Explanatory Memorandum to COM(2000)650 - Amendment of Directive 77/388/EEC with a view to simplifying, modernising and harmonising the conditions laid down for invoicing in respect of VAT - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2000)650 - Amendment of Directive 77/388/EEC with a view to simplifying, modernising and harmonising the conditions laid down for ... |
|---|---|
| source | COM(2000)650  |
| date | 17-11-2000 |
Invoices are among the most important documents in business. They are subject to accounting, tax, business and even linguistic rules. Value added tax legislation forms the core of these rules.
The Community VAT system is built around the obligation to issue invoices. An invoice has three functions: it contains information as to which VAT regime is applicable, it enables the tax authorities to carry out controls and customers to prove, if necessary, their right to deduction.
However, the rules governing invoicing vary widely from one Member State of the European Union to another. There is no fixed practice dictating what or how much information must be included in an invoice. Nor has the Community adopted a common legal framework for electronic invoicing and self-billing. Consequently, Member States' rules are very diverse, ranging from a total ban to extreme flexibility.
As a result, traders find themselves faced with a highly complex legal situation, and one which has clearly failed to keep pace with recent technological developments. This lack of harmonisation was cited by their representatives as an obstacle to the correct functioning of the Internal Market during the second phase of the SLIM i exercise. The results of this consultation were incorporated into the Commission's report on the SLIM initiative i, whose conclusions were approved by the Internal Market Council on 27 November 1997. This report includes a commitment to study 'the details considered necessary for drawing up an invoice for VAT purposes and the legal and technical requirements for electronic invoicing'.
Moreover, in the course of work on adapting the Community's VAT system to the requirements of electronic commerce, it has become clear that there is an urgent need to authorise the widespread use of electronic invoicing, free of any unnecessary constraints. In June 1998, the Ecofin Council itself stressed the importance of establishing a legal framework for the use of electronic invoicing, while ensuring that the ability of the tax authorities to exercise control was in no way impaired.
In late December 1998, the Commission therefore launched a study of the conditions currently laid down for invoicing for VAT purposes.
The aim of this study was firstly to describe the statements required on invoices in each Member State, together with the conditions under which electronic invoicing and self-billing were authorised. Its second purpose was to examine the need to harmonise and modernise Community legislation, in particular so as to make the use of new invoicing technologies possible on a Community-wide basis.
Its recommendations had to take account of the dual need to simplify obligations for traders, which had been highlighted within the framework of the SLIM exercise, and to ensure that the tax authorities can exercise effective control in respect of VAT.
The final report on this study i was delivered to the Commission at the end of August 1999. It concludes that electronic invoicing should be explicitly authorised by Community legislation and should be permitted even between trading partners operating in different Member States. The conditions imposed on this practice should be neutral with regard to the technology employed and should take into account the work that has already been carried out on electronic signatures. No prior authorisation or notification should be required, and only ex-post controls should be carried out by the authorities, leading where necessary to a ban. Storage of invoices using an electronic medium should be permitted on a similar basis. Minimum conditions are set out to ensure that these new procedures provide the same level of security for the tax authorities as conventional ones.
& Coopers and can be accessed at the Internet site of DG Taxation and Customs Union at the following address:
The report also concludes that Community legislation should include a harmonised mandatory list of those statements which must be included on every invoice (date of issue, sequential number, EU VAT identification number of the supplier, identity of the customer, date of supply of goods or completion of services, description of goods or services, VAT rate and taxable amount). In addition, the report proposes adopting a fairly flexible approach to the question of which currencies and languages might be permissible.
Having studied these suggestions in depth and discussed them both with traders and the various national administrations, the Commission has decided to propose an amendment to paragraph 3 of Article 22 of the Sixth VAT Directive i, which deals with the obligation to issue invoices. The aims of this amendment are first, to harmonise the rules determining which statements must be included on invoices, and secondly, to establish a Community legal framework for electronic invoicing and self-billing. In both these domains, the Commission has sought to balance the need to simplify the obligations on traders with the administrations legitimate needs in terms of tax control.
Contents
- 2. The need to simplify, modernise and harmonise the provisions of the sixth directive concerning the obligation to issue an invoice
- 2.1. The obligation to issue an invoice
- 2.2. Invoice contents
- 2.3. Electronic invoicing
- 2.4. Storing invoices
- 3. Proposed changes
- 3.1. Article 1(1)
- 3.1.1. The obligation to issue an invoice (Article 22(3)(a))
- 3.1.3. Electronic invoicing (Article 22(3)(c))
- 3.1.4. Storage of invoices (Article 22(3)(d))
- 3.1.5. Definitions of electronic invoice transmission and storage (Article 22(3)(e))
- 3.2. Article 1(2)
- 4. Conclusions
2. The need to simplify, modernise and harmonise the provisions of the sixth directive concerning the obligation to issue an invoice
The current provisions of the Sixth Directive concerning the obligation to issue an invoice (Article 22(3)) are sketchy and leave considerable freedom of interpretation to the Member States. This paragraph was drafted at a time when the only conceivable invoice was a paper document, and the idea of electronic invoicing is therefore entirely foreign to it. In addition, the invoicing obligations are entirely based on the idea of a paper invoice, and cannot easily be transposed to deal with electronic invoicing. Thus, for example, the obligation to keep a copy of each document is difficult to transpose to invoices issued using a virtual medium.
