International trade compliance: Advice for compliance managers

It’s the responsibility of the finance team, and specifically the Compliance Manager, to ensure all regulations are adhered to without disruption.

Minimising the VAT gap is a priority for tax authorities. Compliance Managers know the implications for the business if deadlines are missed. Urgency is required of organisations with operations in affected territories to ensure compliance with new emerging regulations. This includes Continuous Transaction Controls (CTC). Digitisation of invoice processing is a natural next step to addressing these requirements.

Keeping current with these regulatory changes and announcements from international tax authorities is vital for future growth and success. Compliance Managers must present the most sustainable solutions to gain business buy-in, whilst also being sure to factor in regulatory changes, business growth, and expansion to new territories.

This blog explores:

Multi-national businesses have long needed to contend with regulatory requirements for international trade compliance.

Minimising the VAT gap has been a top priority for tax authorities globally for some time. It is defined as the discrepancy between the expected VAT revenue and the amount actually collected. Typically, tax authorities lean on digitisation to close their respective VAT gaps. So, businesses must remain in tune with changing tax reporting mandates.

The European Commission outlines several causes of the VAT gap, including:

The European Commission also publishes an annual VAT gap report, which outlines how this discrepancy affects countries across Europe.

The matter of how to minimise the VAT gap has become the target of legislation. The introduction of e-invoice and e-reporting mandates means tax authorities can effectively reduce the VAT gap and ensure an auditable, digitised paper trail.

These developments are nothing new. In fact, Chile was one of the first countries to introduce e-invoicing requirements back in 2002 and has since achieved success amounting to a 50% reduction in their VAT gap.** In light of this, countries across Central America, South America and Europe have all either enacted new mandates or made announcements for phased introductions across Business-to-Government (B2G), Business-to-Business (B2B), and even Business-to-Consumer (B2C) transactions.

For Compliance Managers investigating requirements for international trade compliance, there are a couple of key factors to focus on.

Firstly, if the business is operating in a territory that has announced the introduction of any e-invoice or e-reporting mandates applicable to them, then they must comply. Strict penalties will be applied if businesses do not have a suitable solution in place to manage compliance with these new requirements. How these penalties are imposed varies from country to country, but can range from anything between a fixed fee per non-compliant invoice to fines equivalent to 100% of the value of the invoice.***

For example, some countries follow a clearance model, which requires authorisation from the tax authority in order for an organisation to issue an invoice to the end buyer. However, how this authorisation is achieved can vary greatly between countries, with variants such as hard-clearance and soft-clearance. Other countries, such as those in Europe, follow an interoperability model (focusing on the efficiency of invoice processing), and/or utilise the Peppol network.

Furthermore, as businesses evaluate how to comply with these mandates, they will need to assess whether this can be managed in-house or whether the scale of administration requires an automated solution. Organisations issuing and reconciling large volumes of invoices will not find it sustainable to manage the manual processing within their Accounts Receivable function. Instead, they should be concentrating on finding an automated solution that complies with requirements and simultaneously increases efficiency.

The table below highlights some of the most well-documented B2B e-invoicing and e-reporting mandates as a guide for businesses seeking international trade compliance across Europe:

In addition, many other countries have declared plans to introduce new e-invoicing requirements in the near future, including Bulgaria, Croatia, Denmark, Germany, and Sweden, to name a few.

Transalis has experience in supporting its clients with international trade compliance.

One client in particular, a multi-national health and beauty retailer, needed to simultaneously comply with e-invoice requirements in Italy and Turkey. In terms of the genesis of the project, this client needed to tackle inefficiency in their manual Accounts Payable processes, combined with the scale of their business operations across Europe, and these new mandated processes. In this scenario, all B2B invoices needed to be submitted to a government portal so that the VAT could be captured. Previously, the client was receiving invoices from suppliers in a number of different formats and having to rekey them manually into the relevant systems.

To resolve these challenges, Transalis implemented a solution that considered all of the client’s needs, by concentrating on simplifying the routing of information with integrations. As a result, the solution facilitated connections to the required tax authority portals, extracted the invoice information, transformed it into the required format, and attributed the invoice data to the correct entities in order to be paid. In terms of overall benefits, efficient invoice processing and payment meant that the client could also take advantage of prompt payment discounts– especially significant when considering invoices in the hundreds of thousands and above.