E-invoicing is a digitalization trend that governments have been embracing for quicker revenue recognition and to eliminate fraud. This entails electronic, pre-approval (or clearance) by a tax authority of invoices being issued in their jurisdiction. Requirements vary greatly as this practice is being rolled out independently in different countries. Companies must know which of their invoices must be submitted, have the capabilities in place to submit and track their own invoices and handle vendor invoices they must pay. There are special considerations for how this impacts the management of intercompany transactions. Here are some of the things intercompany teams need to know.
How the Pre-Approval (Clearance) Process Works
Some tax teams are now required to get clearance from a tax authority before an invoice can be issued to a buyer. Instead of invoicing an entity directly, these jurisdictions require that an e-invoice be sent to the government first. It's a disruptive additional step in the business process of supplier and buyer, with the government demanding to review invoices and to receive all related documentation.
Under this new process, governments require that invoices be submitted to them in a particular format. For example, in Italy, the legal invoice is submitted through an API to a government web portal. The buyer is then informed the invoice is available to download from that portal so it can be paid.
This extra step lets the government see the taxes being charged on transactions. Theoretically, this process could relieve companies of the need to file tax claims in some countries as tax settlements could be netted and balanced by the tax authority. However, to keep up with various e-invoicing mandates around the globe, companies must connect with each of the government gateways where they transact business, and reconcile those accounts.
For intercompany, e-invoicing is complicated by the fact that one company is both the buyer and the seller. A new challenge created by this scenario is that intercompany teams are now forced to create and issue a legal invoice versus simply managing relevant intercompany transaction data within the organizations’ own systems. This requires new accommodations for intercompany financial management systems, processes and teams.
Creating and Issuing Intercompany e-Invoices
For companies with complex organizational structures that already have intercompany processes in place, adding the creation and issuance of intercompany e-invoices will be a new process. A best practice for balancing the needs of the taxman and keeping intercompany finance running in a timely manner is as follows:
- The seller creates a data file, an e-invoice that is sent electronically to the customer along with a PDF that is digitally signed by the seller.
- Develop flows that channel intercompany invoices through the connections the organization has already established to send e-invoices to various tax authorities
- The PDF is digitally stored by the receiver of the invoice for a period of time, as determined by their country.
- This PDF becomes the legal document that can be retrieved in the event of an audit.
- The data file is used to reconcile with the company’s ERP.
Maintaining Intercompany e-Invoices
The process of sending an invoice makes it a legal document, a copy of which must be kept by the seller for a determined number of years in case of a government audit. The buyer must also keep a record of that invoice for an appropriate period, per the country where the purchase was booked.
Prior to electronic invoicing, paper invoices were the legal documents stored in warehouses and physically retrieved in the event of an audit. To store e-invoices as legal documents in a digital archive means storing them in a way that they can’t be changed. By and large, this is handled by creating a PDF of the invoice. Blockchain strategies may offer a different approach to this requirement in the future.
Coordinating Internal Intercompany Data with e-Invoicing Documents
As things stand, the PDF invoice is considered the legal invoice. It cannot be altered, so it must be digitally signed and stored in both the buyer and seller’s archives. However, because an ERP system can’t easily ingest a PDF, a data file for the ERP must be sent along with the PDF.
The data file in question must have the same information on it as the legal invoice, but the data can be augmented. For example, a company might update the definition of the SKUs in the data file, or change the weights and measures so that your ERP can reconcile items. If a purchase order is sent out to a supplier in kilograms and it comes back grams, your ERP will not be able to make a match. That change to the data file is fine because the legal invoice document is untouched and relevant.
The key benefit of sending a data file to the ERP is that by doing so you’re sending the full information on the invoice, not just a top-line summary. By making sure all the detailed data from your invoice is recorded in your ERP, you can reconcile between your ERP and the transaction. By owning the data, not just the invoice, you get all the line information. If you don’t own the data you may not get all that information, which is critical to good intercompany accounting.
Intercompany e-Invoice Conflict Resolution
When conflicts arise with intercompany transactions and accounting, there are processes in place and shared services teams dedicated to getting them resolved. With the advent of e-invoicing, however, a mistaken invoice is now beyond the walls of intercompany finance and must be addressed.
The best way to address this new problem is to avoid it. Shoring up your intercompany invoicing so conflicts don’t impact e-invoicing is critical, but miscommunications and mistakes will happen.
E-invoicing can, however, make dispute management and query resolution processes more efficient. A multinational must go through a dispute process to get money back - often in the form of service credits and rebates. The more efficient the dispute process, the more can be negotiated. Using e-invoicing with highly detailed, easily accessible data, a multinational can more efficiently audit not only what is being changed, but inventory and usage as well.
Governments will change their requirements for e-invoicing based on the fields they require, the process that is followed, how invoices should be delivered, and the formats they should take.
If your organization has established digital connections with 30 different jurisdictions that require e-invoicing, you can see how required IT time or consulting fees to make adjustments will add up. What’s more, changes to internal financial systems, ERP updates, indoctrinating newly established or acquired business units will require updates to e-invoicing links. Intercompany processes must be considered in those modifications as well.
Let FourQ Manage Your E-invoicing for You
The other way to go is to use a third-party solution such as one offered by FourQ. Unlike workflow-based software approaches, OneBiller provides end-to-end intercompany automation using configurable billing routes between buyers and sellers. This enables companies to structure transactions into service types and enrich transactional data to generate impactful intercompany process analysis and insights.
Connecting directly to ERPs and other data sources, the dynamic rules engine serves as a data stream for routing transactions and data across the platform. Rules logic, validation and allocation tables, and a tax engine inform how transactions are billed across the billing route, allowing teams to book both sides of the intercompany entry on each ledger. Reconciliations become seamless and balances get settled.