What ViDA means for the rise of global e-invoicing

The recent European Commission’s VAT in the Digital Age (ViDA) proposal is a game changer for global businesses and their tax functions.

On 8 December, 2022 the European Commission (EC) published the VAT in the Digital Age proposal (ViDA). The proposal includes measures to modernize the VAT system to avoid fraudulent activities, primarily through digitalization. It also aims to address the VAT problems created by the growth of the platform economy.

ViDA's series of far-reaching VAT measures, which aim to reduce the €93b VAT gap in the EU and to make the VAT system more efficient for businesses, revolve around three pillars: e-invoicing and digital reporting, the single VAT return for trading across the EU, and the platform economy. One of the key proposals is the move to real-time digital reporting based on e-invoicing for businesses that operate cross-border in the EU.

ViDA is "a complete game changer at the European scale," says Gwenaëlle Bernier, International Tax Partner at Ernst & Young Société d'Avocats – France.

ViDA will drive fundamental change within organizations. The tax function will play a critical role, but the interdisciplinary impact is significant, as are the opportunities it creates. It is a powerful potential lever that tax teams should use to improve their processes, data, and quality issues. "One of the great things about e-invoicing is its business-wide impact. It is not just tax-led, nor IT-led. It will touch finance, operation, procurement, IT and tax. It impacts the vast majority of the business because before being a tax process, it's a business process," says Pierre Arman, EY Global Tax SaaS Go-to-Market Leader.

This shift towards digital invoices has been in development by Italy and France for a few years, and it is expected to become the norm in every Member State. This means that all businesses operating in the EU will have to transition to digital invoices.

The advantages of e-invoicing and real-time VAT data for tax authorities are clear. It can assist in closing VAT gaps, prevent unintended errors, enhance risk management capabilities and early detection of fraud schemes. Near real-time availability offers even greater possibilities for quicker and more in-depth analysis of economic developments and forecasts. While businesses can incur high implementation costs, electronic invoicing can, over time, reduce business spending and stimulate the broader digitalization of taxation-related processes.

Data quality is critical

"Businesses are probably spending more money than they need to. There is an opportunity here to look at the process and the data. Time will be better spent committing to a larger strategy even if that strategy is only for the next two to three years," according to Ben Woodfield, UK&I Indirect Tax Partner, Ernst & Young LLP.

Data quality is the most critical factor in e-invoicing. Businesses need to have the relevant data capture processes and controls that ensure high data quality in place. That data is going to be subsequently relied upon not just by systems for e-invoicing submission solutions but possibly by subsequent indirect tax processes, such as traditional VAT return preparation processes and other downstream submission systems. "Data quality is where organizations will get caught out. Data is as critical as selecting your technology solution," adds Woodfield.

Businesses also need to be conscious of their ERP system's current functionalities and capabilities with regard to VAT. In the future, they may have to increase functionalities to reach that data quality level.

The global opportunities created by ViDA

Apart from compliance and preparation, there are obvious opportunities to be gained by the tax function and businesses. "Like with any change, you're either going apply a short-term fix and will probably have to rip it off in two or three years and redo it again. Or you're going to say, 'Actually, how about we take that opportunity to enhance what we are doing? Future-proof how we're going to be set up going forward so we can leverage what we do now for the future challenges the digitalization of indirect tax will throw at us?’” says Arman.

ViDA gives the tax and finance functions access to live granular transactional data. They should harness it to create key performance indicators (KPIs) and data analytics for the benefit of their business. To determine, for example, which clients pay on time or the type of product designs that sell best. Again, data quality is vital because when a business transmits data externally, notably to tax authorities, it has to be good. Up until now, many finance departments have been using aggregated data.

Another benefit is the management of cash. Businesses can determine when cash is paid more quickly and by whom and organize their business development based on those figures. Ultimately, the most significant opportunity ViDA provides is a genuine shift to digital.

"It's a huge business and commercial challenge. Quite a lot of investment is going to be required. But if you flip that around and think about the potential upside, I think this is the single biggest potential lever that tax teams can use to improve the processes, data and quality issues they've been facing for years," says Liam Larke, UK&I Indirect Tax Partner, Ernst & Young LLP. "It is an opportunity to completely overhaul how they manage indirect tax reporting within the organization."

Businesses should use ViDA as the backbone of a business case for investment in a particular technology or as a reason to improve upstream finance processes or improve legacy ERP issues. Use a holistic approach, considering how the processes, data and technology all interact.

ViDA provides an opportunity for tax leaders to get the rest of the organization to stand up and realize that they need to make fundamental changes and build tax requirements into every stage of the process. "If you can successfully align that with other finance transformation initiatives, such as an ERP upgrade or implementation, which lots of our clients are also managing at the moment, that can potentially set your business up from a tax reporting perspective for the next 10 to 20 years," adds Larke.

The country-by-country rollout of e-invoicing regulations has significantly different maturity and complexity levels globally, so having one global e-invoicing platform to manage at scale has become more of a necessity. "Indirect tax is data-driven, so it's impossible to do our job without technology," adds Arman.

There is a lot businesses can do to prepare outside of the technology solution. In terms of setting the strategy, thinking about data quality and the processes in their organization that will ultimately support compliance.