The introduction of B2B e-invoicing and e-reporting mandates that is rolling out globally is changing the way that tax compliance is monitored and enforced. It has resulted in a shift away from post submission audits to real-time monitoring of structured data with little to no intervention from taxpayers’ tax teams. The importance of good data and the stakes for non-compliance have never been higher. And the solution to this increased risk? Solid e-invoicing data validations at the source.
In most territories’ e-invoicing processes, multiple validations are possible. The main e-invoice validations are field validations, ensuring that all fields that need to be included in an electronic invoice appear in an invoice. This includes the triggering of conditional fields and logic that applies under certain scenarios. As an example, for most countries, when the tax rate provided is 0%, a previously optional field “Exemption Code” is triggered and becomes mandatory. This requires complex logic to ensure that all rule sets for a certain format are being met. In most cases, failing to do these validations would result in downstream errors as the tax office mandated systems would also complete these validations. However, in some cases, the responsibility rests with the e-invoicing service providers or clients themselves, increasing the importance of these validations to reduce the risk of penalties.
The next category of e-invoicing validations are calculable validations in which checks are completed on mandated calculations. For example, the invoice totals must be the sum of all line-item totals including tax. These checks are also important to avoid downstream errors as well as to ensure accuracy and reliability of data.
The last category of e-invoice validations are data validations. These validations check whether the data contained in each field is correct. Some of these checks are simple, ensuring that the data meets provided restrictions or rules, such as being in only alphanumeric characters or being limited to a certain number of characters. More complex validations will check whether certain codes provided exists within specified code lists and within required parameters, i.e. for Belgium, a check is run on the Peppol ID provided to ensure that the scheme ID (prefix) is one of two legally allowed values in terms of the Belgian e-invoicing rules. Finally, the most difficult data validation checks are for specific identifiers such as Tax IDs and registered company names. These are often not possible on the e-invoicing service providers’ side as the tax office generally doesn’t release full registries of these values. In some cases, such as in Mexico, these values will be checked on whether they exist AND whether they match the rest of the values, i.e. is the Tax ID correct and is the name of the party correct AND does the Tax ID match the registered name of the party in the SAT system. Where possible by the e-invoicing service provider, these validations are extremely valuable as they result in many, difficult to manage downstream errors.
As noted above, the failure to validate and provide incorrect data or fields can increase errors and the risk of penalties. This is a direct result of the ever-increasing importance of good tax data in source systems. As e-invoicing regulations and mandates proliferate, more tax authorities gain access to their taxpayers’ data in real-time or near-real-time. The tax authority systems can, very quickly and easily show this data and assess this data to determine compliance. Right now, these assessments are likely more rudimentary, confirming that basic validations have been completed and still requiring some manual intervention to assess the data itself and audit a taxpayer based on these results.
However, it is becoming increasingly likely that tax authorities will build systems to automatically assess data in real-time and have the ability to identify errors and non-compliance at a foundational data level. As a result, taxpayers will either need to invest heavily in tax compliance experts to manually implement processes to ensure data integrity and extensive recons. Or use providers that offer automated validations as far as possible, which ensure data correctness through the e-invoicing and e-reporting processes.
And herein lies a powerful distinction that could make or break a company’s tax implementation, should they choose manual intervention or automated validation? There are advantages and disadvantages to both, and it is up to each company to decide how they want to proceed.
Manual intervention requires knowledge tax experts for each region, that will soon also need to have a strong foundational knowledge of data science and handling. For lower volumes of transactions or where very specific tax interpretations are needed, experts that can manually check e-invoices and data can be very useful. However, such a manual system can be expensive and is not at all scalable for higher volumes or bigger businesses.
