What You Should Know About E-Invoicing

An electronic invoice is an invoice that is issued, transmitted and received in an electronic format. A distinction is made between:

• structured data (e.g. EDI, XML),
• unstructured data (e.g. invoices in PDF, TIF, JPEG, Word format or e-mail text)
• hybrid data (e.g. ZUGFeRD or Factur-X).

The available transmission/reception channels include e-mail, DE-Mail, computer fax, fax server, web download, Peppol or web service. Invoices received in paper form and converted to electronic formats do not fall under the definition of electronic invoices under the VAT Act.

It is not very efficient to print, envelope, stamp and send a digital invoice on paper only to have it manually captured and digitized again by the recipient before it can finally be paid.

Such an invoice process is complex, expensive and not environmentally friendly due to the use of paper and transportation resources. Due to this, German legislation has placed the electronic invoice on an equal footing with the paper invoice (01 July 2011). Since then, electronic invoices have been sent without an electronic signature and, for example, by e-mail.

In response to the European Directive 2014/55/EU the legislator defines an electronic invoice in the Act to promote electronic government (E-Government Act - EgovG) as follows:
An invoice is electronic if:

1. it is issued, transmitted and received in a structured electronic format and
2. the format enables the invoice to be processed automatically and electronically.

Source (translated): §4a Para.2 German EGovG

Sending invoices as PDF files does not meet these requirements, because the recipients cannot automatically process PDF files. Businesses expect to receive electronic invoices in a structured format that can be understood automatically.

Structured invoice formats with Electronic Data Interchange (EDI) data are not readable by humans. Recipients must visualize structured electronic invoices for internal invoice verification, release and subsequent archiving.

Hybrid invoice formats avoid this disadvantage by combining the machine-readable structured format and the human-readable visual representation. Technically, this can be achieved by embedding an XML structure in a PDF file. The following figure 1 shows, for example, a ZUGFeRD invoice containing a human-readable PDF with structured invoice data in an XML format.

"It's difficult to make predictions, especially about the future." This quote by Mark Twain also applies to e-invoicing, except that it is a matter of "when” and not “if” electronic invoicing will replace paper invoicing on a large scale.

The European Commission has already done everything necessary to encourage the move away from paper invoices by gradually making e-invoicing mandatory. Whereas in the European Union in 2017, 70 % of all invoices were still exchanged on paper and 22 % in the form of PDF files that cannot be processed electronically, the tide has been turning. Structured and hybrid invoice formats now account for more than 50 % of invoices. The prediction is that this trend will continue and the number of paper invoices and PDF invoices will be reduced to a bare minimum.

Germany is by no means one of the pioneers when it comes to e-invoicing. The southern and eastern EU countries, such as Italy, Spain, Croatia and Hungary, are outpacing Germany in the implementation of the European Directive 2014/55/EU. Nevertheless, electronic invoicing in public administration has also become widely accepted in Germany since 2020 and 2021, and companies are well advised to equip themselves promptly with appropriate digital solutions for e-invoicing, if they have not already done so.

Are you a public sector supplier? Is your company internationally active? If your answer is yes to either question, it is very likely that you will need to send invoices electronically, either now or in the near future.

Despite the enormous cost savings potential through the digitalization of incoming and outgoing invoices, governments are the driver of e-invoicing.

The EU standard 2014/55 regulates e-invoicing for public contracts and required more than 300,000 public administrations in EU countries to be ready for e-invoicing since November 2018, in terms of systems, and since November 2019, in terms of processes. Since 45 to 65 percent of all companies in a country are typically public sector suppliers, the aforementioned EU standard is predicted to be the driving force behind e-invoicing. However, unstructured e-invoices are not electronic invoices within the meaning of this Directive.

24 out of 27 EU countries (as of February 2020)

• have implemented a solution for electronic invoicing in the B2G sector,
• offered suppliers electronic invoicing or
• already requireed a solution for electronic invoicing in the B2G sector.

More and more countries are demanding e-invoicing: The main reason for the growing number of invoicing or e-invoicing regulations is trivial.

Governments are increasingly looking for new ways to enforce their tax laws and collect more of the expected VAT. The VAT GAP Report 2022 shows that EU member states are estimated to have lost €93 billion in VAT revenue in 2021 - or in relative terms, 9.1% of total expected VAT. The so-called tax gap between the expected VAT (also known as the VAT Total Theoretical Liability, abbreviated as "VTTL") and the actual VAT collected is likely to continue its downward trend.

The creation and delivery of paper invoices are highly manual and inefficient business processes for suppliers. These processes result in high costs, errors and late payments.

E-invoicing for outgoing invoices optimizes these internal processes, saves costs, increases the transparency of internal processes and improves the environmental footprint. Companies can improve their customer loyalty and secure market opportunities and competitive advantages.

The process of digital invoice delivery can be divided into four simplified steps: entry, preparation, portal and transfer/export.

The processing of incoming invoices is in a continuous, automated process from the recording of invoice receipts to the final posting:

The digital invoice receipt process can be categorized into three steps: receipt, preparation and processing.

Internationally active companies are increasingly required by government regulations to create and send their invoices electronically. However, different legal regulations apply in each country. E-invoicing regulations already exist in more than 65 countries worldwide, and that number is growing.

Post audit: The regulations of the individual countries specify a minimum period over which electronic versions of invoices must be stored for possible automated auditing. Currently, the post-audit procedure is still predominantly used in the EU.

However, the move away from the highly time-delayed post-audit process and reorientation towards a centrally regulated e-invoicing model and real-time and near real-time transaction-based tax reporting and controls (clearance processes, also known as Continuous Transaction Controls 'CTC') are becoming increasingly entrenched in the EU.

Continuous Transaction Controls to reduce the tax gap
Combating tax fraud and tax evasion under simultaneous pressure of stagnant economic growth, rising government spending and inflation increases the motivation for EU members to rapidly implement Continuous Transaction Controls ("CTC" or "CTCs").

International regulations are changing at a rapid pace. The number of countries that require some form of e-invoicing is constantly increasing, and the numerous regulatory details of individual countries that need to be taken into account increase the complexity of e-invoicing for internationally active companies.

If maximum control over your invoicing and settlement processes is your top priority, the classic, license-based on-premises installation is a good choice. For the greatest possible flexibility, a cloud solution is a good choice. There is even more to be said for cloud-based invoice processing: fast implementation, simple integration and high operational security.