Untangle e-invoicing & digital reporting with this practical structure
TLDR; e-invoicing is a complex area not assisted by the lack of a transparent mental model. You can think of e-invoicing and DRR in seven chronological stages: 1) scope 2) onboarding, 3) data collection, 4) data formatting, 5) transmission & storage, 6) technical responses, and 7) authenticity & integrity.
When we listen to “expert” discussions on this topic it appears that this space sounds more complex and confusing than it needs to. Indeed, we’re convinced that many specialists do this deliberately to make the area inaccessible to others.
With the planned global expansion of mandates in this space, international businesses recognise that they must upskill their staff to understand the e-invoicing and digital reporting landscape.
However, newcomers are frustrated by jargon, confusing terms, fluid definitions and the lack of a practical structure on how to begin to think about this space. Believe us. We know. We were there not too long ago.
While we can’t fix everything with a short “listicle”, we can try to make things easier by sharing a ‘mental model’ that has served us well to date.
We view this space in seven chronological steps (or buckets, or areas …call it what you will) that are common to all country mandates. They are: 1) scope 2) onboarding, 3) data collection, 4) data formatting, 5) transmission & storage, 6) technical responses, and 7) authenticity & integrity.
This model didn’t just simplify the learning curve; it also provided a structured approach to implementation and compliance, ensuring that businesses can meet their reporting obligations efficiently and accurately.
You can use this to steer internal discussions about new mandates or simply to break up your process into conceptually inter-connected and manageable chunks.
We hope you find it helpful.
Scoping sets the stage for understanding the breadth and specifics of the e-invoicing and DRR. In this initial step, businesses get a comprehensive understanding of the extent of their e-invoicing and DRR requirements by examining various factors.
Key questions include identifying the types of transactions that fall under the e-invoicing mandate, such as Business-to-Government (B2G), Business-to-Business (B2B), or Business-to-Consumer (B2C). This differentiation is important because the rules and standards can vary significantly across transaction types. For instance, B2B transactions might be subject to e-invoicing and B2C transactions might be subject to real-time reporting in the same country. This means that different actions must be taken for different transaction types.
Additionally, the inquiry into whether any threshold limits exempt smaller businesses from certain e-invoicing obligations is vital for ensuring compliance without overburdening small-scale operations.
Another aspect worth knowing upfront for international businesses is how inbound cross-border transactions are treated, especially in cases where a non-resident business is VAT-registered. This involves navigating the complexities of international tax law and understanding how these transactions are reported and taxed.
Furthermore, understanding whether AR and AP systems are both affected is another vital point to clear out from the beginning of the project. Most e-invoicing systems have an impact on AR processes, however, AP systems are also affected by regulations in more and more countries as buyers are expected to be able to receive e-invoices either from the tax authority portal or from their suppliers.
Establishing a clear scope at the outset helps businesses tailor their e-invoicing systems and processes effectively, ensuring they meet all relevant legal requirements while optimizing their compliance efforts. Our Fonoa country guides section on the Fonoa website has an exceptionally detailed e-invoicing and digital reporting section.
The focus of onboarding is to understand the registration/certification process to start to comply with the local reporting obligations. You need to know how your business can get authorized to report the data.
What is important to note is that the onboarding process varies vastly between countries depending on the type of e-invoicing or reporting system they are introducing. Some countries give you criteria to check against and expect you to confirm to see if you meet them. Others publish an open list and notify taxpayers directly that they must register.
Typically, you would want to know if your company is ‘automatically’ enrolled for reporting. If not, how is the application process done - is it online or offline, and are there physical forms or documents that need to be submitted? For non-resident companies, will the documents need to be authenticated with a local embassy or consulate (it’s happened!).
Some countries require you to register in person (yes, for a director or company representative to turn up at a local office), while others have a digital portal which greatly facilitates faster and more expedited onboarding.
3. Data collection
This step refers to understanding the data elements that need to be collected, stored, and validated by businesses and then transmitted to governments.
Most governments require the transmission of standard invoice data e.g. invoice number, date, VAT/GST amount, and company identifiers. However, some go beyond by requiring the communication of specialized data like fiscal markers or specific tax codes.
Some governments also have procedures for validating data accuracy before submission. For example, some authority systems will run basic calculations on whether the Net, Tax and Gross line items sum up. Others will also impose tolerance thresholds for rounding (custom rounding logic may need to be applied for each country).
Several countries now require the validation of taxpayer registration numbers (VAT/GST numbers) in the submission process. If these numbers do not match, then the transaction reporting can be rejected. Incidentally this is one of the reasons we built a global tax ID validation tool which handles such use cases in countries like Mexico.
4. Data formatting
The "Data Formatting" section covers how the information, prepared by businesses, aligns with the specific standards and requirements set by tax authorities. This step involves converting invoice data into a structured format, such as XML or JSON, as per the mandates of different jurisdictions.
The formatting often needs to adhere to a particular schema version, which defines how the data gathered above should be organized and what elements it must contain.
