The strong arm of the law in the EU
Two key EU directives affecting all EU member states stimulated a wave of disruptive change for businesses and governments across the continent in the last few years. One is the electronic invoicing directive, the second the EU Directive on VAT. Behind many of the changes, a sense of duty to the public purse that promotes initiatives to improve uniform good governance prevails.
In some cases, the directives issued by the EU have acted as a catalyst for governments to go further and deeper than required by the EU Commission when implementing the directive in national law. Italy is a case in point.
The stronger arm of Italian law
When the Italian government transitioned the EU Commission eInvoicing directive into national law, it went further than required seizing the opportunity to introduce a CTC (Continuous Tax Clearance) model along the lines of those implemented in Brazil and India. To do this, it needed to seek a special dispensation from the EU Commission to deviate from the provisions of the VAT Directive.
The authorisation was granted covering July 1, 2018, to Dec. 31, 2021, with the possibility of a further extension, provided that Italy submits a new request evaluating the effectiveness of their approach. Italy now requires all but small businesses and individuals to have invoices pre-approved by the tax authority. This provides the government with a continuous stream of data showing the amounts of VAT due.
Italy leads the charge for other EU countries
In its first year of mandatory eInvoicing and VAT pre-authorisation, Italy increased VAT revenue by 3%, gaining an extra 3,623 million Euros, compared with figures from 2018. This represents a turnaround for the nation previously recording the lowest levels of VAT income in the EU. The success of the SDL system in Italy has prompted interest from many other companies to follow suit, France, Poland, and Germany. As may be said of the other countries, Brazil and India, for example, that introduced a CTC model, the beneficial effect on tax revenue and tax compliance were long called for.
Key drivers of interest in CTC eInvoicing models
Continuous Tax Clearance models depend upon the successful implementation of eInvoicing. Here are the direct impacts of CTC from a tax authority perspective and a wider public sector vantage point:
- Increasing tax collections revenue (net financial gains without raising taxes)
- Reduction in tax fraud and corruption (lower costs associated with tax fraud investigation and proceedings)
- Wider tax compliance (and the ability for better monitoring and early detection of fraud)
And more broadly:
- Lowering the barriers to international trade with more harmonised systems
- Better tracking of invoice data, payment status and cash forecasting for suppliers and buyers
- Improved collaboration between buyers and suppliers at lower costs
Further catalysts for change
The national debts incurred by the global pandemic will undoubtedly be an accelerating factor for governments seeking to fund their stimulus programs. However, the economic case for introducing Continuous Transactions Control (CTC) for Goods and Service Tax (GST) was already there. An OECD report of 2020 showed that an estimated 44% of all tax revenue was never collected across all OECD companies.
In a data-driven, real-time world of ‘track and trace’ eInvoicing, there is also a cultural demand for tax compliance systems to align better with digital media.
Despite this, we risk now being faced with yet more fragmentation and complexity as both eInvoicing, and VAT collection models are implemented with subtle differences across the EU and the world, making the job of both AP and AR managers increasingly vexed by compliance challenges. At Data Interconnect, we have found that digitising invoice generation is the foundation of any global electronic invoicing system.
Our clients rely on our experience with implementing first time compliant systems in countries where the tax regulation around VAT collection is changing to help them navigate the continuously changing landscape and remain pro-active and prepared for any further changes affecting the countries they trade-in.