Electronic Invoicing: How it Works and Benefits
Governments across the European Union are introducing mandate e-invoicing. Get to know all details!
What is electronic invoicing?
An e-invoice is an electronically delivered invoice in a specified standardized electronic format, allowing automatic and electronic processing. Not all invoices in electronic format are e-invoices. For example, a PDF or a scanned document are not e-invoices as they do not have a structured, standard format.
Governments across the European Union and the world are introducing the mandate of e-invoicing on both B2G and B2B transactions with the aim of reducing the VAT gap and combating fraud.
Benefits and advantages of electronic invoicing
When electronic invoicing is introduced, invoices are automatically generated and transmitted by the supplier and automatically processed by the customer. Some of the benefits include:
- Increasing competitiveness between businesses by accelerating digital transitions.
- Reducing costs to businesses related to paper invoices. The electronic format allows simpler and faster management and archiving of invoices.
- Simplifying, in the long term, VAT reporting obligations for businesses by pre-filling returns.
- Anti-fraud measure. Speed up the fraud detection process, thus making the VAT reporting process more transparent.
- Reduced risk of human error and strategic management. Creates a more precise and more complex picture of economic activity to enable the organization and improvement of economic policy for businesses.
Types of electronic invoices
In summary, depending on the government regulations requiring e‐invoicing, this obligation can be implemented via two major models: the post‐audit model and the clearance model.
Post‐audit model
In the post-audit model, invoices are exchanged directly between seller and buyer, and reviewed by the tax authorities after being issued. It could also be the case that the e-invoice is sent and received via the service providers, but in any case, the tax authorities only can view a limited quantity of information, upon request, and after the invoices have been issued.
The post-audit model is in place in countries like Portugal or Hungary.
Clearance model
In the clearance model, the seller must receive approval from the tax authority to issue each invoice. Sometimes, once the different checks performed by the tax authority are done, they may add a unique invoice number or digital signature to prove the validity of the invoice. In some other cases, the tax authority is issuing the final invoice, after having received all the transaction data and carried out the correspondent checks, which can be done on the structure, format, customer information, etc. This means that governments issue the invoice on behalf of the supplier. It also means that tax authorities have all invoice information before it is sent to the client.
The clearance model is already in place in countries like Italy or Brazil.
Format of the e-invoice: PEPPOL model
The schema is the description of a specific structure for an e-invoice, often defined by the tax authority. The schema defines the semantic and the syntax models of the invoice:
- Semantic: this refers to the list of transaction data that needs to be included on the e-invoice.
- Syntax: is the electronic XML structure or language automatically readable.
The PEPPOL (Pan-European Public Procurement on-line) is a network and data exchange system facilitating this task to businesses and public administrations. This organization sets standard specifications for e-invoicing, which are according to the EU standard format EN 16931. Namely, the Peppol BIS Billing 3.0 format is the schema or format established for B2G e-invoicing within the EU.
PEPPOL also works as a delivery network – defining how invoices are issued and received, and it can be accessed through Access Points and Certified Providers. This promotes interoperability between service providers.
The PEPPOL standards are expanding not only in the EU but also in other non-EU countries, such as Australia.
PEPPOL also designed the so called “4 corner model”:
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C1Supplier who issues the invoice via C2
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C2C1’s service provider – Access point. This is a software to issue and receive invoices.
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C3C4’s service provider – Access point. This is a software to issue and receive invoices.
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C4Customer who receives the invoice via C3.
When the tax authority is involved in the issuance of the invoice or performs some controls on the invoice data previous to approving it – clearance method, two more corners are added consisting of the tax authority itself and its Access Point.
Invoice exchange within PEPPOL users is structured around the SMP (Service Metadata Publisher) and SML (Service Metadata Locator) concepts. These are services that work as address books to identify the issuers and recipients of e-invoices. SMP registers the participants’ details, including which invoices can receive. Every SMP needs to be initially registered in the SML. The latter acts as a central address book or registry able to locate the recipients of the invoices. As a result, SMP and SML services help by automating the management of businesses master data.
Service providers can join PEPPOL as certified providers.
What are the CTCs?
We refer to “CTC” (continuous tax control) to generally describe the checks and controls that tax authorities may perform at a transaction level. These may consist of the obligation to send a listing of your invoices to the tax authorities, typically in real-time. In summary, CTCs are mechanisms used by the tax authorities to improve the management of VAT and collect data on a real or near real-time basis.
CTCs include several models, such as the clearance model, previously mentioned, the centralized model, where the tax authorities must approve each e-invoice, reporting, and real-time reporting, where part of the transaction data is reported to the tax authorities in a real-time or near real-time basis.
Countries adopting these mechanisms include Spain (SII), Poland (SAF-T), and Hungary (RTIR), as well as most EU countries adopting mandate B2G e-invoicing – centralized model in Italy, Spain, France, Portugal, etc.
When is an electronic invoice required?
EU overview
E-invoices are usually required in the EU countries for transactions made between businesses and the public administration, B2G transactions. Luxembourg and Belgium recently implemented the mandatory B2G e-invoicing. There is more information here about the EU Directives issued in this regard.
Mandate B2B e-invoicing is expanding among EU and non-EU countries.
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Mandate B2B e-invoicing
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Current
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2024
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2025Germany
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It is also important to mention the VAT in the Digital Age proposal, which aims to facilitate the implementation of e-invoicing in the EU countries. Under the current rules, countries implementing mandatory e-invoicing on B2B transactions must ask first the Commission an authorization, while the ViDA proposal changes the approach by making the electronic invoices the standard.
Have a look at our article on VAT in the Digital Age proposal. This Directive aims to facilitate the implementation of e-invoicing in the EU countries.
Is e-invoice only for B2B?
No. E-invoices may be implemented for B2G, B2B and B2C transactions. As explained in the previous paragraph, B2G e-invoicing is the most spread at the moment, however, the mandate of B2B invoices is growing fast.
Some countries, like Romania, implement mandate B2B e-invoicing only for certain specific transactions.
Also, in some other countries, B2C invoices are required to include a QR code or are subject to specific reporting obligations, like the e-reporting in France. Some countries that introduced the B2C e-invoicing are Italy and Slovakia – in 2024.
What do I have to take into account for electronic invoicing?
This is a high-level overview on the steps to follow to start using e-invoicing solutions.
- Consulting phase: you should first check the specific e-invoicing format and requirements existing in your country. Some countries have implemented mandate e-invoicing on B2G and B2B transactions, therefore, in such cases you must verify the requirements. Some other countries only mandate B2G transactions.
- Review your finance process: this is especially important in case of a mandate e-invoicing scenario with a clearance model implemented. This phase consists of a review of all your finance processes to make sure that your real-time reporting of e-invoices will not attract questions (and penalties) from the tax authorities.
- Service provider: search and contact a service provider offering an e-invoicing solution according to the particular needs of your business and the specific country requirements set by the Government.
Marosa’s solution on e-invoicing in Europe
Marosa´s software is able to issue and receive e-invoices in Italy, Portugal, and Hungary. In addition, we are developing a Pan-European solution allowing businesses to issue e-invoices to any European country using a single standard file for all Europe. We will reuse this data for reporting and data analytics, hence completing the entire cycle of business-invoice-tax reporting.
Marosa is expanding the tax technology solutions available for our clients. We can help you with our e-invoicing solution for Italy, as well as the certified billing in Portugal and the real time reporting obligations in Spain (SII) and Hungary.