By Abigail Myers-Antiaye, Global Country Compliance Manager at Tungsten Network
As you may know, the Italian government is on the verge of making all B2B e-invoicing mandatory in an attempt to close its VAT gap. This decision could recover billions but also violates several terms of the EU VAT Directive, potentially pushing the EU to shift its policies. In addition, the Italian Government’s initiative could see a domino effect across Europe as other EU members follow suit.
We’ve been following the situation closely having worked with Italian businesses since 2005. There’s no question that there is a big problem – 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. Understandably, 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.
Italy’s e-invoicing journey
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 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, the Italian Government looks set to extend its regulations further, making B2B e-invoicing mandatory for all companies from January 2019. This is controversial because unless it negotiates an exemption with the EU, it will violate 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.
The EU is therefore faced with a conundrum – it must either negotiate an exemption for Italy or shift its policy on e-invoicing, potentially triggering a number of other countries to follow suit and introduce mandatory e-invoicing.
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 such as Turkey and several countries in Latin America. 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.
A bumpy transition?
However, there are a number of challenges which may make the adoption of e-invoicing in Italy 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. In addition, in Italy approximately four out of five million registered businesses are SMEs who might struggle to get their ERP systems compatible with the government’s platform by January.
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 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.
As part of our vision to be an intermediary between businesses and tax authorities, we, at Tungsten Network, 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. As a conduit to SDI, our Italian customers will be able to route all their invoices, both inbound and outbound, via Tungsten Network and don’t need to worry about whether they are compliant or not.
As digital evangelists, we are passionate advocates of e-invoicing but we recognise that these changes will take time, investment and buy-in from Italian companies. In the long run, however, the Government’s mandate will bring numerous benefits to businesses of all shapes and sizes that far outweigh the initial set up costs. On top of bringing in much needed tax revenue for the State, e-invoicing 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. It is the right step for Italy to take and it won’t be long before other countries act similarly to bring their tax systems into the digital age.
