The VAT in the Digital Age (ViDA) proposal, published by the European Commission in December 2022, has created seismic waves in the business community. The proposal must be regarded as a landmark moment that, if approved, will re-structure the e-invoicing and e-reporting landscape for years to come. The proposal is radical and expected to be a major catalyst for change.
This article will provide a critical analysis of the main elements of the proposal, its impact on businesses, and its value to the e-invoicing and e-reporting infrastructure. We will also discuss its potential respective limitations, with some candid suggestions for improvement.
Why is ViDA important- and what impact will it have?
E-invoicing in Europe is growing – and with good reason. It affords a myriad of advantages from reduced error frequencies, to decreased manual labour, and the simplification of the Accounts Payable (AP) process. In line with increasing conservation awareness, e-invoicing can lead to reduced environmental pressures- as well as reduced compliance costs.
The ViDa proposal further capitalises on these advances, establishing e-invoicing as the norm rather than the exception from January 1st, 2028 across EU Member States. When put into context, Europe currently has one live-functioning e-invoicing mandate in Italy, with a handful of other EU Member States currently working on implementing their own mandates. As the proposal sets out, e-invoicing will become mandatory for intra-community transactions amongst all 27 EU member states, manifesting the proliferation of e-invoicing.
The ViDA proposal serves as a powerful, instructive document - but its scope spans much further than just stimulating e-invoicing augmentation. In fact, e-invoicing creates additional societal benefits, including increased automation, enhanced job creation opportunities, and wider economic profits. Automation is integral to supply chain finance, such as establishing streamlined fiscal practices and procedures in business operations. E-invoicing and its correlation with the broader economic infrastructure are clear, cementing its significance in a wider commercial and fiscal framework.
In addition to e-invoicing obligations, the proposal introduces harmonised Digital Reporting Requirements (DRRs) from January 1st, 2028 across all EU Member States - meaning businesses must report all intra-community transactions to a central VIES database. The DRRs effectively displace the need for recapitulative statements. These sweeping measures necessitate the need to consider the overriding objectives of the proposal.
One of the prevailing aims is closing the VAT gap- which stood at a staggering 93 billion Euros in 2020. The DRRs are an intriguing component of the proposal - which is entering unchartered territory by imposing harmonised reporting obligations on all EU Member States. In practice, we know that a sizeable portion of intra-community transactions will not charge VAT- via the reverse charge and zero rate VAT – and only time will tell whether a reduction in the VAT gap will become a reality. Conversely, Italy’s e-invoicing mandate has had some success in reducing the country’s VAT deficit.
Whatever your views on the competence of e-invoicing and e-reporting obligations to reduce the VAT gap, it’s clear that ViDA presents Europe with an excellent opportunity to set the bar and define the global standard for e-invoicing and e-reporting practices. While a global e-invoicing standard might seem like an unconceivable illusion, ViDA provides a tentative, albeit significant, step to something not too far removed- and it is certain that the effects of ViDA have the capability to penetrate more expansively on a global level.
ViDA and the ‘retirement’ of the derogation process
EU Member States currently require a derogation from an EU Directive which regards paper and electronic invoices as equal to mandate e-invoicing. ViDA removes the requirement for Member States to request such a derogation from January 1st, 2024.
The derogation process is lengthy, convoluted, and problematic. Nonetheless, while the limitations of the derogation process are evident, it is critical that a regulatory framework provides businesses with ample time to grasp the pressures associated with a mandate. ViDA puts businesses at serious risk by imposing unrealistic, unviable, and cumbersome obligations and timelines. While the optimum scenario would see every EU Member State implement mandates within a reasonable timeframe, the proposal does not suggest that this is enforceable.
The solution seems to naturally incline itself to a period of 12 months, as a minimum, to allow businesses to prepare for any upcoming mandates.
The changing definition of an e-invoice – and why this matters
ViDA makes a distinction between a digitised invoice (e.g. a PDF) and an electronic invoice (which contains structured information). The former will essentially become redundant in line with the proposal, as PDFs will no longer come under the definition of an electronic invoice.
This is an intriguing development. Crucially, the Commission needs to clarify the intent behind this – Tungsten Network, like many e-invoicing service providers, does not regard the PDF as an electronic document. Furthermore, when governments impose e-invoicing obligations, they rarely, if ever, regard the PDF as the same. Moreover, Tungsten signs the PDF with a digital signature for proof of authenticity and integrity. The ViDA proposal renders this practice obsolete while still demanding the application of digital signatures to structured invoices even though both serve the same purpose. This immediately poses several challenges.
