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Digitalized invoicing processes promise huge cost savings of between 60 and 80 percent compared to paper-based invoicing processes. The benefits of switching to e-invoicing include reduced entry errors, shortened processing times and an increase in cash discounts. Increasingly, e-invoicing is also becoming a legal obligation (e.g. European Directive 2014/55/EU).
But what exactly is an electronic invoice, what are the challenges in e-invoicing, what components should an e-invoicing solution have and what is Peppol? The following guide to e-invoicing answers these questions and more.
An electronic invoice is an invoice that is issued, transmitted and received in an electronic format. A distinction is made between:
The available transmission/reception channels include email, DE-Mail, computer fax, fax server, web download, Peppol or web service. Invoices received in paper form and converted to electronic formats do not fall under the definition of electronic invoices under the VAT Act.
It is not very efficient to print, envelope, stamp and send a digital invoice on paper only to have it manually captured and digitized again by the recipient before it can finally be paid.
Such an invoice process is complex, expensive and not environmentally friendly due to the use of paper and transportation resources. Due to this, German legislation has placed the electronic invoice on an equal footing with the paper invoice (01 July 2011). Since then, electronic invoices have been sent without an electronic signature and, for example, by email.
In response to the European Directive 2014/55/EU the legislator defines an electronic invoice in the Act to promote electronic government (E-Government Act - EgovG) as follows:
An invoice is electronic if:
1. it is issued, transmitted and received in a structured electronic format and 2. the format enables the invoice to be processed automatically and electronically.
Source (translated): §4a Para.2 German EGovG
Sending invoices as PDF files does not meet these requirements, because the recipients cannot automatically process PDF files. Businesses expect to receive electronic invoices in a structured format that can be understood automatically.
Structured invoice formats with Electronic Data Interchange (EDI) data are not readable by humans. Recipients must visualize structured electronic invoices for internal invoice verification, release and subsequent archiving.
Hybrid invoice formats avoid this disadvantage by combining the machine-readable structured format and the human-readable visual representation. Technically, this can be achieved by embedding an XML structure in a PDF file. The following figure shows, for example, a ZUGFeRD invoice containing a human-readable PDF with structured invoice data in an XML format.
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"It's difficult to make predictions, especially about the future." This quote by Mark Twain also applies to e-invoicing, except that it is a matter of "when” and not “if” electronic invoicing will replace paper invoicing on a large scale. The European Commission has already done everything necessary to encourage the move away from paper invoices by gradually making e-invoicing mandatory. Whereas in the European Union in 2017, 70% of all invoices were still exchanged on paper and 22% in the form of PDF files that cannot be processed electronically, the tide has been turning. Structured and hybrid invoice formats now account for more than 50% of invoices. The prediction is that this trend will continue and the number of paper invoices and PDF invoices will be reduced to a bare minimum.
Germany is by no means one of the pioneers when it comes to e-invoicing. The southern and eastern EU countries, such as Italy, Spain, Croatia and Hungary, are outpacing Germany in the implementation of the European Directive 2014/55/EU. Nevertheless, e-invoicing will become widely accepted in Germany, and companies are advised to equip themselves with digital solutions for e-invoicing.
Are you a public sector supplier? Is your company internationally active? If your answer is yes to either question, it is very likely that you will need to send invoices electronically, either now or in the near future.
Despite the enormous cost savings potential through the digitalization of incoming and outgoing invoices, governments are the driver of e-invoicing.
The EU standard 2014/55 regulates e-invoicing for public contracts and required more than 300,000 public administrations in EU countries to be ready for e-invoicing from November 2018, in terms of systems, and from November 2019, in terms of processes. However, unstructured e-invoices are not electronic invoices within the meaning of this Directive.
By February 2020, 24 EU countries had implemented a B2G e-invoicing solution, offered e-invoicing to suppliers or required a B2G e-invoicing solution.
■ In progress
■ No information
Since 45 to 65 percent of all companies in a country are typically public sector suppliers, the aforementioned EU standard is predicted to be the driving force behind e-invoicing. Suppliers to public sector clients are predominantly required to provide electronic invoices with structured data.
