The Future of Electronic Invoicing

In 2009 the European Commission’s expert group on e-Invoicing published its recommendations to promote the uptake of e-invoicing in Europe. Perhaps the most significant was that member states should give paper and electronic invoices ‘equal treatment’ by 2013. So what does this mean for any company considering an electronic invoicing solution?

Authored by Nigel Taylor, Head of e-Invoicing Solutions at GXS.

Electronic invoicing isn’t new and Europe has led the way for some time – the European Commission (EC) defined guidelines for Electronic Data Interchange (EDI) invoices in 1994, for digital signatures in 1999 and for electronic invoices related to VAT law in 2001, 2006 and 2010. Moving paper-based trade documents such as invoices or purchase orders to an electronic model offers significant cost savings and benefits to large, medium and small companies alike so why is the EC compelled to continue to change its guidelines to further encourage adoption?

In short, electronic invoicing has failed to cross the chasm from early adopter status into early majority status. We can point to the dot.com bubble bursting in 2001 or the credit-crunch of 2008 as very large bumps in the road to mass adoption. Just as the market showed clear growth corporate budgets shrank and slowed adoption even though the return on investment was clear. A second reason has been the lack of adoption by the small- and medium-size businesses (SMBs) that represent the vast majority of businesses in Europe. Perhaps the most obvious reason is the uncertainty around VAT issues that arise from electronic invoices i.e. the requirements to ensure that mandatory data fields are present, guarantee the authenticity and integrity of the invoice and archive for an appropriate period of time.

The EC, along with the International Chambers of Commerce, the United Nations Conference on Trade and Development, the United Nations Commission on International Trade Law and others, defined compliant EDI in 1994 (1994/820/EC). Different interpretations of the rules by member states created some confusion. This lack of clarity around VAT law meant that even though corporations could legally do business electronically they would still store EDI invoices in paper form to be certain of tax compliance. The emergence of digital signatures, new XML standards and web-based technologies prompted the EC define a framework for digital signatures (1999/93/EC) and to revise VAT law first in 2001 (2001/115/EC) and then in 2006 (2006/112/EC) to eliminate the confusion and clarify how electronic invoices can be tax compliant.

Best intentions do not always ensure the right result. This was proven when each EU member state again interpreted the rules slightly differently and implemented legislation that varied from a prescriptive approach that focused on the form and correct process involved, to a functional, more relaxed approach that focused on the end result. Because of the resulting inconsistent approaches the EC created an expert working group to study the situation and make recommendations. The working group published its findings in 2009, in which they recommended 1) meeting the needs of SMBs 2) equal treatment of paper and electronic invoices to harmonise the legal and VAT framework 3) creation of national and European forums and 4) maximum interoperability and reach 5) adoption of common standards 6) wider promotion by the EC.

The EC expert group’s collective recommendations, specifically that electronic invoices should be treated exactly the same as paper, has led to the latest EC legislation (2010/45/EU) that insists each member state allow any model for compliant electronic invoicing providing they prove a supply actually took place. The key fundamentals remain true, so what does this mean to the three common models used today?

  • EDI
  • Digital Signatures
  • “Any other means…”

Each of these models is valid providing the supply transaction is proven. Where these models vary is in guaranteeing the “authenticity and integrity” of an electronic invoice. EDI ensures this by surrounding data interchange with multiple security and audit controls combined with trading party interchange agreements. Digital signatures ensure this by employing a Public Key Infrastructure (PKI) alongside digital certificates that validate the signatures.

To ensure authenticity and integrity under the “any other means” model a company must put in place “business controls” and “audit trails” around their solution. Unfortunately it is not clear at this time exactly what constitutes an acceptable business control or audit trail. Working groups at CEN are helping to define this area but it will take some time to finalise and then more time for an established model to become available. For this reason, any organisation employing “any other means” should be aware that their model will be subject to scrutiny when audited.

So what does this mean for companies doing business in Europe in 2013? If you are evaluating an electronic invoicing solution today, you need to be sure that you are compliant tomorrow. A compliant e-Invoicing solution that encapsulates EDI and digital signature processes, provides audit trails that prove supply transactions will guarantee the authenticity and integrity of electronic invoices within the EU in 2013. How can we be so sure..? These two methods are already compliant today.