Firstly, from an ideological perspective, the PDF serves as the legal artifact in many instances and is often regarded as the central, core by-product of the e-invoicing process. The conceptual shift to a structured invoice will no doubt be a difficult one to realise in the wider business community.
Secondly, from a practical perspective, the shift to a structured invoice establishes the need for significant changes in AP and AR processes - including additional resources and processing structures. This paradoxically reverses the key benefits e-invoicing affords in the first place, and we need to bear in mind that approval of workflow processes requires human-readable documents.
Critically, the transition from digitised to structured invoices could also disproportionately affect small and medium (SME) businesses. It is inevitable that change affects businesses to varying degrees because inevitably, businesses have different processing capabilities and varying dependence on international trade. This raises some ethical questions about the proposal. From an equitable perspective, it is only reasonable to expect that the proposal’s impact is distributed equally across the wider business community. The proposal does not place any restrictions on the PDF being regarded as a legal artifact, in principle.
However, mandating e-invoicing poses a problem - this means, de facto, that the structured invoice must function as the legal artifact. Again, it is SME businesses that stand to lose out. Whether this triggers any calls for a phased implementation will be an interesting development in the aftermath of the public consultation.
The dilemma of harmonisation – and the problem with ‘exclusive’ structured invoices
If there has been any division in Europe in recent years on an e-invoicing level, the proposal aims to rectify this in several ways. Firstly, it states that reported transactions must adhere to the EU standard – specifically, the EN 16931 invoice format- this format is well established in the B2G landscape, with the ability to also send another invoice format if the EU standard is functional. It further blurs the binaries between intra-community cross-border transactions and domestic e-invoicing solutions, citing that from January 1st, 2028, any domestic e-invoicing solutions must align with the cross-border reporting infrastructure. Reduced scope equates to greater unification – an obvious accomplishment of the proposal. In principle, harmonisation leads to greater efficiency, consistency, and (crucially) transparency.
The EU 16931 standard is a method of ensuring the consistent exchange of invoice formats across the EU. But this lack of divergence comes at a cost. The common standard, while capable of meeting the demands of some e-invoicing scenarios, certainly will not meet the demands of all e-invoicing scenarios – and ironically, this imposition, which encourages harmonisation, then becomes a limitation. Modifications and revisions to the common EU standard are certain to feature and will frustrate the overall sentiment of the proposal, which is to propagate the free-flowing exchange of data.
An invoice is a unique document. Superficially, it is a request for payment, but in reality is much more than this: it can serve as a legal document or a customs document; conversely, it can also contain critical excise information. Buyers critically use invoices for Input Tax Recovery, and are also the basis for Supply Chain Finance (SCF). Rich invoice data plays a material part in Supply Chain Automation - all pointing to the multi-faceted nature of the invoice. Tungsten provides a valuable service to its customers by enriching invoice data and yielding a product that meets the customised needs of its buyers. But the variable nature of the invoice leaves it vulnerable to an exclusively structured form.
Current industry practice goes against the notion of a ‘wholly’ structured invoice format. While an EU-wide common standard superficially can be perceived as an optimum standard for harmonisation, practical reality dictates otherwise. It, therefore, becomes critical that the Commission addresses more problematic questions relating to hybrid invoice forms and the partial structured transfer of data.
ViDA and the demise of the clearance model
Harmonisation can take other forms- most notably, through the categories of e-invoicing models countries deploy. Clearance models characteristically require a ‘green light’ from tax authorities before the exchange with the buyer; this typically takes the form of passing multiple validations. ViDA promotes the cessation of clearance models, which conclusively results in the unconstrained flow of data. In restricting the ability of countries to deploy clearance models, the proposal naturally reduces the scope of e-invoicing models. In principle, this leads to increased harmonisation. In practice, we know that the abolition of clearance models will still lead to some e-invoicing divergence. This can only really be remedied by the imposition of a single e-invoicing model, which has not been touted by the proposal. Moreover, the proposal raises some basic, primary questions: what is the definition of ‘clearance’? The term is broad and consequently, the Commission has an obligation to clarify the meaning of clearance as a tangible concept.
The proposal also raises some thought-provoking questions about the actual intent behind clearance: we know that from a practical perspective, a minimum set of data checks are not only logical but also imperative. These checks are instrumental in reducing non-compliant invoices and serve as a critical component of the e-invoicing process. Its exclusion therefore may lead businesses to perceive this as an illogical and counter-productive measure to the friction-free exchange of data that the proposal advocates.
