Although the United States has not yet officially adopted e-invoicing, many countries in Europe, Latin America, and Asia have embraced it. To find out what’s happening, in August Michael Levin-Epstein, Tax Executive’s senior editor, interviewed Alex Baulf, senior director, global indirect tax, at Avalara.
Michael Levin-Epstein: E-invoicing as it relates to tax isn’t a one-size-fits-all term. What nuances around e-invoicing should businesses be aware of?
Alex Baulf: “E-invoicing” means a lot of different things to different people, and that’s because e-invoicing and digital reporting have evolved over the last decade. For some people, an e-invoice is simply a PDF that can be emailed to a customer. But what we’re seeing around the globe is tax authorities and governments issuing tax-led mandates for the use of e-invoicing but with very strict requirements in terms of format, the standards, signatures, and even the route the invoice needs to travel before it reaches the customer. So that will involve different formats, typically formats such as XML; PDFs, where they have embedded XML so they are machine-readable; and other types of e-invoicing like EDI [electronic data exchange] or Peppol.
Levin-Epstein: You mentioned mandates, and there’s been a lot of activity in Europe and Latin America and Asia around e-invoicing, ranging from brand-new requirements to updates to existing rules. Can you talk about these changes and what businesses need to know about them?
Baulf: We’re seeing more mandates almost every day—it’s unprecedented, the amount of new e-invoicing mandates being introduced across the globe. Within Europe, Italy was the first country to really mandate e-invoicing between businesses, and they did that back in 2019. But now, looking ahead, Poland, France, Spain—they will all introduce mandatory e-invoicing from 2024. They are likely to be joined in a similar timescale by Belgium, Slovakia, Romania, and others. So this really is a game changer. By 2024, at least forty-five percent of European GDP will actually be covered by an e-invoicing mandate. The list of countries currently consulting on implementing e-invoicing, either with a voluntary e-invoicing system or draft legislation, just continues to grow every day. There’s another growing long list of countries across [the Asia-Pacific region] and [Latin America] that will also introduce e-invoicing, from pilots, voluntary use, or mandates. Within the European Union itself, every single government body or organization has been required by European law to be able to accept e-invoices in the last couple of years. And indeed, there are a lot of European countries that are mandating the use of e-invoicing for [business-to-government] supplies, so e-invoicing is already becoming mainstream within public procurement.
E-Invoicing in the US?
Levin-Epstein: While e-invoicing hasn’t been adopted formally in the United States yet, there are efforts aimed at exploring what e-invoicing applications could work here. Can you talk a little bit about the e-invoicing pilot program that’s currently in flight and what we might expect from that?
Baulf: Absolutely. The E-invoice Exchange Market Pilot is an e-invoicing pilot program. It’s a big initiative run by the Business Payments Coalition. It’s looking to define the requirements for and then build a network to provide an open e-invoice delivery framework between providers in the US. This will allow US businesses to exchange e-invoices in an agreed format through a network to improve efficiencies, lead to faster payments, reduce administration, and hopefully really provide clear benefits for businesses. The big challenge in the US is that there is no federal VAT [value-added tax]. Of course, there are sales taxes at a state level. Around the world, a lot of the big e-invoicing mandates are being driven by tax. Governments want to reduce what we call the “VAT gap,” so maximize tax revenues, reduce fraud, reduce errors, and that’s obviously driven by the tax authorities themselves. Within the US, because there isn’t that federal VAT regime, it’s not going to be tax that’s going to be the driver. This pilot program by the BPC, the Business Payments Coalition, is therefore more commercially focused and looking for business process improvement.
Increased Reliance on Technology
Levin-Epstein: As e-invoicing continues to become more prevalent around the world, do
you think it’s likely that there will be an increased reliance on technology to manage tax? What benefits are associated with applying new technology to tax compliance?
Baulf: I think it’s inevitable looking at the direction of travel that tax compliance is heading towards. Tax compliance will include more granular data submitted to tax authorities in real time. So, by definition, businesses do need to use technology to not only comply with the requirements, but manage increasing tax risk across the globe. That would include investing in e-invoicing software to meet the very specific requirements in individual countries. But also we’re seeing a shift where businesses no longer are looking for a local tactical solution for a local country requirement; they’re looking for a global, scalable solution. Given the pace of change and the number of new mandates that are arising, they want a platform that will scale with them. So, every time there is a new requirement, they don’t have to go out to market and invest in a new bit of technology. And then, because tax authorities will receive data in real time, they’ll be able to apply their own technologies against that data, using advanced exception reporting, data analytics, even [artificial intelligence]. So businesses will want to be proactive and run their own tests, analytics, on that data to ensure the tax that they’re charged and collecting, declaring on that invoice, is right the first time. We’re likely going to see more of a demand across the globe for real-time tax determination—or at least real-time tax validation—to ensure there are no errors, no discrepancies, once that invoice is issued and the government receives that data.
Levin-Epstein: Thank you.