The cost of I2P non-compliance – Part 1: A fragmented landscape

When you think of the billions of transactions that take place every single day in the B2B buying world, the possibilities for error during the buying and supplying, and the paying and the getting paid process, are manifold. At the same time, across the globe the tax rules for B2B invoicing are different and regulations can change rapidly, especially now that governments are starting to get involved in the invoice-to-pay (I2P) financial supply chains. It costs time, money and business disruption if you don’t get it right, and with increasing demands for compliance, non-compliance can be very damaging for both sides of the B2B transaction.

So what do we mean by I2P non-compliance?

To be ‘legally’ compliant means we must act in accordance with local/national legislation or requirements: these might focus on how invoices are processed, transmitted or stored. Then we have to be ‘tax’ compliant, where we must comply with the local/national tax laws and have that correctly reflected in our invoices.

It’s a complex business for businesses, and getting it right is hard. Mandates are not harmonized across governments or regions, neither from a technical standpoint nor a legal one. So organizations are more and more concerned with streamlining their processes to protect their business from the cost of non-compliance. And as the consequences of not getting it right can be severe, many organizations choose to outsource that responsibility to a third party, one that knows exactly how to get it right.

The issue with compliance

Ruud van Hilten is an expert on e-invoicing and country compliance at global e-invoicing firm Tungsten Network. We talked to him to better understand the compliance landscape, the consequences of non-compliance and what you can do to avoid them.

“In order to understand the cost of e-invoice non-compliance,” he said, “we have to understand compliance, and that means understanding not just the legal obligations of processing an e-invoice, but the tax implications and requirements too. And those requirements are different all over the world.

“First of all, we have to consider that any invoice is a living legal document, and as such is subject to audits. Buyers rely on its accuracy to settle with suppliers and to reclaim value-added tax in whatever local format that takes. So there is a taxation element to invoices that should be taken very seriously, because failure to do so runs substantial risk; invoice audit failure can result in monetary penalties or even criminal charges.

“Tax on the value of goods or services delivered to a customer, whether called VAT, GST or sales tax, depending on the region, must be reflected in the invoice — it’s an obligation that every country has. The problem is that each tax regime differs; what a government requires a business to do can be hugely different depending on the region, and even inside of a region, like Europe, there are country differences between what makes up a compliant invoice.

“So companies have to consider whether their invoices satisfy the requirements of their local tax office, specifically if they are domestic invoices; that is, to a buyer within their own country, or whether they satisfy the requirements of multiple countries’ tax offices if they sell to different countries — there are so many variables.”

A problematic landscape

The invoicing landscape is home to many variants and every organization must familiarize itself with the legal requirements of each country it deals with — or find someone who can.

Whether wilful or genuine, errors pose a significant threat to business, and to governments.

“It’s no secret that tax evasion and tax avoidance take place,” said van Hilten, “and they can create significant tax deficiencies for countries in terms of the tax they receive compared to what they should receive (a so-called VAT Gap). This shortfall leaves a country with less money to invest in the likes of education, infrastructure and healthcare. In the EU alone this equates to in excess of €165 billion. So countries are missing out on a staggering amount of money. Clearly they need to find ways of curtailing that, so in recent years governments have invested more in technology that can help them get a better grip on tax payable — the business case is a no-brainer!

“In that regard, governments have started to place themselves inside the financial supply chain, within the flow of invoices from supplier to buyer. In many countries plans have been launched that force the supplier to register invoices before they go to the buyers to be settled — Italy is one example. It’s no longer the case that we can simply send an invoice and expect to get audited a few years later. In essence, you are audited before you complete the transaction.

“By deploying technology, they can force the behaviors of buyers and suppliers. From a tax-due perspective it’s a very logical thing for a government to do, but from a business point of view, it can seem very intrusive. The objectives for government to impose a mandate are often in total opposition to the objectives of companies to drive their digital agenda. And companies have to plan for this: maybe the IT department isn’t ready to integrate with that technology, or maybe you didn’t budget for it. Complying with these regimes is difficult enough in one country, even more so if you are dealing with tens of country regimes.

Non-compliance is not an option

The problem is, if you don’t comply, you risk penalties. And in some countries, a supplier cannot even invoice a buyer, because the government will reject the invoice.

“Firms that have offshored their AP to lower-wage countries, for example, often find themselves moving it back into their own areas to better satisfy these regimes. But these mandates are not set out to drive efficiencies for the company. When we follow just what the government requires us to do, the efficiencies you’ve built up in your cost-savings initiatives can deteriorate, because of extra time and money investment. So it’s fair to say that what’s good for government isn’t always good for business. On the other hand, this movement from governments can stimulate greater digitization, which is a positive. However, that requires a business to partner wisely and not make the mistake of trying to implement these mandates in house.”

The hidden consequence of mandates

When a government imposes a mandate, you can guarantee it will not be a one-off.

“Governments will look for continuous improvements, maybe other areas of taxation they can pull in, and will drive you to constantly do more as a business to satisfy the compliance agenda. Often they will bring other pieces of information in to be part of the invoice, for example Tax Deducted/Collected at Source, as is the case in India where the income tax requirement has been added as an obligation for compliant invoicing. You can suddenly be in a position where your systems have to be able to output this and you must adapt your processes to fit,” he said.

And of course, there is also an element of reporting to comply with government legislation in terms of revenues, accounts, etc., and all can be done online. That component is also starting to move into invoicing, in so-called “hybrid mandate models” — so there’s a convergence of worlds in some countries: reporting can take the dominant role in some, and e-involving in others.

“The point is,” he continued, “you have to stay on the ball with all the different obligations, and make sure your back-end systems are ready to comply. There’s a lot of ambiguity around taxation and it’s something none of us likes, because unlike developing a new product, or implementing a new system, this change comes from the outside, and is beyond our control.”

The Covid angle

The landscape is pretty unstable as more countries emerge from the relief programmes put in place to keep their businesses afloat during Covid.

So, the message is this: if you don’t want a broken AP process, you need to find a partner that can absorb all of this change for you, to make sure you are doing the right thing.

In part 2, we’ll discover just what the implications are of not being compliant, and what senior execs should be considering in order to avoid them.