The main reason for the growing number of e-invoicing regulations is that governments are looking for new ways to enforce their tax laws and collect more VAT. From the VAT GAP Report 2020 the EU member states escaped an estimated EUR 137.5 billion in 2017, or 11.2% of the total expected VAT. The so-called tax gap from the expected VAT (also known as the VAT total theoretical liability, or VTTL) and the VAT actually collected fell below EUR 130 billion and 10% of the VTTL in 2018 E-Invoicing regulations.
Against the backdrop of tight national budgets and slowing economic growth, the motivation in the EU member states to actually collect more of the expected tax will continue to rise.
The easiest way for the EU member states to do this is by requiring companies that operate within their national borders to provide all invoices electronically and, as is already the case in some countries, to report either the entire invoice, or at least the VAT information, electronically to the tax authorities in real time.
Italy has taken a pioneering role in the electronic exchange of invoices in Europe through a recent amendment to the law: as of 1 January 2019, all domestic invoices in Italy must be issued in a defined electronic format and exchanged via an invoice portal (Sdi) run by the state. Since August 2018, the electronic VAT Reporting of outgoing invoices has been mandatory in Hungary under certain conditions. Also, France plans to extend the current B2G e-invoicing mandate to B2B e-invoices by 2025. Outside of Europe, India introduced a new mandatory reporting system for e-invoicing in April 2020.
The main advantage of e-invoicing lies in the enormous cost savings. Printing and shipping costs are eliminated, invoices can be delivered faster and errors in incoming invoice processing are reduced. If there is an order reference to an incoming invoice, the invoice can be booked fully automatically. In addition, e-invoicing shortens the time from invoicing to payment and thus increases liquidity of the supplier and increases the chance for the customer to meet the requirements for a trade discount.
The creation and delivery of paper invoices are highly manual and inefficient business processes for suppliers. These processes result in high costs, errors and late payments.
From receipt of incoming invoices to release, all work steps are logged in a revision-proof manner.
E-invoicing for outgoing invoices optimizes these internal processes, saves costs, increases the transparency of internal processes and improves the environmental footprint. Companies can improve their customer loyalty and secure market opportunities and competitive advantages.
The process of digital invoice delivery can be divided into four simplified steps: entry, preparation, portal and transfer/export.
Entry: After the invoices have been created with an ERP system, the outgoing invoices are automatically transferred via an interface to the e-invoicing solution for digital outgoing invoices.
Preparation: Depending on the e-invoicing standard (e.g. ZUGFeRD), the received invoice data is converted into the desired format.
Portal: In a portal application, the outgoing invoice book can optionally be viewed centrally and an audit-proof archive can also be connected.
Transfer/Export: In the last step, the electronic invoice is sent to the invoice recipient, for example by email as an attachment or as a secure download link. A connection of invoice recipients via EDI (EDIFACT) is also a common approach.
By using an e-invoicing solution for outgoing invoices, manual outgoing invoice processes are eliminated and the time for invoices to become due is considerably shortened by immediate delivery.
By using e-invoicing, incoming invoices can be processed by the customer in a continuous, automated process: from the recording of incoming invoices to the final booking.
The digital invoice receipt process can be categorized into three steps: receipt, preparation and processing:
Receipt: The invoices are automatically received via different input channels.
Preparation: After invoice receipt, the invoice contents are converted into an internal standard. Electronic invoices, which already contain structured data, are converted. Scanned paper invoices and PDF invoices are identified and extracted using OCR/text recognition software.
Processing: The prepared invoice data is enriched with master and order data from the ERP system and automatically checked for order reference, quantity and price deviations or country-specific rules. At best, invoices can be automatically transferred for posting. All other invoices must be routed to an integrated clarification or approval process.
All steps that an invoice goes through in the verification process are logged. The invoice content required for the booking is transferred to the customer's ERP system. The invoice, attachments in the editing process, conversion and editing protocols must be archived in a revision-proof manner in accordance with the applicable national requirements.
Due to government regulations, internationally active companies are increasingly obliged to create and send their invoices electronically. But every country has different legal regulations. Corresponding global e-invoicing regulations exist in more than 65 countries worldwide and the number is rising.
