This webinar was led by Benedetto De Francesco, Studio de Francesco Business & Leadership Consultants, Rome, Italy.
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Benedetto: Regarding e-invoicing in Europe, first of all, we have to say that e-invoicing is something that has been introduced as a process of legislation since 2009 more or less, even before, but just after 2006 following the introduction of the VAT directive in Europe. This is very important to be stressed because the e-invoicing process is strictly related to the VAT collection system in Europe and we will see later on why I am making this statement.
As far as Italy is concerned, we have a full operational introduction of e-invoicing, either in B2G, B2C and B2B operations. B2B operations have been ruled by the mandatory e-invoicing system since 2014, just like some other countries in Europe. Of course, for B2G operations and all those that can be named as contractor operators, mainly government entities, it is quite understandable why they have been included in the space of mandatory application of e-invoicing. This, first of all, in order to contrast corruption, VAT evasion and avoidance, and also to create an automatic system within the administrative processes of government entities. But, of course, government entities have accounting systems that are very much different from those in private companies because government entities only have a system that is focused on cash transactions; they have a financial perspective, while companies have an economic perspective. Furthermore, the B2G system of e-invoicing here in Italy provides also for the separation, when a government entity pays a private company operating with the government entity, the government entity pays only the revenue, the VAT is withheld by the government entity and then placed in the VAT state basket. In this way, a lot of fraud that could be perpetrated before the introduction of e-invoicing in B2G operations has been avoided or prevented.
Question 1: What are some of the main benefits of e-invoicing in general? Likewise, what are some of the main benefits of standardizing e-invoicing across the EU?
Speaking about the private sector, there are a lot of issues. Of course, if we are speaking about exchanging information and operations between governments, there are probably many benefits that refer to the speed of exchanging and processing this information, mainly because there’s the financial perspective so you don’t have to allocate or to classify costs to handle VAT in each operation. Just because you separate the cost from the VAT amount and that’s all.
On the other hand, speaking about private companies, it is very different because speaking about how the B2B e-invoicing works you have to think that the company creates the XML file to be sent—to the government or to a company—the standard is the same. Then, this XML file is handled by special software that is in between the company and the interexchange system, which is managed by the Italian Internal Revenue Service, and then they hold the information and distribute it to the receiver, which is the client of the issuer of the invoice.
Mateo: This works locally or also works across the EU?
Benedetto: For the time being, it only works in Italy because Italy is the only country in the EU that introduced this system for B2B and B2C operations. There is a very interesting website – CEF Digital Connecting Europe - where you can find a lot of information about e-invoicing in Europe and see the level of implementation of e-invoicing in all the countries, and Italy is the only country where B2C operations have been implemented.
So we are the only country and, as a matter of fact, when we issue an invoice for another company based in another country we still have to prepare a paper invoice and send it via email or ordinary mail, and we have to put the information regarding cross-country operation invoices in a special amendment, which includes all the operations that you have made with other countries, European or outside of Europe.
But for Italian operations only, you have to exchange only via the e-invoicing system that provides for the existence of the two endpoint operators, the issuer and the receiver, in the middle there is the interchange system from the Italian IRS and, in between the interchange and the endpoints, there are the providers of the system that allows to each company to download the XML files in their accounting systems.
Mateo: So they are software providers to a certain extent?
Benedetto: Yes. This model obliges companies to buy, first, a translation system that allows translating the XML files into something that the accounting software can read and process. This translator is like a modem, makes the codification and the de-codification. So this system codifies into XML and de-codifies from XML in order to download everything into your accounting system. Nevertheless, when you download from the central clearinghouse, the interchange system, when you download all the files that have been sent from all of your suppliers around Italy, when you download each invoice you have to handle each line of the invoice, because for each recurrence, for each item, you have to tell the system what cost is linked to that item purchased. If I am a shirt re-seller, it is raw materials that I have to re-sell. But if I am an accountant because, of course, I wear the shirt to do my profession, but it’s not something that without I cannot do my profession. So the relevance of the cost is different. For the shirt re-seller it is totally a deductible cost, for me it’s not. So I have to handle each line for each item within the invoice, so speaking about e-invoicing benefits for the companies, there are none. We have calculated that the time to process e-invoices has tripled.