This is where automated validation shines. It allows for very accurate handling of large amounts of data and is highly repeatable and consistent. It is also generally cheaper to run such systems, once set up. However, the initial investment in such systems can be high as they need to be overseen on a project level to ensure their reliability and accuracy. They are also not very adaptable as each country/territory will have its own rules and regulations. This requires individual setup and determination for all business scenarios for each country. But, once it is setup and, provided there are no changes in the business scenarios, the systems can run and any error handling will be easy to rectify with very little risk to the company. Automated validations are quick, consistent and remove the possibility of human error. They can be a very useful tool in a company’s arsenal to improve tax compliance.
It’s clear that automated validation generally wins for most larger companies and, indeed, for many SMEs. With the right initial support, these automated validation engines are far more robust than manual solutions. But which system is best suited for this automated validation? In some cases, the tax authority systems will run exhaustive validations, and it can be rest assured that any errors or data inconsistencies will be identified and a technical error returned, averting possible penalties. However, in most cases, the tax office system does not have the capability for exhaustive validation and, rather, performs the simpler validations where errors that can be penalised can slip through. As such, there are two practical possibilities for systems to host such validations.
Firstly, the validations can sit in the ERP or accounting system. As the source of truth and originator of tax data in most cases, this would make sense and provide and robust and accurate solution. However, in most cases, ERPs and accounting systems do not primarily focus on automated tax validation and determination. Most tax engines are based on old technology and there are few in-house tools that provide validations within even the major ERP ecosystems. Accordingly, the responsibility generally has to shift elsewhere.
E-invoicing platforms are the second and, likely, most practical, platform to run these validations. With their primary focus being compliance with various e-invoicing mandates, ensuring the correct generation and transmission of e-invoice and other tax data, they are very well placed to build in robust validations to minimise the risk of non-compliance to taxpayers. It is important to interrogate the level of validation provided by e-invoicing platforms as, in most cases, they can become accredited with tax authorities by only proving that they perform a minimum set of validations. It is important to ensure the platform that is chosen, provides as many tools as possible to aid in ensuring a company’s tax compliance as possible. At eezi, we perform as many validations as are possible per country, including field validations, calculation checks and data validations. We cover all EU VAT rules and provide VAT ID checks where possible. Our platform also provides all necessary audit trails and dashboards, meaning our clients are always plugged in and able to monitor their tax compliance with the exact tools as the tax authorities would use to monitor them, arming them well to ensure compliance.
1. How does e-invoicing data validation reduce VAT audit and penalty risk for EU businesses?
With fully validated data, little to no errors can be passed downstream to tax authorities. If the data is assessed by the tax authorities contains no errors and appears validated, and matches with the periodic reporting data submissions, there is little to no risk that they will flag such taxpayers for audit.
2. How often should companies update validation rules to reflect new EU VAT regulations?
Quite simply, as often as the EU VAT and local VAT regulations change. This can seem quite daunting without a comprehensive, in-house tax compliance team. However, when using a platform such as eezi, the function moves away from your team as our teams are always up to date with the ever-changing rules and ensuring that our validation sets are comprehensive and correct at all times.
3. How can multinational groups standardise electronic invoice data validation across multiple EU countries?
Choosing a single provider that has coverage for all the groups’ regions with exposure, and that provides a unified API, such as eezi, is the most efficient method to consolidate and standardise invoice data validation. Once you are connected with a unified API, most of the compliance checks and validation requirements can be shared across all supported territories, with only slight tweaks to each country to meet their unique needs. This streamlines compliance and strengthens validation.
While the risk of non-compliance is growing constantly, in parallel with the increasing global e-invoicing initiatives, the burden and worry need not fall on taxpayers themselves. With the right partners that can provide expert assistance and advice during set up, and that offer comprehensive validations, taxpayers can significantly reduce their risk profile in terms of tax compliance. There are also other great advantages to having validations and automations in place. Once these systems are established, there will be more reliable data being fed back into ERPS and accounting systems that can be leveraged for reporting or forecasting with some clever effort. As taxpayers become more exposed to e-invoicing requirements, it is vital that they assess and choose the right partners to help them through.
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