International e-invoicing is complex because many countries have different regulations. In almost all 65 countries in which e-invoicing regulations apply, there are subtle differences in what data must be collected, how this data must be collected and what requirements must be met by the digital signature. However, there are two types of rules for e-invoicing, commonly known as clearance and post-audit.
Clearance regulations: : The regulating countries require that invoices to companies in the respective country must be settled via an intermediary regulatory authority with real-time controls. These real-time controls usually include digital signatures. The clearance rule is applied in Mexico, Brazil, Italy, Turkey, Portugal, Spain and Hungary.
Post-audit: The rules in the respective country specify a minimum period for which electronic versions of invoices must be kept for possible automated verification. The post-audit procedure is used in the EU with a few exceptions.
The implementation of the EU standard EN 16931 requires that invoice recipients can receive and process invoices electronically. However, this does not mean that they also enforce this with your suppliers.
International regulations are changing at a rapid pace. More countries are requiring e-invoicing, and numerous regulatory details increase the complexity of e-invoicing for internationally active companies.
One of the biggest challenges in international business is to keep pace with regulatory changes. Here are three examples:
In Hungary, the electronic transmission of VAT-relevant data to the tax authorities has been mandatory by law since 1 July 2018.
Until April 2020, the mandate received new XML versions, data elements and validation rules every couple of months, and additonal changes became effective in 2021.
In Italy, the eighth largest economy in the world, e-invoicing has been obligatory for all B2B invoices since 1 January 2019.
In 2019, over 2 billion documents passed successfully through the SDI (Sistema Di Interscambio). The flows were mainly B2B (towards VAT) and B2C (towards tax ID numbers), with a minority of B2G (towards Public Administration).
2020 was considered to be the consolidation and improvement year for the e-invoicing processes with a push towards digitization.
To this end, on the basis of Revenue Agency Provision no. 99922 of 28 February 2020, a new XML layout and technical specifications were implemented as of 4 May 2020, in order to make the accounting process for invoices faster and more precise.
Since 1 April 2019, electronic reporting of VAT-relevant data to the HMRC – the so called Move To Digital (MTD) for businesses – has been mandatory in in the UK.
The soft-landing period of MTD ends on 31 March 2020. From 1st April 2020 the penalty system starts for taxpayers who do not comply with the requirements of the digital recordkeeping and full digital link.
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PEPPOL is an acronym for Pan-European Public Procurement OnLine. The PEPPOL project was launched in 2008 with the aim of simplifying electronic procurement across borders. Technology standards have been developed and implemented by all European governments. and PEPPOL is the most important driver for electronic procurement by public authorities in the EU and naturally supports Directive 2014/55/EU.
In late 2019, PEPPOL was re-branded to Peppol for marketing purposes.
Peppol is now a brand for global e-procurement, with nearly 10 percent of the approximately 300 Peppol service providers outside of Europe (e.g. Singapore, Australia, Turkey, USA and likely Malaysia and others joining soon). Asian countries have introduced Peppol for B2B and not for B2G.
The Peppol network is used as an open exchange network – not a platform! – for electronic procurement, which includes electronic ordering and invoicing. It is increasingly being used for business-to-business (B2B) scenarios. Peppol is gaining momentum worldwide and is used in 31 countries across Europe, Canada, Singapore and the USA.
Peppol currently consists of a consortium of project partners from 12 European countries, and Peppol Authorities are responsible for the definition of the national characteristics of e-invoicing. In Germany, the Coordination Center for IT Standards (KoSIT) handles this task. For example, the KoSIT defines the compliance of the invoice standard XRechnung and the transport protocol AS4 with Peppol.
The introduction of Peppol in the Benelux countries is encouraged and promoted by the relevant government authorities. In addition, e-invoicing has been mandatory for B2G invoices in Croatia since 1 July 2019, where the Peppol network is used for the transmission of invoices. Another example is e-invoicing in Poland via Peppol, which became mandatory in November 2020.
The exchange of invoices in the Peppol network is based on the 4 corner model. The 4 corner model consists of a transmitter, a receiver and their access points. The Peppol format UBL (Universal Business Language) is used for seamless cooperation between the different systems. Communication takes place via the Peppol network, which provides a partner directory through which recipients, the supported processes (such as the electronic invoice) and the recipient access point are identified.