Question 2: What kind of skills and expertise are required from a small business to deal with e-invoicing?
Mateo: What was the process before for comparison purposes?
Benedetto: We just received the paper invoices, put them in front of us and made the data entry but using our brains, the appropriate data entry. When you download the raw information, you have to process it. This is not the only time expenditure, since you download all these files, you have to take a look and print out the list of files received, accessing the interchange system. Because, at the end, once you have processed all the information you have downloaded in your system, you have to print out your VAT ledger to compare it to the list of files that according to the IRS you have received. If there’s something that is not in the VAT register, you have to verify why it’s not there. If you’re a very small operator or entrepreneur, if I am a craftsmen or a car mechanic, of course, I may have the skills but I don't have the time to produce my own electronic invoices, I don't have the time.
Question 3: Is e-invoicing a way to reduce administrative costs? In which circumstances and after how much time? If you have software that will help, but the software will also cost money too, right?
Benedetto: The software costs money and its cost is related to the number of invoices you send and receive, mainly to how many invoices you receive. As many invoices you have to download from the system and that have to be translated in a readable file from the accounting system, the software company will ask you for a fee that is proportional to the number of invoices that you have downloaded. So you buy a pack, say, 5000 invoices, and if you go over that number you have to pay a fee for each additional invoice, which is much more than the price of each invoice up until 5000. So if you have a very different trend in your business, and you’ve forecasted wrongly the number of operations that you will do in one year, in excess or in defect as well, because if you buy 5000 invoices and you use 3000 of them, of course there won’t be a reduction. So it’s very tricky.
For the time being, this is the third month since the introduction of the e-invoicing in Italy, and we cannot see any improvement in the administrative process. Many times we have to print the invoices as well because—the invoice of course can be produced in PDF and be printable—many times in order to be sure that your customer will pay you, you have to send him the courtesy copy at least in PDF form. But some also send the PDF to be paid and do not send the XML file, so the evasion, avoidance, fraud can be avoided but after a certain amount of time. If I am a fraudulent operator or an operator opening a VAT number to make fraud, I have a lot of ways of doing that without getting caught until the end of the process.
Question 4: Do you think, as people start using the system and start getting familiarized with the different types of software, will things improve? One year down the road, will Italy be in a different position vis-à-vis e-invoicing?
Benedetto: First of all, this system has only one purpose: VAT collection. The simplification process is true only for the government. For the Italian government, the European government and the European fiscal administration, mainly because you have a total control of VAT-relevant transactions. But the simplification for companies is completely absent for the time being; so far we haven’t seen any improvement in administration procedures. On the contrary, we have seen an increase in number of steps and controls we have to do to make sure we are processing everything that we have received, all the invoices that have been sent.
Another strange thing in the way this system has been implemented in Italy is that if I send you an invoice and you didn’t actually receive it from me, you cannot contest my invoice. You can only ask me for a credit note but you cannot refuse my invoice. On that basis, if you do not pay me, I can go to the court to get the payment, to force you to pay me. Of course, you can oppose during the process, but I will create a large problem for you. If we’re speaking about small amounts, you are not keen to contest, probably you will pay or probably you will let the invoice go, you’ll forget it and a lot of problems can arise from such a false operation. There are many things to be adjusted and changed, at least because we do not have any advantages for companies coming from this system. It only has a tax purpose, a VAT purpose, it is another burden that the EU has put upon operators, and I don’t know why but Italy always results to be the laboratory of Europe.
Question 5: How have other countries reacted to what’s happening in Italy? What are they going to be doing differently?
Benedetto: The issue is not an urgent matter across Europe. But this is true also because if you look at the contents of CEF Digital, for example, if you go to the section for Germany, there is no legislation regarding e-invoicing, each land has its own rules and each land can implement or not implement. Or France has until 2020 to discuss about the rules of e-invoicing with the government. It’s not something very emerging; it’s not at the top of the agenda of anyone. There are countries that have B2G e-invoicing like Denmark, Portugal or Spain, but not the largest ones. The UK doesn't have any rules in this respect; of course, we can imagine that they won’t have any in the near future.
