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Italy 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 an incredible €35 billion. Like many nations around the world, the Italian Government is taking measures to address the issue – hoping to both reduce tax evasion and increase VAT collection.
Since June 2014, Business-to-Government (B2G) e-invoicing has been mandatory. In 2016, this helped the Government successfully recover €19 million worth of tax. Over the last year, businesses have been encouraged to use the Italian governmental e-invoicing platform Sistema di Interscambio (SDI). 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.
In the next year however, the Italian Government will make B2B e-invoicing mandatory for all companies, starting from January 2019. This was originally seen as controversial due to the fact it required a derogation granted by the European Council because the mandate violates several terms of the EU VAT Directive, specifically the requirement for a buyer to agree to exchanging e-invoices and their ability to choose the format of the document. The Italian Government’s regulations would force e-invoicing on businesses without an opt out.
Now the European Council has confirmed that Italy is authorised to channel all domestic invoices via the SDI, this may result in a number of other EU countries following suit and introducing mandatory e-invoicing.
Progress in Latin America
While Italy may be causing a ruckus in Europe, what it is proposing has already been successfully rolled out in many other parts of the world. Turkey and several countries in Latin America have already introduced what is known as the clearance model. This is where all transactions (primarily e-invoices) between private businesses must pass through a government e-invoicing platform so that the tax authority can, in real-time, audit and monitor dealings between trading partners. It has helped governments decrease VAT gaps and improve efficiency. For example, in Mexico, the clearance system processes around 10 billion e-invoices annually and has lifted tax collection by 34 per cent so far.
There may be trouble ahead
Making B2B e-invoicing mandatory may not be a smooth process. 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. In addition, in Italy approximately four out of five million registered businesses are SMEs. All of these factors mean that the move towards e-invoicing by January could be problematic.
Given the state of digitisation and internet usage in Italy, the regulations could create a huge technical and cost burden for small businesses that they just won’t be able to bear. Many businesses will face a major challenge with issuing and processing e-invoices, as their ERP systems may be out-dated and incompatible with the government’s platform. 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 making preparations ahead of time.
As digital evangelists, we are passionate advocates of e-invoicing but we do recognise the move takes time, investment and buy-in from companies. In the long run, however, it brings numerous benefits to businesses of all shapes and sizes that far outweigh the initial set up costs. It is more efficient and accurate; it eliminates fraud, and according to Billentis, e-invoicing reduces the costs of handling invoices by more than 50 per cent. By outsourcing the payment process to an e-invoicing provider such as Tungsten Network, companies can hand over much of the stress associated with compliance.
How will companies outside of Italy be affected?
The regulations will apply to companies resident or established in Italy. They will also impact multi-national companies if they transact using their Italian VAT number. However even 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. Whichever category a business falls into, we have made it our mission to smooth the way and ensure these changes aren’t a cause for concern for the businesses on our network.
We understand the complexities of working and trading in Italy, having worked with Italian businesses since 2005. In fact, last year in Italy we processed £4.5bn worth of invoices through our electronic platform.
Tungsten Network partnering with businesses every step of the way
As part of our vision to be an intermediary between businesses and tax authorities, we have been working alongside the Italian government to create a product which keeps organisations on the right side of the law. We are building a capability into our system to route invoicing data through the Italian tax authorities on behalf of the businesses on the network so that they won’t need to worry about the regulations. As a conduit to SDI, our Italian customers will be able to route all their invoices, both inbound and outbound, via Tungsten Network.
The compliance landscape is continually evolving and we’re dedicated to understanding each country’s unique requirements so that the invoices we process are compliant. However, when the rollout happens in January, we will be there to support and encourage frictionless trade throughout the global supply chain.