To become part of the Peppol network, you need a connection to a Peppol Access Point. A Peppol Access Point assumes the role of the sending and the receiving Access Point and thus enables the electronic exchange of documents such as catalogues, orders, dispatch notifications and especially invoices.
SEEBURGER is a certified Peppol access point provider for AS2 and AS4 and also offers Peppol access as a cloud service. Invoice issuers can use this SEEBURGER Peppol Cloud Service to quickly and easily send EU-compliant invoices to government agencies and other global invoice recipients.
In order to determine which operating model is optimal for your e-invoicing process, the following three questions need to be answered:
Hosting: Should the e-invoicing solution be located in your own data center or should the operation be outsourced to a data center operator?
Operating mode: Should the solution be operated as a licensed product on-premises or as a cloud service on a pay-per-use basis?
Standards and formats: Which e-invoicing standards and formats do I need now and in the future?
If your priority is maximum control over your invoicing and settlement processes, the classic license-based, on-premise installation is the way to go. However, if you want the greatest possible flexibility, a cloud solution is more appropriate. Additionally, cloud-based invoice processing offers many benefits: fast implementation, simple integration and high-operational reliability. Make sure that your cloud provider can deliver the solutions for all relevant countries and scenarios with one single platform.
In contrast to flexible cloud operations, the overhead for an on-premise operation includes the acquisition costs of the hardware and software, as well as the implementation and technical setup. Don’t underestimate the running costs for personnel and maintenance with an on-premise e-invoicing solution.
While legislation in various countries and international regulations have been the main drivers of e-invoicing, companies are realizing many benefits from e-invoicing. For example, e-invoicing eliminates manual outgoing invoice processes, and real-time invoice delivery means that payments are received more quickly.
Plus, the digitalization of incoming invoices increases the processing quality by preventing manual errors. Our data surveys show that costs can be reduced by up to 85% with e-invoicing from as little as 12,000 incoming invoices per year, compared with manual invoice processing.
Internationally active companies are faced with the challenge of supporting and processing all the different e-invoicing standards. In order to manage the constantly changing regulations, the use of a cloud-based e-invoicing solution is recommended.
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New mandatory e-invoice reporting system in India
The Indian government is rolling out a new mandatory e-invoice reporting system becoming effective on 1st of April 2020. It is based on the new Invoice Reporting Portal (IRP) for the registration of domestic B2B and B2G invoice transactions and export invoices.
Hungary: VAT Reporting
Electronic invoicing becomes mandatory in Hungary as of August 1, 2018. Avoid penalties by transferring data to NAV automatically.
United Kingdom: Making Tax Digital – MTD
Electronic VAT returns is obligatory in the UK since 1st of April, 2019.
On 1st of April, 2020 the soft landing period ends and the penalty regime starts.
Recent changes to Italian law require that the online platform SdI is used for all business-to-business E-invoicing.
France: E-Invoicing with Chorus Pro
Send invoices to the public administration in France via Platform Chorus Pro.
Switzerland: How is E-Invoicing implemented in Switzerland?
Electronic invoicing has existed in Switzerland for more than two decades.
How do I connect to Peppol?
Send electronic invoices to authorities and other Peppol participants worldwide quickly and easily with SEEBURGER Cloud Services.
E-Ordering Mandate in Italy via the NSO Platform – Postponed to 1st of February 2020
Italy mandates e-ordering for suppliers of the national healthcare system, referred to as SSN (Servizio Sanitario Nazionale). For e-ordering the NSO platform “Nodo di Smistamento degli Ordini di acquisto delle amministrazioni pubbliche (NSO)”, known from the Emilia-Romagna region, is mandatory to be used by 1st of February 2020 (initial deadline was 1st of October 2019).
France plans to extend the current B2G e-invoicing mandate to B2B e-invoices until beginning of 2025
Has the race to mandatory business-to-business (B2B) e-invoicing in Europe just begun? Following Italy’s new B2B mandate, France now plans to extend the current business-to-government (B2G) e-invoicing mandate to B2B e-invoices until the beginning of 2025.