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What Is E-Invoicing?

What is e-invoicing, and how can businesses prepare to adopt e-invoices in their organization? Discover the current state of e-invoices in Europe, and how implementing e-invoicing can improve productivity and accuracy in the AP department.

You may have heard of e-invoicing before. After all, the idea of e-invoicing is not new. Electronic invoices have been around for 30 years, using electronic data interchange (EDI) and XML formats. More recently, the main driver behind e-invoicing adoption has come from a government level.

In Europe – the world’s most active region with regard to e-invoicing – a series of legislation has been created to promote the uptake of e-invoicing across the European Union. In fact, as of April 2020, EU countries are required to transpose the European Union’s eInvoicing Directive into their national laws and comply with its associated standards.

What is E-Invoicing?

Let’s take a step back for a moment, though and discuss what e-invoicing means. The most commonly used definition is that “electronic invoicing is the exchange of an electronic invoice document between a supplier and a buyer.” In other words, it’s a form of billing that is presented to the buyer in electronic (rather than paper) format via a predefined structured data exchange.

This electronic exchange can be enabled by two main options. The first is a point-to-point connection between the buyer and seller, which is most often the case when using EDI invoicing. The other option is through a network connecting multiple buyers and sellers. The network model is most commonly used today where the growth of e-invoicing is expected, thanks to its scalability and efficiency for all parties involved.

What is an E-Invoice?

An e-invoice is an electronically delivered invoice in a specified standardized format.

E-invoices contain invoice data in a structured form and can be automatically imported into the buying organization’s accounts payable system. They typically include a visual presentation of the invoice data. However, they can be temporarily rendered during processing or transposed into visual formats.

The use of e-invoices requires two key functions:

  • The e-invoice needs to be created with the correct structure. '
  • The e-invoice needs to be transferred from the seller’s system to the buyer’s system.

E-invoices are not:

  • Unstructured invoice data issued in pdf or Word formats.
  • Images of invoices such as jpg of tiff.
  • Unstructured HTML invoices on a web page or in an email.
  • OCR (Scanned paper invoices).
  • Paper invoices sent as images via fax machines.

E-Invoicing Legislations in the European Union

In 2014, the European Parliament voted for the Directive on electronic invoicing in public procurement:

“The Directive calls for the definition of a common European standard on e-invoicing at a semantic level, and additional standardization deliverables which will enhance interoperability at the syntax level.“

Put simply, the semantic level refers to a standard set of data fields that an e-invoice should include. And the syntax level defines the technical format for the data exchange. This means the EU Directive aims to set a standard for both what the e-invoice should contain and how it should be transferred to the receiving part.

Per the directive, as of April 2019, all governmental organizations are required to be able to receive e-invoices. Some countries, including Sweden, Norway, Spain, and Denmark, have taken the legislation one step further making it mandatory for suppliers to provide e-invoicing if contracting with a governmental organization, in particular in the case of public tenders.

As of April 2020, adhesion to the standards set forth in E-Invoicing Directive 2014/55/EU is required by all countries within the European Union. These standards were designed to streamline differences in e-invoice formatting, thus cutting down on confusion and lowering processing expenses. All e-invoices need to comply with these basic standards, but rules specific to each country will still apply.

Tax Control Drives Mandatory E-Invoicing – Italy First Out in Europe

Tax control and compliance is an essential driver behind the governmental push for e-invoicing in Europe. In countries where the tax gap is large, e-invoicing can be used to combat tax fraud, evasion, and avoidance. This strategy has already been applied by several countries in Latin America including Chile, Brazil, and Mexico, where adoption of e-invoicing is high both in business-to-government and business-to-business transactions. Joining this list is India, where e-invoicing is also set to become mandatory beginning in October 2020. 

It is no surprise that Italy, with the largest VAT gap among the EU members, was the first European country to introduce a mandatory e-invoicing model for all business transactions. The Italian legislation is built on a clearance model where the seller registers the invoice in a government invoicing portal. The buyer confirms receipt and will only pay the invoice if it has been registered in the portal. This way, the Italian government can transition to real-time or near real-time tax control as opposed to the post-audit model.

Countries with similar tax challenges as Italy, including Spain, Portugal, and Greece, are also looking at this type of mandatory e-invoicing model.

What is PEPPOL?

PEPPOL is a non-profit international association with both public sector and private members, facilitating cross-border e-invoicing by providing its stakeholders with widely accepted technology standards and specifications.

It is crucial to understand that PEPPOL is not an e-procurement platform. Rather, it provides a set of technical specifications that can be implemented in existing e-procurement solutions and e-business exchange services to make them interoperable between disparate systems across Europe.

The PEPPOL structure also includes a network used as a directory where members, via a PEPPOL Access Point, can register their acceptable e-invoice formats (as long as these formats are on the EU approved list) to ensure smooth and accurate delivery of e-invoices.

PEPPOL Access Points connect users to the PEPPOL network and exchange electronic documents based on the PEPPOL specifications. These access points are often so-called VAN operators, or service providers, that have the data exchange as their core business. But lately, other providers in related business areas (such as ERP systems and accounts payable solutions) have been certified to be PEPPOL access points on behalf of their customers.

Both the buying and selling organizations need to be connected to a PEPPOL access point, but it does not need to be the same operator on the buying and selling sides. The e-invoicing networks’ interoperability can be compared to the model used by mobile phone operators where local phone operators facilitate cross-border calls by connecting via a global network, aka roaming.

Businesses Need to Prepare to Send and Accept E-Invoices

Significant cost and time savings can be achieved by removing paper and manual processing from your invoicing. But the real benefits of e-invoicing come with the level of integration you can achieve, not only with  your trading partners but also between your invoicing software and other business systems. For accounts payable in particular, integrating e-invoices directly into the AP automation solution further drives touchless invoice processing - which frees up time and resources for more value adding and strategic tasks.

If your organization wants to provide e-invoices to European buyers or streamline the reception and processing of cross-border e-invoices, we recommend that you partner with a PEPPOL access point. Bear in mind that this might be someone you already work with, such as your ERP partner or AP automation solution provider. Although PEPPOL is far from the only e-invoicing network in the world, it is the one showing the highest growth rates, and many industry analysts believe PEPPOL will be the dominant network in the future.

Starting to send and receive e-invoices can be an excellent first step of your organization’s digital transformation journey, and a critical step in ensuring that your business operations are efficient and scalable to support future growth.

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