The global game of e-compliance / e-invoicing
Why e-invoicing is not to be ignored and how to rule electronic compliance in a digitized and government mandated world.
Why this blog post?
While I have seen many technical blogs on how to implement e-compliance or e-invoicing with SAP, blogs for all the different country solutions or very detailed reports on the matter, i did not find a short introduction into: What e-invoicing is, Why is it on the rise, What are the different models, What challenges does it bring and how to tackle all this.
With this blog i tried to give exactly this, a short introduction to e-compliance and e-invoicing.
e-invoicing is dead, long live e-compliance!
While invoices are still the lion’s share of digital B2G and B2B scenarios, e-invoicing has grown to encompass much more than just electronic invoicing. Today, e-invoicing has evolved into e-compliance as it has grown to include the reporting of goods movements, payment flows, journal entry data, etc. to various governmental authorities. This blog will focus on e-invoicing, but many of the topics that will be discussed can also be applied to the other components of e-compliance as well.
Differentiating e-invoicing and e-compliance in this blog
When you see e-invoicing your first thought might be “well we have been doing this for years now, what’s new about it?”, however, when I talk about e-invoicing I am not talking about scanned invoices transferred to structured data. I am also not talking about EDI and how it has been used to support electronic invoicing for the last 30 years. Rather this blog focuses on e-compliance and e-invoicing in the context of B2G and B2B government mandated requirements.
Problems with the old EDI world:
As an experienced Integration Consultant, I can tell you from personal experience that there are several downsides to both electronic invoices via EDI and EDI in general. Most EDI connections were developed as point-to-point connections and bilateral EDI interfaces between two parties, making every connection different. The usage of an EDI VAN provider has helped mitigate that downside a bit in the past through standardizing formats within the VAN´s connected companies, but in the end the problem still remains that not everyone is part of the same Network or not in a Network at all.
You might feel differently about this if you are one of the larger players in your industry and can dictate what EDI standards are to be used to integrate with your suppliers, and in some cases also with your customers, but for most entities this is not the case. With the likes of EDIFACT, ANSI X12, VDA, GS1, custom structures etc., there are too many different standards for companies to choose from. Furthermore, the standards also leave too much room for interpretation, meaning that even though two parties may be using the same standards, they might be used differently.
That is not to say this is not a significant improvement over the very manual process of sending paper invoices around the world, it is. But shouldn´t the digital world be more harmonized? Shouldn’t we want to reduce complexity, increase efficiency, and reduce cost?
Why e-compliance is on the rise:
The majority of e-invoicing mandates are driven by fiscal considerations as well as the need to improve tax collections in an increasingly globalized world. But it is also about creating efficiency and value through digitization.
Many countries around the globe already have e-compliance or e-invoicing mandates (more than 60) with the number growing steadily over the past few years and set to keep increasing.
The different forms of e-invoicing
There are basically 3 different e-compliance/e-invoicing scenarios:
No government requirement to share invoices electronically
Post Audit Model:
The Post Audit Model allows for the free exchange of invoices between trading partners but requires that they archive invoices for up to a decade, make that archive easily accessible, and perform periodic reporting electronically.
This is a tripartite model between the seller, buyer, and administration. Prior to issuing an invoice, the supplier of a good or service must receive approval from the administration before charging the buyer. This process registers the invoice with the tax authorities in real-time and the tax authority either approves or rejects the invoice, providing a digital approval stamp. This process also allows governments to track total sales as well as the total VAT being collected. This model is already used in many Latin American countries, Russia, China, and some European countries like Italy and Portugal.
But there are two different types of the clearance model.
Asymmetric Clearance Model:
The asymmetric clearance model focuses mainly on suppliers. With this approach, the buyer cannot receive the invoice until it has been validated and approved by the relevant tax authorities. Only then, can the invoice be freely exchanged between the supplier and customer using their bilateral agreed standards.
Symmetric Clearance Model:
With the symmetric clearance model, the standardized format and connection approach used to deliver invoices to the relevant tax authorities is also used to deliver the invoices to the invoice recipient. This approach is the most beneficial, as neither the supplier nor the customer need to worry about the technical exchange standards in B2B invoicing. This is the approach that is currently used in Italy, Turkey or Poland, for example.
Countries often tend to go with a three-step approach to implementing e-invoicing/e-compliance, with the Post Audit model being implemented first, followed by the Asymmetric Clearance model, and finally evolving to the Symmetric Clearance model.
The Symmetric Clearance Model is expected to be the dominant model by 2025
What is in it for me?
While adapting to a mandated e-invoicing requirement in the B2G context might come across as an unnecessary burden, albeit a forced one, there are actually some benefits that can be easy to miss at first glance.