Question 6: Is there a fixed deadline for implementation of this directive?
Benedetto: Actually, there is a deadline provided by the Directive that has been issued in 2009 and then in 2014, but of course there are no sanctions for those that do not comply with the deadline. It’s strange that Italy has complied as the first country with this directive and not with the environmental ones or many other ones that have been issued in Europe. Some could say that Italy had to be pushed towards this process because it is one of the countries with the highest tax evasion rate. But according to OECD data, in absolute figures, Germany has a higher amount of tax evasion. Of course, we have a little higher rate in percentage of GDP. In absolute figures, Germany has the higher amounts and they do not have any rules in terms of e-invoicing. This is a heavy charge on small companies and professionals.
Question 7: To what extent does e-invoicing affect transfer pricing, if at all?
Benedetto: For the time being, there is no relation. As I said, the e-invoicing as provided by the law is only working for internal operations in Italy. Cross-border operations are not affected. Since transfer pricing is something that regards international operations, operations between companies that are linked to the same group, of course, this is not an internal operation.
At the beginning, when the transfer pricing rules were introduced in Italy some years ago, there was also an extension of the transfer pricing principles and the criteria also in internal operations. But they became aware quickly that there was no relevance in controlling and disputing internal operations under transfer pricing point of view unless there is no final or initial cross-border operation linked to the internal ones. So no effect for transfer pricing at the moment.
Of course, if we try to make a projection of the development of e-invoicing in B2C operations, it might affect the transfer pricing area because e-invoicing involves the gathering of all the information regarding any operation between any company with any other company in a unique database, and this enormous amount of information is at the disposal of a foreseeable unified fiscal authority in Europe. They are already speaking about this kind of authority, a unified tax authority for all of Europe, controlling the tax compliance in all the EU countries. So the availability of such an enormous database will give the power and the possibility to this unified tax authority to also investigate any operation under any point of view, VAT one, transfer pricing one. So if we’re using in transfer pricing the comparison (arm’s length) principle, with AI systems they can make calculations in a few seconds of millions or billions of operations, or a few minutes, so it will be very easy for them to impose more controls. But this generally speaking can be something positive because there will probably be a reduction of avoidance and evasion in commercial operations regarding tax matters. But we also have to consider that all this information will include, for example, if you’re a client of mine and make products with a lot of intellectual property in it, the list of products I sell to you and even the prices I apply to you, are transformed into bits that we exchange or better, I am not exchanging these bits with you, I am sending them to a central database and they will send it to you.
In November 2018, the certified email accounts and servers of the Ministry of Justice and Ministry of Interior have been hacked. I don’t know how safe we can be considering how strong or clever are the Chinese or Russian hackers who can access this information. The smart phones of Merkel and Sarkozy that had been hacked by we don’t know whom, but this kind of information is the industrial backbone of our economic system. It’s a little bit scary.
Question 8: Plenty of concerns have arisen with regards to data protection and cyber security vis-à-vis e-invoicing. What are your thoughts on this specific issue? What kind of concerns should we have regarding cyber security, personal freedom, industrial spying, etc.?
Benedetto: Everyone can easily imagine what could happen if the safety and the access to these databases are not totally secure. If you can access and hack a database, you can change the information there. Let’s see everything from the perspective of the EU. All that information is very important for administrative and governmental purposes, and if that information is not secured and can be changed, destroyed or stolen, the functioning of the EU administration is under threat.
Also, personal information. If I am a lawyer and I assist a person in a penal trial for homicide or for any kind of crime, I have to produce an invoice for that person describing what is the process, the trial number, etc. The number of trial is something identifiable. First of all, the person that is receiving that invoice is identified, his name, surname, fiscal code, etc.
Mateo: What information is included in the e-invoice?
Benedetto: The e-invoices include, for B2C operations, the company name, the address of the company, the VAT number and the fiscal code, which most of the times coincide also with the company registration number.
For private individuals, we have first name, surname, fiscal code, and a special code with some letters of the name and surname, year of birth, month of birth, day of birth, and then a code identifying the municipality of birth. It’s a code that can identify you without any mistake. Also, in the invoice, I include all the information that qualifies the operations: if you buy products, the recurrence, the number, the weight, the description of the product, etc. And if you’re a private individual, the products or the services that you have bought from the professional or from the company. This is the information that generally speaking is protected by the GDPR and so on. In this way, they go through electronic systems whose safety is yet to be determined.
Question 9: Are there any specific details on e-invoicing as it pertains to the EU's GDPR?
Benedetto: Just because the problems I was mentioning were so evident, a lot of people have raised claims to the privacy authority in Italy in order to stress the privacy problems that e-invoicing would bring about. Of course, the privacy authority has made very little changes to the rules in order to make happy those who brought up these problems. But they haven’t solved these problems totally.
Question 10: Mexico started the electronic invoice in 2014 and in 2017 changed to a new version, using catalogues of measures, goods and services, forms of payment, etc. Mexico currently uses an electronic payment receipt to identify the cash flow and the platform for issuing payroll receipts. What scope do you intend to give to e-invoicing in the EU besides VAT?
Benedetto: During the days preceding this webinar, I had a lot of discussion with many colleagues of mine to collect ideas and present the issues that my colleagues have met, and the problems that they have faced during these first three months of full operations.
One of the points that we have reached is that the benefits can only be found if there is a larger scope than VAT. And a larger scope is harmonizing VAT throughout Europe. Here in Italy, we have a very complicated VAT legislation, providing for different deductions, different treatment of VAT in many different cases related to the kind of operator you are, etc. If we make everything deductible, speaking about costs, and everything detractable, speaking about VAT, in all the European countries. Of course, we won’t have to worry about the treatment of each item, and we can create codes that identify an item and link that code to any cost or revenue account, and then no one will have to process accounting anymore. Accounting will only be limited to analyzing the accounts and probably making some changes to comply with international accounting principles or standards in order to make the correct representation in the financial statements and comply with the IFRS, etc. So this will be the only situation in which the e-invoicing will be largely exploitable and give a concrete benefit to the accounting process.
Benedetto: I would like to launch a provocation to all of our members. We are going towards the European election in May 2019, and I really would like the new European government to take the chance to use this e-invoicing standardization to go farther and give it a larger scope than just VAT collection. Because according to the current political sentiment, the new EU will have a very different face and probably the new set of politicians will be such that it will stop this process. What I am afraid of is that all of these investments we’ve made in Italy and other countries will be canceled. We have really made a great effort to be prepared for this January 1, 2019 deadline in Italy, which has represented an explosion and thunderstorm in our firms and the administration of many companies. Of course, this is something that can be exploited better but, in its current form, it will be only a worsening of the administrative process, mainly for those companies that are SMEs that give their accounting process to external professionals.
If we’re talking about MNCs, of course, they have integrated systems and for them it’s easier. But they have very large administrative departments with a lot of people working there, but I think that even for larger companies it is not so easy to implement such a system.
The largest number of difficulties in Italy is in the professional offices because they are those in charge of the largest number of companies when we speak about accounting.
The real simplification is for the government. They just don’t care. Since 1998, we started a digitalization process in taxation. All the amendments and the communication with the tax authority are done digitally. But all the work has been shifted to the professional offices. The tax authorities only make controls and that’s all. We have to make preventive controls that make final controls and automatic controls. Or better they make automatic controls, they contest you for anything, we have to say, “No, the automatic control is wrong,” any taxpayer has to pay money to the professional to tell the tax administration, “Excuse me, you’re wrong, the automatic control is wrong, you weren’t aware of this,” and you have to go to the tax authority and they correct it. But after you’ve paid the professional. Everything has been shifted to the private side and the government now has fewer costs than before.