Governments across the world have sought to move away from the inefficiencies of paper-based invoices for nearly two decades in an effort to close the VAT gap and minimise fraud by applying digitally-driven measurement and reporting tools to support their team of experts, writes Oscar Caicedo, VP of Strategy and Operations, VAT at Sovos.
Latin America was the first to introduce mandatory clearance of B2B e-invoices, and today the likes of Brazil and Mexico operate on a full clearance model creating a significant trade challenge for multinational corporations in those largely digital economies. The move towards a digital tax regime and the successes in these countries sparked a global economic trend as a result. The issuance of e-invoices and digital tax reporting remains inconsistent and slow elsewhere, however.
With VAT information still being reported periodically in many countries, as opposed to in real-time or near real-time, and each jurisdiction digitising the process setting its own specific standards, the landscape is complex. Increasingly, the rules are becoming so convoluted that this is no longer a manual job. Governments and businesses alike are turning to automation and advanced technology to streamline the process.
Digital tax reporting: Keeping pace with compliance
In Europe, the EU-VAT directive prohibits countries from introducing full e-invoicing – Italy was the first (and currently only) country to buck this trend in 2019, following a lengthy derogation process. Finland, meanwhile, has devised a loophole to skirt around the issue whilst staying compliant with the EU regulation. Their legislation states that buyers have the option to request a structured electronic invoice, as opposed to the supplier deciding whether to supply one, which creates a model for other European countries to potentially follow. But despite these two examples, the overall European picture for firms with an international presence is a lot of administrative headaches and intricate legislation to navigate as reporting has become more digital and real-time – not an easy task for finance teams.
Subsequently, the path towards a fully digital way of working is in no way clear and as more governments begin to adopt automation, and the task of staying compliant is moving beyond the practical management of businesses. Tax regulations are not consistent globally and staying on top of the latest reporting requirements is making compliance a challenge. Organisations may find themselves falling foul of regulations when trading in a different jurisdiction without even realising given the varying standards.
So the first proof point that needs to be addressed when assessing any technology that involves invoicing and its reporting is a system that regularly tracks and updates changing legislation across the globe, ensuring any countries a business operates in is included in the system. The technology must also automate the formatting of information per the requests of each country and ensure that the business knows in what time frame this needs to be submitted in. By monitoring and formatting against this ever-changing legislation, automation can ensure that those working within the finance department can save time, allowing them to work on the more strategic side of business finance.
The right tools for the trade
As mentioned, technology presents an opportunity for businesses to meet varying global audit requirements and reduce the time spent on labour-intensive legal research. An extensive knowledge of governmental financial legislation in each country is required to avoid penalties, so it makes sense to invest in tools that will streamline this process and alleviate some of the pressure on finance teams without the need for costly expert staff or outsourced support. Manually submitting the paperwork for these audits and reports once they are understood is no longer a viable or practical option either.
As automation becomes key in adhering to evolving tax regulations, investing in the right tools is critical. These tools must be able to synchronise and communicate vital information from across a businesses’ IT infrastructure. A tax automation system which can’t align with existing ERP systems, payroll or expenses software will offer little benefit to businesses trying to get their house in order. Programmes with sophisticated APIs enable tax systems to "plug in" to a business and gather vital information, allowing businesses to present the necessary data from across their business processes, generate accurate results and avoid hefty government penalties. Put simply, it’s crucial that all technology is capable of integrating with various billing systems, ERPs, procure-to-pay platforms and APIs used globally to keep pace with the changes.
The economic impact of the COVID-19 crisis has placed extra pressures on finance teams to strictly monitor their budgets. As such, there is a strong business case for investing in the right tools to manage the costs associated with cross-border transactions and international trading legislation. At times like these, firms can’t afford to take any risks that could impact the bottom line. As automation continues to transform the way we work, businesses must be sage in their tech procurement decisions and look to invest in tools capable of plugging financial leaks where possible. When it comes to tackling the issue of complex and inconsistent e-invoicing regulations, software systems need to be agile, flexible and able to fully integrate with a variety of pre-existing software.
Accurately assessing finances and forecasting is not solely a job for the machines, but can instead enhance the way teams thrive and remain compliant across the world stage of trading.