Italy’s on the cusp of an invoicing revolution. On January 1st, 2019, e-invoicing will be mandatory for all Business to Business (B2B) transactions in the country. If you receive or send invoices in Italy, you need to take notice.
But the impact of Italy’s new rules will likely extend beyond its own borders. Other countries in Europe are also looking closely at mandating e-invoicing for B2B transactions. If you’re doing business on the continent, be ahead of the game and make sure e-invoicing is on your agenda.
Closing the VAT gap
Italy’s mandating e-invoicing because it’s losing billions of euros in value-added tax (VAT) revenue. In fact, Italy is Europe’s worst offender for lost VAT revenue. The most recent data from the European Commission cites that Italy accounts for 23 percent of the €151.5 billion VAT missing in Europe.
Authorities have pinpointed the country’s ‘post-audit’ VAT collection method as the main reason for this. Currently, tax authorities conduct random audits on invoices after the transactions have taken place, making it easier for companies to avoid paying VAT.
To rectify this, Italy is becoming the first country in Europe to introduce real-time VAT control—known as the ‘clearance model.’ Starting January 1, 2019, companies in Italy will have their invoices reported on and validated by the tax authorities before or during the exchange process.
The clearance model is popular in Latin America and has proved successful in helping governments close their VAT gap. Take Mexico, for example: the authorities achieved a 34 percent increase in VAT collections in just a single quarter after introducing a variant of the clearance model. Tax authorities in Brazil and Chile have had similar success.
Companies must exchange invoices electronically for the clearance model to work.
Hence why Italy is mandating e-invoicing for all B2B transactions from January 1, 2019. The new rules will apply to resident Italian companies and those established in the country. Multinationals transacting with their Italian VAT number must also comply. There will also be an impact on certain Business to Consumer (B2C) transactions if a consumer specifically requests an invoice.
To be compliant, companies must create, transmit, and archive e-invoices in the FatturaPA XML format using the Sistema di Interscambio (SDI) data exchange system. This validates the transactions in real-time before sending the invoice to the customer.
Failing to comply will result in penalties ranging from 90% to 180% of the VAT inaccuracy. Authorities will also treat the invoice as unissued.
A sign of things to come?
Italy’s move to mandate e-invoicing to close its VAT gap may be a sign of what’s to come across Europe. Currently, mandatory e-invoicing is in violation of EU VAT Directive (2010/45), which says a buyer must agree to exchange e-invoices and should have the freedom to choose a document format. However, Italy negotiated a deal with the EU to be exempt from this directive.
By granting Italy an exception, the EU may have opened the floodgates for other countries in Europe to mandate e-invoicing for B2B transactions. In fact, straight after the EU gave Italy the go-ahead to mandate e-invoicing, rumors emerged that other countries were looking to follow suit.
Spain, for example, announced that it’s extending its B2G e-invoice mandate to cover a limited scope of transactions in the B2B sector, earlier this year. Greece, Portugal and France are also laying the groundwork to make the switch.
Get ahead of the game
So the trend is clear: mandatory e-invoicing is coming to Europe. It’s a matter of when not if. The question is: will your company be ready? And will you see it as more than an exercise in compliance, but as an opportunity to transform your supply chain payments by adopting a digital-first strategy that puts compliance at your fingertips? Either way, now might be a great time to consider a best-in-class digital supply chain payment solution.