E-archiving for VAT: Compliance in a Digital World

Jun 25, 2020 | Digital Services

The importance of compliant archiving of original invoices and similar tax-relevant documents has long been underestimated. For any company, the e-invoice archive is where the evidence of your tax compliance lies, but in today’s highly digitized global environment that evidence tends to be dispersed over multiple systems in multiple countries. Both understanding what rules apply for these records as well as ensuring compliance with them in an ever-changing regulatory landscape can be daunting for multi-national companies.

Against this backdrop, the digital transformation carried out by tax authorities across the globe shows no sign of slowing as governments continue their quest to reduce fraud and tax evasion to close tax gaps. More tax authorities are enforcing their own specific technology-based continuous transaction controls (CTC) frameworks.

The introduction of CTCs coupled with the transformation of business is fundamentally changing the nature and importance of archiving. Whilst many companies have long considered archiving as simply storage, this has now become an outdated and potentially dangerous view.

This extract (from Sovos white paper) dispels that myth and illustrates why archiving today is more than just storage, and more important than ever.

THE ROLE OF ARCHIVING IN VAT COMPLIANCE

VAT requirements historically follow three broad categories, each of which corresponds to a certain period from the perspective of a company that must meet them:

Invoicing and storage requirements

At a high level, the requirements that apply during the processing of business transactions break down into requirements related to:

  • The form of invoices

Most countries have abolished such requirements, but in some cases, businesses still use pre-printed paper invoices obtained from the tax authority; these types of requirements often exist to give the tax authority tight control over invoice numbering and integrity.

  • Minimum content requirements

In most countries with VAT, an invoice is only recognised for VAT purposes if it contains certain information such as the name of the supplier and the buyer, the type of supply, etc. In addition to VAT and other indirect tax laws, commercial and other laws may also impose certain requirements on the content of invoices.

  • Tax determination

For every invoice, the supplier must determine the applicable law and decide on that basis what the applicable tax rate is; in addition, the application of certain tax rates requires a reference to an article in the VAT law to be mentioned on the invoice, as well.

  • Timing

The moment that an invoice must be issued is often specifically dictated by the VAT law.

  • Record keeping

An “original” invoice should be archived by each trading partner as evidence of the underlying supply; archiving requirements often further specify the retention time, location and specific features – such as human readability – that must be present to ensure auditability.

Periodic reporting requirements

These are reports for business transaction data in summary or aggregate form or full data from individual invoices. Historically such reporting requirements have often been monthly, with certain less-common reports being quarterly or yearly.

Audit requirements

These requirements come into play when, during the mandatory retention period for invoices and other records and books – typically seven to 10 years – a tax authority may request access to such

records and books to assess their correspondence to reports. These requirement types and their relative importance for businesses and tax authorities have changed significantly in recent years. As further described in this white paper, the overall trend is clearly toward various forms of continuous transaction controls (CTCs)

CTCs defined

Continuous Transaction Controls (CTCs) refers to legal obligations for businesses to submit authenticated transaction data in real-time or near-real-time to digital platforms operated or controlled by tax or other authorities for purposes of automatically authorizing or auditing such data. The ultimate goal of CTCs is often for the tax administration to use the data received to constitute its own ‘source of truth’ based on which it can take a proactive rather than a reactive role in assessing indirect taxes. CTCs include schemes with and without a requirement for the legal invoice to be exchanged between the trading partners in electronic format.

FUTURE-PROOF E-ARCHIVING AS AN ANCHOR FOR YOUR CTC STRATEGY

With tax authorities spending billions on next-generation online invoice control systems, companies trading internationally come under pressure to implement global e-invoicing in a consistent, scalable and cost-effective manner. The quality of your compliance strategy will consequently become a competitive differentiator – and e-archiving will increasingly play an important role in getting it right.

Classic arguments for a robust approach to e-archiving

E-archiving is a base requirement nearly everywhere

E-archiving is a common denominator. E-invoicing rules vary from country to country, but most countries require the “original” of an invoice to be e-archived. Contrary to transaction compliance, where compliance-specific processes can vary wildly, e-archiving can be done in a compliant manner by using a “superset” approach to country rules, which requires relatively little country-specific logic as part of your e-archiving solution.

An e-archiving strategy is half of the work toward global compliance

The compliant e-archive is where your ultimate evidence is. It’s also the visible part of your process. For tax authorities worldwide, this makes e-archiving a key consideration in assessing your compliance. Yes, there are many requirements that relate to the transaction part of the e-invoice lifecycle, but getting e-archiving right means you’ve done pretty much half the work toward a full e-invoicing strategy already.

Having an e-archiving strategy helps you stay in control of your own destiny

Multi-national companies will be less vulnerable to pressure from subsidiaries or departments that seek a quick implementation of e-business solutions that include e-invoicing and e-archiving through local solution vendors. If you don’t have an e-archiving strategy, you’ll invariably end up with a fragmented e-archiving landscape and vendor lock-in. Extracting yourself from such relationships can be close to impossible.

E-archiving is a common anchor for all transactions in your global architecture

If you know in which e-archive you’re going to store your original e-invoices, it becomes easier to trace a “compliant path” back from that ultimate resting place to the different applications, service providers, trading partners, processes, product lines, and countries where e-invoices originate. To design a winning approach, our advice is to start thinking about the big picture with a solid e-archiving blueprint at the centre. There are many practical reasons why companies often end up e-archiving their invoices and other important transaction data from many different systems and external transaction automation platforms. This, however, does not necessarily mean that a company must accept as many business and compliance approaches to e-archiving as it has e-archives. The ideal architecture is a single underlying e-archive with consistent access and compliance management but total flexibility as to which systems or platforms send data to that e-archive.

 

Source Credit – Sovos