Tax authorities often update their standards or schemas to accommodate new regulations or improve data processing efficiency. Our one piece of advice to save you a lot of maintenance headaches is to note how and where these updates are published.
Ensuring proper data formatting, facilitates smoother interactions with government systems, reduces the likelihood of errors or rejections, and maintains compliance with e-invoicing regulations.
5. Transmission & storage
In this step you need to understand how the data is transferred from taxpayers to the authorities and where information needs to be stored (e.g. e-archiving rules).
In addition to structuring the data (as done in the formatting step above), the transmission stage may also involve applying security mechanisms to maintain confidentiality and integrity during the transmission of data to the tax authorities. Transmission can be handled via secure electronic channels like dedicated government portals or APIs.
When it comes to storage it is important to know if cloud-based storage solutions would comply with local e-archiving laws or if the information must be stored in-country on domestic servers to adhere to privacy and other cyber security obligations. This local storage requirement has proven extremely difficult in some countries to comply with for multinational businesses.
Furthermore, when it comes to storage there may also be a need for backup mechanisms to ensure data integrity and availability.
Some countries require e-invoice files to be searchable or named according to a naming convention.
6. Technical responses
Responses from government systems to taxpayers about the information they submitted are essential. Taxpayers need to know if they have successfully discharged their reporting obligations or, if there was an error, what it was and how it can be corrected.
Successful confirmations are helpful so that you are not left wondering whether or not. However, some countries provide these confirmation days after your submission.
Moreover, there are (rare) cases where governments simply don’t provide a response... but they do provide an error if you attempt to submit the same information twice (deduplication logic). Some businesses have “used” this deduplication logic, to gauge if their initial submission was accepted (i.e. submit the identical information to see if they get an error that says it has already been submitted).
Rejection or error notices are absolutely essential - currently, these vary by country. So if you are implementing a new territory or jurisdiction your teams will want to learn what the new error responses are, what they mean, and how they can be resolved.
This is important because different errors will have different resolution paths (e.g. if your information was rejected due to a system outage or a validation you will need to take different actions). Understanding why error arose removes the time needed to investigate and accelerates the time to a resolution.
We have observed cases where a submission contains several errors while the government response may only indicate one (i.e. seemingly some authorities runs checks in a sequence that stops once one error is identified). This is one reason why performing your own validations and not only relying on government checks is advisable.
7. Authenticity & Integrity
This stage focuses on verifying that the e-invoice is both genuinely issued by the authorized entity or business (Authenticity) and remains unaltered during its transmission and storage (Integrity). Your aim here is to understand how the authorities expect you to ensure the security and trustworthiness of the electronic invoicing process.
To maintain authenticity, e-invoices often (but not always) require digital signatures, which act as a seal confirming the identity of the issuer and the integrity of the invoice content. Additionally, mechanisms like timestamping are used to record the exact time of the invoice issuance, providing a chronological audit trail.
If digital certificates are used to demonstrate authenticity it is helpful to know how these are provided. Moreover, for certificates, it is good to know how long these last before they need to be renewed (will it be in 5 years, 2 years, or another period of time).
Apart from digital signatures, to safeguard the integrity of the e-invoice, encryption protocols may be employed during transmission to prevent unauthorized access or tampering. Businesses might need to implement internal controls and regular audits to detect and address any discrepancies or unauthorized alterations.
The rigorous approach to maintaining authenticity and integrity is performed not only for compliance with regulatory standards but also for preserving trust in the e-invoicing system among businesses, tax authorities, and other stakeholders.
To help with the invoice integrity some countries, like Portugal make use of “hashing”. When an invoice is generated, a hash code is created using a specific algorithm. This hash code is essentially a unique string of characters that represents the data contained in the invoice and it's common to think of this as a fingerprint of the invoice.
This mental model has served us as an invaluable tool for navigating the often labyrinthine world of e-invoicing and digital reporting. Compartmentalizing the process into distinct, sequential steps, allows both newcomers and experienced practitioners to gain a clearer understanding of their obligations and the actions required at each stage.
If you are interested in this topic here are some of our materials worth bookmarking:
- Fonoa Country Pages - deepdive into country specific rules and regulations, including e-invoicing and digital reporting
- ViDA Key Takeaways - summary of the changes coming in the EU
- Practical e-invoicing Guides - a growing list of guides we make available
You can also subscribe to our newsletter, Fonoa Digest, where we share tax intelligence updates, notable product enhancements, exciting upcoming webinars, events, and tax compliance news.
For the experts, you will note that we’ve stayed away from technical jargon in this article as much as possible. There was no discussion on “polling” vs “webhooks”. If you do want to get nitty gritty and technical, reach out to us - we love to talk about these on calls.
How can Fonoa help
If you feel this space is in need of simplification, we’re on the same page. This is why we’ve built a global solution to address the digital reporting and e-invoicing needs of multinational enterprises. Our solutions are uniquely positioned to handle the complexity of modern-day businesses including the business models of digital platforms and international marketplaces.
If you are interested to learn more about our capabilities just reach out to our team who can provide you with more information.