The 2021 Billentis1 report noted several benefits of e-invoicing for businesses including:
- Using a clearance model reduces tax compliance costs by 37% to 39% for corporate businesses and 8% to 56% for private businesses
- Reduces the risk of fines as tax compliance is checked in real-time
- The potential for a future reduction in tax rates as a result of increased compliance
- e.g. Brazil increased its tax receipts by $58 billion dollars as a result of closing the gaps in invoicing and reporting
- Establishing countrywide exchange standards and thereby reducing overall complexity
- Eliminating the need for tax declarations, deductions, reclaims, and traditional audits
It should also be noted that the overall goal of most government mandated e-invoicing initiatives is to encourage the widespread adoption of e-invoicing (B2G, B2B, B2C), such as what is currently done in Italy. This will not, however, create a harmonized “world invoice,” but a massive harmonization effort that will help to increase the effectiveness of invoice processing.
This is not to say that all the complexity will go away in the future as the collection of e-invoicing mandate buzzwords below shows:
Roadblocks on the way to the throne:
Of course, adapting your company’s current business processes to incorporate these mandates requires a significant effort.
In the long run, the fact that tax authorities regulate between seller and buyer, requiring the invoice be approved in the process is a major regulatory and technological constraint.
And although the likes of the EU is striving for harmonization throughout the 27 member countries, there are no plans for a global standard. As such, this will leave companies with a large number of mandates, each with their own unique technology, business and legal requirements, to adapt to. Every country can have different requirements related to the format, structure, connection technologies, and stamping requirements, for example.
Some additional challenges in global e-compliance:
- Change Frequency: Frequent changes varying in scope and required effort
- Criticality: Risk of audits, fines/penalties, and the potential for suspending the ability to deliver goods, invoice customers, etc.
- Complexity: Complex system and interface landscape to support the legal requirements in multiple countries.
- Support: Comprehensive legal and technical knowledge required to prevent compliance issues.
- Cost: High operating and licensing expenses
- Resources: High effort of infrastructure and human resources
- Impact: Impact on global ERP system and process landscape
Tackling e-compliance strategically with SAP ERP or S4
Now we get to the point that I guess everybody was waiting for.
One of the first things to consider when developing an e-compliance strategy is how global your company’s footprint is – how many countries do you presently operate in, how many new countries are you planning on entering, and most importantly how many of those countries have, or are planning on having, government mandated e-invoicing. After that you also need to consider the following:
- Do you want to invest the time and resources to implement your own solution for every country?
- Do you want one provider for all or various providers and local partners for each country?
- Do you want to invest the time and resources to stay up-to date with all legal changes?
- Does your organization have the knowledge to implement these requirements?
- Do you have and/or want the technical resources to maintain all these scenarios?
- Do you prefer to leverage the values of well proven software solutions?
- Do you prefer to have as little involvement in the setup and maintenance of these scenarios?
There are three main approaches for implementing these scenarios:
- Implement and maintain all by yourself, either with or without products like SAP Document Compliance, your own middleware, maybe prepackaged content, and local providers. Let´s call it the DIY approach.
- Use Platform as a Service or Software as a Service Providers where you leverage existing and proven solutions but have to do the implementation and maintenance by yourself
- Use a full managed service provider using field tested solutions in a carefree package delivered End-to-End with implementation, legal and technical maintenance covered. We could also call this e-compliance as a Service (eCaaS)
|1. DIY Approach||high||
|2. Leveraging SaaS||Medium||High|
|3. Full managed Service||Low||low|
One additional topic worth mentioning is that the e-compliance or e-invoicing is not a solely technical topic. It is not enough to just buy and implement a technical solution as the data for e-invoicing is based on your business processes which might be different depending on country, industry, culture and are basically different for every company. It is important to build the bridge between technical and business implementation. The complete project needs to be in close collaboration of technical and business experts as equals.
e-compliance and e-invoicing is a complex topic, and unfortunately, its nature of being a legal requirement and it´s growing importance makes it unavoidable.
With the final state of government mandated e-invoicing, and all its associated benefits yet to be realized in many countries, electronic invoicing via EDI in the B2B context will continue to play a big role. That, however, will change as e-invoicing/e-compliance matures and is adopted by more countries and it is best to develop a comprehensive e-compliance strategy now, than be left with a patchwork landscape that will prove costly and disruptive to harmonize in the future.
Great overview of the latest challenges and opportunities with digital compliance.
Find out more here how SAP Document and Reporting Compliance can support enterprises to seamlessly fulfil all these types of mandates, from e-invoicing to statutory reporting, including handling of emerging draft returns: https://blogs.sap.com/2021/10/13/sap-s-4hana-2021-e-invoicing-and-statutory-reporting-made-easy-with-sap-document-and-reporting-compliance-a-holistic-approach-to-compliance-reporting-regulations/.
With its localization in 50+ countries, it provides ready-to-use content to enable seamless compliance while standardizing processes and taking advantage of digitalization to increase efficiency and automation. And, with its extensibility framework open to partners and customers, it provides the flexibility required to scale worldwide.
A well written and compelling opinion article, I especially enjoyed the section on the evolution of E-Invoicing to E-Compliance. While this is not yet required uniformly on a global scale we also see the developments in that direction at SAP. Some comments if I may on the remaining points stated: