Designing a legally compliant e-invoicing solution

Submitted by Tonnis de Boer on Tue, 12/20/2011 - 15:17 in
Tonnis de Boer's picture

The key to implementing a successful e-invoicing process is to design and set up a solution that meets both business and regulatory requirements. Especially in a cross-border environment the legal design is an essential part where you and your business partners want 100% assurance. There is not so much ‘good’ you can do in sending an invoice, but you can do it very ‘wrong’ when the auditor arrives.

Compliancy questions might come up in 10 years

Many companies do not make a proper distinction between doing the right thing (being compliant now) and being able to prove one did the right thing in the past (auditability later).

The result of overlooking this evidence aspect is that appropriate controls may be put in place without any improvement of the company’s compliance position because they cannot at a later stage be demonstrated.

The basic rules to avoid over-simplification and over-complexity are:

  • Start with a legal design which views transactions from a tax, and particularly a tax audit, perspective; and
  • Take a multidisciplinary approach that pays equal attention to business process, technical and legal requirements.

Starting design discussions from a legal perspective enables all parties involved to have a clear understanding of how transactions will be presented to tax administrations up to a decade (or more) from now. The proof of a good e-invoicing system will always lie in its ability to allow quick and easy audits by tax inspectors; therefore, a legal design process should work its way back from the question of how to quickly and cost-effectively prove that invoices meet all requirements.

What is the real invoice?

A corporation-wide view of the key points in the invoice life cycle should be the first goal. To begin with: when and by whom is the invoice issued? In a world where many companies are integrating their ERP and supply chain automation systems, it is quite common for different parts of the same enterprise to refer to different datasets as ‘the invoice’.
From a legal perspective, only one of the different data sets can be the original tax invoice.

Tax law is based on the simple model of two distinct taxable persons conducting a transaction. There is always one buyer and one supplier and a delivery of goods or services according to a contract. The supplier is ordinarily obligated to issue an invoice. No matter how complex a company's commercial and technical reality, the company has to conceptually reduce, for tax purposes, its flows of goods, services and money to a series of defined buyer-supplier transactions. It therefore has to start its analysis of invoicing requirements and compliance solutions from this model. 

Gap analysis

If the future e-invoicing system is based on an existing B2B system and back-office infrastructure, then a fit/gap analysis should be performed based on the principal processes and controls needed in any invoice life cycle.

In sending invoices the key steps are:

  1. Creation of invoice
  2. Exchange of invoice to receiver
  3. Storage

In receiving invoices the key steps are:

  1. Exchange of invoice from sender
  2. Receipt of invoice
  3. Storage

For each of these steps, the following points should be addressed:

  • High-level process description
  • Process owning legal entity
  • System owning legal entity
  • Physical location of hosting and operation of the system(s) involved
  • Relevant agreements including on all levels of outsourcing
  • Technical details of tax-relevant controls
  • Evidence provision of the controls
  • Error and exception handling

Once the identified gaps have been mended, these same principal processes and controls should be the core of the basic documentation each company engaged in e-invoicing uses so that tax authorities can understand the system. This documentation must be properly managed so as to ensure that an auditor can quickly consult relevant materials from the time an invoice was processed. The legal design should drive the technical design, but it should also drive the agreements that will be needed between or among different parties to ensure an end-to-end compliant system. The initial technical and agreement design should be performed in close coordination, so that optimum use can be made of existing or planned interfaces and business contracts.

Business, legal and technical

Overall, the design of a compliant e-invoicing system must take into account:

  • business processes
  • legal requirements
  • and technical parameters.
  • In organizational terms, an e-invoicing project needs to include the legal, tax, IT, finance, accounts payable/receivable and supply chain experts from within a company. In addition, expertise from across different legal areas should be included so as to ensure that all legal and business imperatives are closely coordinated to avoid gaps or conflicts when deciding about controls.

    Feel free to contact me if you need any assistance in this area.

    Tonnis de Boer (tonnis@innopay.com)

    Disclaimer: this blog is partly based on information provided by Trustweaver.com, all rights reserved.

     

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