It is almost certain that businesses across the continent view clearance as synonymous with e-invoicing. Clearance, whichever way you define it, will be a component of multiple e-invoicing models such as France, Poland, and Italy. In practice, clearance is separate from VAT checks, where validations ultimately confirm basic, elementary components of the invoice. Naturally, this will raise questions in respect of the clearance demarcation lines. Drawing up these lines will not be an easy task for the Commission.
This raises yet further questions - if clearance models are effectively abolished, what is a reasonable alternative or compromise? A practical application of ViDA could be applied via a five-corner model. E-invoicing via a Decentralised Transaction Control model could present an e-invoicing process where the data exchange between businesses is unconstrained, regulated, and credible. This typically involves a strategy in which the sender and the receiver are enrolled on different service provider platforms, where the fifth corner is the government platform.
The model has obvious advantages: end-to-end automation, improved flexibility, and enhanced data quality alongside the capability for every taxpayer to connect to an access point. Finally, all markets, irrespective of technological limitations and processing volume, can experience the benefits of this e-invoicing system, establishing a greater sense of equality in implementation.
ViDA for buyers: a step in the right direction – or a step back?
If the proposal presents challenges for countries that deploy clearance models, it also poses its own unique challenges for buyers.
Member States can provide for the transmission of data from electronic invoices issued in any invoice format – if they also allow the use of the European Standard, which is immediately problematic: flexibility breeds variance. However, this becomes even more concerning as ViDA will remove the buyer requirement to accept e-invoices from January 1st, 2024. This holds the obvious benefit of acting as a catalyst for the expansion of e-invoicing, which is irrefutably a benefit Tungsten would support, but this concurrently leaves buyers vulnerable to receiving and compelled to accept unfamiliar invoice formats. The proposal is, quite remarkably, silent on invoice formats, breeding further confusion. E-invoicing growth is fundamental for increased automation and, ‘digitisation’ of wider fiscal practices, but nurturing this growth in a way that enables buyers to process e-invoices in a practical manner becomes a necessity.
Additionally, from 1st January 2028, businesses must complete the real-time reporting obligation for all intra-community B2B transactions within two working days after the invoice date. Given the current position - which allows a period of up to 45 days- the timeline seems unrealistic, impractical, and subject to mass resistance to the market – and so a compromise between the two would be a more rational solution.
There are still further woes for buyers. The abolishment of summary invoices which consolidate invoice data for several weeks or months was triggered by the proposal’s emphasis on per-transaction reporting rather than aggregated data. This was no doubt influenced by the necessity to reduce VAT fraud. The ramifications include mass processing, which can seriously hinder businesses, and other economic costs. In fact, consequences can extend further than just businesses: the invoice growth will have ramifications for tax authorities, who may also find themselves reviewing yet further invoices, additional entries required for VAT return population, and potentially even increased audit frequency. While the underlying motivation behind this measure is plain to see, it remains difficult to see how the commission will fail to address this issue or at least consider feasible alternatives.
Vida and the spotlight on data quality- friend or foe?
As much as the re-categorisation of the PDF poses a challenge for businesses, a further contentious item is the increased scrutiny of data quality. The proposal cites more rigorous demands on invoice data quality from January 1st, 2028, with the recommended inclusion of additional fields in the invoice including payment and bank information. This is not coincidental; these fields are intrinsically linked to VAT fraud which the proposal attempts to contain. Again, this adds strains on businesses by triggering surplus data requirements which may not even be readily available, affecting other stages of the e-invoicing process within a short timeframe.
An invoice is not typically associated with payment information, which may render this information more problematic to obtain. In fact, there may even be security considerations with providing payment information on the invoice in the first place. What’s more, we also must keep in mind that this will affect all EU Member States- many of whom have had static invoice content for years and which have also had limited, if indeed any, exposure to e-invoicing and e-reporting obligations.
The proposal overwhelmingly must be commended, as it remedies the risk of the e-invoicing process remaining latent across the EU and at risk of further fragmentation. Kofax supports ViDA’s categorical and constructive curvature, but there is good reason to be wary of the ambitious proposed implementation, which presents ideological and practical complications. Businesses cannot - and should not- underestimate ViDA’s proposed change in the e-invoicing and e-reporting paradigm - but its significance also triggers pressure for the Commission to deliver on its proposal. It is vital that the proposal clarifies specific elements with full transparency. The Commission is assuming an immense responsibility with the proposal and is accountable for ensuring that the proposal is realistic, practical, and – ultimately – viable.