Despite the original intention of the EU to harmonize the local legislation of its member states, local rules and requirements still vary in many areas. Dealing with VAT returns and tax evasion is just one example, albeit an important one. All the more reason to shine some light into the darkness.
B2G, B2B and ‘B2T’
In order to achieve greater harmonization within the European context and at the same time combat tax evasion, the mandatory submission of electronic invoices to the authorities plays a key role. All EU countries are in agreement on this. However, the stage that e-invoicing has reached varies from country to country. Roughly speaking, e-invoicing follows three tracks, namely B2G (Business to Government), B2B (Business to Business) and even B2T, or Business to Tax authorities. B2G logically involves invoices for products or services from or to governments that must be submitted electronically to the appropriate authorities for verification. After verification, the invoices are released to be sent to the relevant party.
Thanks to this procedure, the tax authorities of each country can more or less anticipate final individual VAT declarations. The same procedure is followed in B2B. Following successful implementations in Latin American countries, Italy took the lead in this in 2019. Mandatory e-invoicing currently only applies to Italian companies and will soon start applying to foreign companies as well. France is expected to follow by the end of 2024 with an indirect system, whereby an intermediary converts all formats offered by businesses into the required format and forwards them to the tax authorities.
From indirect tax declaration to direct tax bill
The next and ultimate step in combating tax fraud and evasion will be Business to Tax authorities, as we call it. This will put an end to tracing and drawing up all underlying transactions ourselves or by third parties. Instead, upon receipt of all relevant e-invoices, the tax authorities will automatically prepare a turnover tax assessment. As soon as all companies are included in this regime, the tax authorities can use smart software, and increasingly AI, to determine almost immediately whether parties trading with each other use the same VAT amounts.
Preliminary VAT reconciliation
In order to check submitted invoices efficiently, they must be provided in a standard format. These are not the same in every country, although most countries have opted for Standard Audit File for Tax (SAF-T). The software that companies will use to account for the transactions on each invoice in advance is at least as important. All the more so because, from that moment on, there will be no more intermediaries to draw up or adjust the figures. You will therefore have to ensure yourself that your source systems provide the correct transaction data. Moreover, the software must be certified by the tax authorities.
Apart from that, for several reasons, you want to be able to see the impact on your VAT as soon as possible by using a tax system on top of your financial or ERP package. As luck would have it, we happen to know just the right address for that particular software…
If you want to know more about mandatory e-invoicing and/or software for this, feel free to contact us.