t expecting to spend and indirect taxation is seen as a functional remedy to recover lost funds.
Ruud adds: “At some point, this money needs to come back. And the best instrument, the most flexible instrument is indirect taxation. You can impose all sorts of additional taxes, you can impose levies, you can raise tax rates if you wish. But if you can't collect, it doesn't matter. So what you need to do is improve collection. And that's what everybody's now looking at.”
In September 2022, Lisbon held the European E-invoicing Exchange Summit where tackling global compliance challenges was high on the agenda. The industry discussed concern about the complexity of upcoming mandates across Europe and beyond. Ruud, who presented at the summit, shares what he feels were the opinions of key industry figures:
‘I wouldn't call it panic, but there is a lot of uncertainty. People are worried about the complexity of the upcoming French mandate, then there’s Germany which requires years to plan because each state has its own rules and laws. There's the threatening legislation from Europe, and countries outside of Europe like China, Japan, Australia, New Zealand, Singapore, Malaysia. In the Middle East, Saudi Arabia is imposing a mandate in January 2023.
‘So it's an unstoppable tsunami of all sorts of mandates all over the world, and you need to understand exactly what you need to do in all these countries.’
There is a growing need for standardisation, however it’s unlikely for this to happen on a European level for some time.
Another driving factor for the I2P mandates is concerns led by macroeconomic trends. For instance, it’s predicted that one in six people globally will be over the age of 65 by 2050. Meanwhile, Nigeria is set to have a larger population than the USA by 2050 with an average age of 28. What does this mean for income taxation? Governments are looking at these macrotrends which are undoubtedly playing a part in fiscal policy.
Ruud says: ‘Governments are asking these questions. What is our multi-year funding program going to be? How are we going to fund our military, our society, our welfare, our social security? So there are lots of macro economic questions going on in the background. From an invoicing perspective, there is absolutely a need for standardisation.’
Predictions for the future
When we look to the future of invoicing, many may think about advancements in AI and blockchain and IoT. However, the reality is, the world is still swimming in paper invoices and there’s a high likelihood that we’ll see a lot more of these mandates come into effect. At some point, there may be some level of standardisation from Europe but for now these I2P mandates will continue to differ country-by-country.
Ruud predicts: ‘I suspect that between now and 2025 to 2026, we'll see at least 30 to 40 countries either extending their current mandate or imposing new changes. Changes that you need to be ready for.
‘There is light at the end of the tunnel, because there are people who can help you deal with this. We help businesses to navigate variability and a lack of standards. That's our job. We make things standard by dealing with the lack of standardisation.’
Find out how Tungsten Network could help you navigate global I2P compliance mandates by contacting us today.