Italy to spark an e-invoicing revolution?
1 July 2018 marked the start of a significant revolution within fintech in Europe. On that day, the first stage of Italy’s new e-invoicing legislation kicked in and the wheels were set in motion to usher in one of the biggest tax reforms Italy has ever undertaken.
It began for sub-contractors to suppliers in public procurement. Then from 1 September 2018, e-invoicing will be required for tax-free shopping (invoices issued for supply of goods to private customers with a non-EU residence).
Finally, on 1 January 2019, business-to-business (B2B) e-invoicing will become mandatory for suppliers of goods and services between all parties established and VAT-registered in Italy. It will also apply to business-to-consumer (B2C) contracts where the customer expressly requests an invoice. Exclusions will apply purely for non-resident taxpayers identified purely for VAT purposes.
Under the changes, an invoice will have to be transmitted using the Italian government’s interchange system, Sistema di Interscambio (SDI) and will have to be issued in a specific format called Fattura PR xml. If it is issued in a different format or not transmitted via the SDI, penalties may apply and the invoice would be treated as not issued.
Plugging the gap
The Italian government is taking these steps in an attempt to close its substantial VAT gap. It currently has the largest VAT gap among the EU Member States – in 2015, the difference between the expected VAT revenue and the amount actually collected was a staggering €35 billion. The move to mandate e-invoicing could recover billions of Euros.
There’s no question that Italy has a big tax problem that needs addressing. Mandatory e-invoicing has been proven elsewhere to reduce tax evasion and increase VAT collection – many other parts of the world such as Turkey and several countries in Latin America have already successfully rolled out similar initiatives. For example, in Mexico, the clearance system processes around ten billion e-invoices annually and has lifted tax collection by 34% so far.
The journey so far
Since June 2014, business-to-government (B2G) e-invoicing has been mandatory in Italy. In 2016, this helped the government successfully recover €19 million worth of tax. Over the last year, businesses have been encouraged to start using SDI, the governmental e-invoicing platform. To boost uptake of the SDI platform, the Italian government has offered multiple tax benefits to businesses, such as exemption from Intrastat reporting and priority for VAT repayments but this hasn’t really resulted in much of an increase.
Italy’s decision to mandate e-invoicing is controversial because it had to negotiate an exemption with the EU, or risk violating several terms of the EU VAT Directive. For example, the EU VAT Directive (2010/45) clearly states that a buyer must agree to exchanging e-invoices and should have the freedom to choose a document format. The Italian government’s regulations would force e-invoicing on businesses without an opt out. On 21 April 2018, Italy was finally granted an exemption from the EU VAT Directive and is now permitted to implement mandatory e-invoicing for all B2B and B2G invoices.
We expect the first few months to be a bit bumpy. First and foremost, Italy is not a leading digital economy. According to the Digital Economy and Society Index (DESI), which tracks the evolution of EU member states in digital competitiveness, Italy has the fourth lowest score. Only Romania, Bulgaria and Greece rank lower. It also has one of the lowest numbers of active internet users.
On top of this, Italy is dominated by SMEs – approximately four out of five million registered businesses are SMEs. Smaller businesses may well struggle to get their ERP systems compatible with the government’s platform by January.
Many therefore worry that these reforms could, despite best intentions of bringing efficiencies and modernisation, turn into an administrative nightmare for the Italian Government and the nation’s small businesses if they don’t start getting ready now.
Who will be affected by the mandate?
The regulations will apply to companies resident and established in Italy. It will also have implications in some cases for multi-nationals. For instance, if a UK company uses their UK VAT number to transact, the Italian company involved will have an obligation to electronically submit a cross border communication detailing the transaction to the Italian tax authority by the last day of the month subsequent to the receipt of the invoice.
Businesses need not be daunted however. There is still time for businesses to adapt their systems so that they are compatible.
We are passionate about encouraging businesses and governments to embrace e-invoicing. We believe it is a no-brainer and while we recognise that change takes time, investment and buy-in, in the long run, it brings numerous benefits to businesses.
Italy’s new legislation shouldn’t be viewed as just more red tape, bureaucracy and inconvenience from a tax-poor and interfering government. E-invoicing is proven to be more efficient and accurate – according to e-billing and invoicing specialist Billentis, it reduces the costs of handling invoices by more than 50% and it also helps reduce fraud.
Mandatory e-invoicing will bring in much needed tax revenue and as Europe watches on, we believe it won’t be long before other countries follow suit to bring their tax systems into the digital age.
By Krasimira Banova, product manager, countries at Tungsten Network