By Ruud van Hilten on 1st November 2018
Tungsten Network's Ruud van Hilten says Italy's move is part of a wider digitisation trend.
Around the world, governments are beginning to move towards digitisation to tackle tax leakage. New regulations are forcing finance departments to innovate and there is increasing pressure for businesses to move from manual to digital invoicing as a result. This trend began in places such as Latin America, but now electronic invoicing is making moves across the Atlantic too with Italy as the first country in the European Union to make it mandatory for B2B transactions, moving from a post-audit to a clearance model.
Businesses that trade in Italy will have already seen the start of the rollout of e-invoicing. Initially it affected sub-contractors to suppliers in public procurement but from January 2019 the wheels will be set in motion for one of the biggest tax reforms ever undertaken in Italy.
Since June 2014, Business-to-Government (B2G) e-invoicing has been mandatory in Italy. In 2016, this helped the Government successfully recover €19 million worth of tax. Over the last year, businesses have been encouraged to start using the Italian government’s interchange system, Sistema di Interscambio (SdI), and to boost uptake the Italian government has offered multiple tax benefits to businesses, such as exemption from Intrastat reporting and priority for VAT repayments. Until now, this hasn’t yielded the results they had hoped for.
Since 1st September, e-invoicing has been required for tax-free shopping (invoices issued for supply of goods to private customers with a non-EU residence). Then, on 1st January 2019, B2B e-invoicing will become mandatory for supplies of goods and services between all parties established or VAT-registered in Italy. It will also apply to B2C contracts where the customer expressly requests an invoice.
The Italian government is motivated by a desire to close its VAT gap. It currently has the largest VAT gap among the EU Member States - in 2015, the difference between the expected VAT revenue and the amount actually collected was a staggering €35 billion.
E-invoicing is proven to help reduce tax leakage and increase VAT collection, and many other parts of the world such as Turkey and several countries in Latin America have already successfully implemented similar initiatives. For example, in Mexico, the clearance system processes around 10 billion e-invoices annually and has lifted tax collection by 34 per cent so far. Italy will be hoping for similar long-term impact.
The regulations will apply to companies that are resident and established in Italy. It will also have implications in some cases for multinationals. For instance, if a UK company uses their UK VAT number to transact, the Italian company involved will have an obligation to electronically report this to the Italian tax authority by the last day of the month following the month in which they received the invoice.
Having worked closely with Italian businesses since 2005, we anticipate a challenging few months ahead as Italians adjust to the new requirements. There are a number of reasons why the rollout may not go as smoothly as in other parts of the world.
First, Italy is not a leading digital economy. According to the Digital Economy and Society Index (DESI), which tracks the evolution of EU member states in digital competitiveness, Italy has the fourth lowest score. Only Romania, Bulgaria and Greece rank lower. It also has one of the lowest numbers of active internet users.
Secondly, Italy is dominated by SMEs - approximately 80 per cent of five million registered businesses are SMEs. Smaller businesses may well struggle to get their finance systems compatible with the government’s platform by January.
The reforms could, despite the best intentions of bringing efficiencies and modernisation, turn into an administrative headache for the Italian Government and the nation’s small businesses if they don’t start getting ready now.
Businesses, both Italian and global, need not be daunted and fear that they have to become experts in Italian tax law by January. We believe these tax reforms will ultimately be really positive for the Italian economy and for individual businesses. We recognise that change takes time, investment and buy-in, but digital transformation is always worth it in the end. By connecting themselves with industry leaders and experts, companies can take advantage of best practice methods to guide them in the change. E-invoicing is proven to be more efficient and accurate than manual methods; according to Billentis, it reduces the costs of handling invoices by more than 50 per cent and it helps reduce fraud. While Italy is only one country, the move should be recognised as part of a much wider trend and we believe it won’t be long before other countries follow suit to bring their tax systems into the digital age.