E-Archiving: Challenges and Unexpected Benefits
If you’re a digital business experiencing international growth, keeping paper records of your business transactions in a storage facility is not ideal. In 2023, it’s a bit like using rotary phones in an office – sure, they can make calls, but there are more efficient, modern solutions available.
Electronic archiving (e-archiving) is your modern solution for electronic records – ones that also provide fiscal evidence. And in some jurisdictions around the world, using e-archiving isn’t only a smart business decision, it’s also mandatory in order to manage compliance. In this article, we’ll discuss what e-archiving is, why it’s used, how it can be a challenge for Digital Platforms and Marketplaces, and the potential benefits.
Storage and archiving obligations for tax documents vary by country, and many companies are often unaware archiving is even mandatory. Don’t expect uniformity around e-archiving rules across countries – even across 27 EU member states, no two have “exactly” the same rules. In almost all countries, documents must be stored and may be subject to audit. With the rise of digital reporting requirements, it is common to see an increasing amount of e-archiving obligations. Most jurisdictions also regulate how the data is stored in order to make it easier to perform audits and ensure integrity and authenticity of the documents, which is covered towards the end of this article.
Generally speaking, the laws for storing and archiving tax documents require the documents to be kept for a certain amount of time, usually 5-10 years, depending on the country. The exact length of time is generally based on how sophisticated a country’s tax system is and how proactive their policy makers are. Fun fact: capitalist countries normally have shorter archiving periods than socialist countries – for example, Australia and Denmark have five year periods, whereas Germany and Vietnam have 10 year periods. Additionally, some countries require that the servers/data centers storing the documents are located in the country of origin, while other countries allow the documents to be stored elsewhere.
The costs of e-archiving
E-archiving is essentially trying to remove paper from the archiving process, as archiving paper invoices for years is a burden for any company (and the tax authorities). Taking away the need for physical storage and instead storing your documents on the cloud or on a server/database not only reduces maintenance costs (digital storage is less expensive than paper, in this respect), but it’s much easier to search a digital database than by physically going through thousands of documents.
Many countries mandate that documents be stored electronically in order to improve data security and privacy – and to enforce privacy and security standards. Storing documents electronically allows them to be kept in a secure location where they can be easily accessed and monitored.
Consider this: for large businesses that generate a receipt for every transaction, that could mean storing thousands of terabytes of data at a hefty cost (even if a single receipt is just a few megabytes… it adds up). For growing businesses, that can fast become a large cost that generates no revenue – and only gets more expensive over time. As a result, most archiving storage providers have “cold storage” options that are significantly more cost-effective, and may save companies money over the life of the transaction.
How e-archiving has evolved
Initially, many companies that only kept physical copies of their invoices ran into issues digitizing, as there are numerous problems converting paper invoices into electronic ones. Optical Character Recognition (OCR) solutions worked to do the conversions, but shortfalls often arose, such as not picking up all the data on the invoice (or reading data incorrectly).
As Digital Platforms purely work with digital invoices, the vast majority of e-archiving requirements are simply transferring data from one form (a PDF, for instance) into another type of electronic form, like a structured data file. In addition, many jurisdictions have regulations in respect to how the data file is structured – in order to make it easier for them to analyze the data within the document. We’ll cover those in more detail shortly.
Why e-archiving can be a net positive for your company
When you analyze your company’s previous transactions (whether it’s purchases or sales), those analytics can help you make better decisions. For sellers of goods, if they see sales more often at certain times of the day, they might look to ramp up advertising spend at those times. Having this data available is also helpful for a company's internal audit processes – and ensuring data accuracy.
That type of transactional data may not always originate from the invoice, but it will inevitably always be found there. An archiving provider should have dashboards to help you visualize data like this. This sort of analytical data has incredible benefits – but you also need to have the correct tools to analyze it.
Why e-archiving is a challenge for many companies
Let’s look into some of the reasons e-archiving is difficult for global businesses:
The retention periods for tax documents differ around the world. While they’re generally between 3-10 years, depending on the type of document or the underlying supply that is being invoiced, it can often vary.
Some countries require documents to be stored in their own jurisdiction. This can be a requirement set in the tax law, or in privacy rules, such as GDPR.
Technical storage requirements
As mentioned earlier, even countries in the EU do not have the exact same requirements. Here are some of the technical requirements that can differ across jurisdictions:
Structured file requirements
Some countries require documents to be stored in a specific format. They usually provide a schema file that’s used to describe (and help validate) the stored file.
In a few countries, it’s not only an electronic document that needs to be stored – an index file also needs to be maintained. This file contains the metadata of all the stored documents and the place where they are stored, like a table of contents within an archiving package. Italy is among the countries that require this.
The format of a file is quite important for two reasons. Sometimes companies need to be able to provide data in a particular format that allows auditors to analyze financial data quickly. Italy, for instance, requires invoices in the FatturaPA format, which is a type of XML specific to that country. Other tax authorities are more lenient, and just require a CSV/XLSX file.
While a company’s files may not need to be archived in those formats, they may be asked to provide their invoices in that format to satisfy an auditor’s request. For example, if your financial data is stored in an XML format, you must also be able to provide the data in a human readable format, as not all countries are so sophisticated that they can analyze documents in a structured form.
Integrity and authenticity of the records stored
In order to prevent changes to the tax documents after they are stored, most countries require the documents to be signed. This protects the authenticity of the origin and integrity of the document’s content. It not only verifies who created the document, but also that it’s the same document now as it was when it was created.
Encryption is sometimes explicitly or implicitly required to maintain and prove authenticity or to comply with privacy regulations. It also ensures that even if a malicious actor obtains access to your archive, that because it’s encrypted, the files cannot be read.
Besides storage rules for tax purposes, many countries have conflicting rules for document storage. Those inconsistencies in the regulations can understandably cause confusion for companies. For example, data privacy rules like GDPR say you can’t store personal data, but you might be required to store invoices in which you sold something – and your invoice might have personal data in it. Companies not archiving their invoices correctly (e.g. not encrypting their files, for one example) may be allowing other businesses to obtain sensitive data about clients a company has worked with, or the customers they’ve sold to.
Many companies doing business in the EU are familiar with the concept of a Data Protection Officer (DPO). In Italy, businesses are required to have a dedicated Conversation Manager (Responsabile della Conservazione) or Archiving manager who is responsible for making sure that their business documents are being stored according to the law. That Archiving Manager is also required to create documents that describe how the company’s archiving practice works in detail. While companies like Fonoa can deal with the e-archiving aspect, companies still are not allowed to outsource the responsibility aspect of how documents are archived.
Why e-archiving can be a net positive for your company
Because the root of the word “e-archiving” is “archive” – it’s natural to assume that there are only long-term benefits. After all, it takes a long-term outlook to see the benefits in storing data over an extended period of time. But your company can also realize short-term benefits from e-archiving as well, including:
- potential cost reduction
- audit protection
- data governance and improved internal organization
- greater control
How Fonoa can help
Fonoa allows you to issue tax invoices in locally compliant languages and formats, with support for third-party or self-billing – and then will archive those invoices on your behalf. Fonoa’s dashboard also provides valuable insight into the data sourced from your invoices. In addition, you can instantly determine the tax treatment of your transactions globally using Fonoa’s flexible and customizable tax engine. Our easy-to-integrate solution automatically keeps track of changing rates and rules to help your business stay compliant. Get in touch to find out more.