The "VAT in the Digital Age" initiative
The European Commission intends to use technology in order to fight tax fraud and support businesses, and amend the current VAT regulations in response to the challenges posed by the digital age.
The initiative focuses on three topics:
- Single VAT registration
- Digital Reporting Requirements (DRR) and e-invoicing
- VAT treatment of the platform economy
What do the proposed new rules mean for electronic invoicing?
The new rules amend the formal definition of electronic invoicing, introduce mandatory e-invoicing and abolish the obligation of acceptance by customers.
Is this the end of PDF invoicing?
The new definition clarifies the meaning of e-invoices and declares that only structured data are acceptable.
This means that, if the proposed amendment to the Directive is passed, electronic invoice would mean an invoice containing the data required under the Directive that has been issued, transmitted, and received in a structured electronic format which allows for its automatic and electronic processing.
A plain PDF invoice without structured data would no longer be acceptable as an e-invoice. E-invoices must contain structured data, and the most suitable solution could be to generate invoice data in XML format.
Changes to the definition of an electronic invoice
In addition to the requirement of issuing electronic invoices based on structured data, the obligation of acceptance by customers, which is currently in effect, would be abolished, meaning that the issuers of invoices would be free to adopt e-invoicing in the country in question, even if there is no mandatory rule in place for e-invoicing in the given Member State. As a result, those accepting invoices would also need to be prepared to accept and process electronic invoices.
However, contrary to the current regulations, the proposal would allow Member States to make e-invoicing mandatory without formally requesting permission from the Commission in advance. This would simplify the implementation of e-invoicing in the given Member State.
Mandatory electronic invoicing to be introduced
According to the proposal of the EU, electronic invoicing would be the general rule for invoicing, and Member States would have the option of making e-invoicing mandatory.
Until now, electronic invoices and paper invoices have been subject to the same treatment, which will change significantly in the future.
With the entry into force of the new regulations, paper invoices could only remain in use if explicitly permitted by a given Member State. Exceptions would include cross-border transactions within the Community where issuing an electronic invoice would definitely be mandatory, which means that, for these transactions, Member States would not be able to allow the issue of paper invoices. Essentially, issuing paper invoices may be permitted in domestic transactions, subject to the decision of the given Member State.
With the new regulations, the EU intends to make electronic invoicing ubiquitous and intends to ensure that taxpayers would not be required to request acceptance of the invoice by the customer. According to the proposal, electronic invoicing would become mandatory in 2028, which means that businesses would still have ample time to prepare. However, the above definition of an electronic invoice and the related requirements could become effective as early as in 2024.
Significance of electronic invoicing for Member States
E-invoicing based on structured data and invoice data reporting are highly significant for tax authorities as they allow for more effective tax audits and the timely detection of VAT fraud. Also, by substantially reducing VAT arrears, tax authorities and the economy could enjoy considerable benefits. According to the 2022 "VAT Gap in the EU" report of the European Commission, the VAT compliance gap in Hungary was 5.1% in 2020, which represents a decline of 4.7 percentage points compared to 2019. The report highlights the online invoice data reporting introduced in Hungary in 2018 which greatly contributed to the reduction in the VAT compliance gap, thus ranking Hungary number 9 in the EU.
However, increased tax compliance is not the only advantage of e-invoicing and real-time invoice data reporting, as these also benefit businesses in a number of ways through the implementation of automated solutions and the reduction of administrative burdens.
What can businesses do to prepare for changes concerning e-invoicing?
Changes in electronic invoicing could potentially have a profound impact on business in the EU. The new rules may represent both opportunities and challenges for businesses. In order to prepare for these changes, it is important to gather the necessary information and develop the processes that allow for a seamless transition to the new rules.
We recommend beginning preparations in a timely manner, and existing invoicing practices should be examined to make sure that they comply with the new requirements. In addition, it is a good idea for businesses to review their invoicing systems in order to ensure that their electronic invoicing procedures are compliant, to understand all of the changes affecting them and, if necessary, to ask experts for help.
Electronic invoicing provides an opportunity to improve the efficiency and cost-effectiveness of business processes; however, preparing for the implementation of the new rules is essential for reaping all of the rewards of e-invoicing, perhaps even via an online invoicing service provider.