While Article 22 i begins by stating that it is the taxable person himself who must issue the invoice, point (c) of the same paragraph also provides that 'Member States shall lay down the criteria that shall determine whether a document may be considered an invoice'. This can only be interpreted as providing for the possibility that an invoice issued by a third party or by the customer may also be valid i.
Although such practices are not explicitly referred to by Community legislation, they are very common, and have been so for a long time.
Outsourcing of invoicing operations is an established practice in almost all European countries, even though it is not explicitly provided for by Community law. It is therefore desirable to take the opportunity provided by this proposed Directive to clarify this point.
Self-billing is also standard practice in a number of different sectors, e.g. in the car industry, where the customer - who receives parts in huge quantity - can issue the invoice himself after he has checked the quality of the parts received. In such sectors, there is substantial economic justification for this practice. It would therefore be prejudicial to forbid this practice on a Community-wide scale, the more so as it would not appear to create any major risk of tax fraud. The Commission therefore believes that it would be appropriate to establish common mechanisms to allow self-billing under certain specified conditions.
The Sixth VAT Directive provides that every taxable person is obliged to issue an invoice for every act of supply of goods or services to another taxable person or non-taxable legal person (as well as for any related payments on account). There is no obligation to issue invoices to non-taxable persons, except in the case of the supply of new means of transport (Article 28cA) or some distance selling (covered by Article 28bB(1)). Other laws, however, allow Member States to make invoicing obligatory in other cases as well.
The Commission does not see the need to amend these provisions at this stage, as it is not aware of them having created any major problems. Moreover, while it believes that the list of required statements should be harmonised, in its opinion the new compulsory list that would result should be applicable only in cases in which invoicing is obligatory under the Sixth VAT Directive, and not in other cases which might be required by particular national legislation.
Paragraph 3 of Article 22 simply refers to a non-exhaustive list of statements to be mentioned on the invoice. This list can therefore be extended by any Member State if it so wishes, by adding further information which they consider useful, on condition that the principle of proportionality is respected (Judgment of 14 July 1988 - Joined Cases 123 and 330/87).
According to the terms of this paragraph, every invoice must mention:
- the price exclusive of tax and the relevant tax;
- any applicable exemptions;
- the intra-Community VAT number of the taxable person and the customer in the case of the transactions referred to in Article 28b(C), (D), (E) and (F) i;
- the intra-Community VAT number of the taxable person and the person acquiring the goods in the case of the transactions referred to in Article 28c(A)(a) i;
- the particulars specified in Article 28a i in the case of the supply of new means of transport i;
- in cases in which the rules relating to triangular transactions apply i, the VAT identification number of the taxable person who has carried out the intra-Community acquisition and the subsequent supply of goods and an explicit reference to Article 28c(E) i.
The value of these compulsory statements is not in question. However, it would seem unsatisfactory to rely on such a minimum list, which is by definition incomplete, with the inevitable result, as the consultants' report to the Commission rightly observed, that in practice the required statements vary widely from one Member State to another, thus creating many problems for traders who operate in more than one Member State.
The idea of electronic invoicing as such is entirely absent from the Sixth VAT Directive. However, Article 22(3)(c) allows Member States to accept this type of invoice. However, this is clearly an inadequate basis, since it simply gives the Member States the option.
The result is that not only are Member States completely free to choose whether or not to establish the relevant legal framework, and thus allow or forbid this practice, but the conditions under which such a framework might be established also vary widely. As long as there are no minimum conditions laid down at the Community level, certain Member States may have difficulty accepting the development of these new invoicing technologies on a cross-border basis, especially as invoicing lies at the heart of the VAT control system.
The fact that the conditions governing electronic invoicing are not harmonised represents a significant obstacle to the wide-scale deployment of this practice, especially by large companies who may wish to delegate all their invoicing activities to a single subsidiary (or to a third party) acting on behalf of their branches in a number of Member States, which are thus subject to different laws.
Indeed, the growing trend for European companies' branches to specialise in particular sectors has recently led large groups to assign invoicing activities for the whole group to a single branch, irrespective of where their other branches are established. The fact that invoicing is currently subject to fifteen different legislative regimes is a major obstacle to this trend, which if allowed to develop unhindered could help reduce the administrative costs of European companies and make them more competitive vis-à-vis non-Community companies.
At the same time, recent technological developments have made it a matter of some urgency to establish a common legal framework for electronic invoicing. The development of EDI i means that secure electronic invoicing is now possible, and this technology has already been accepted in many European countries, although, until recently only by a few large companies. Now, a much more flexible technology is emerging - based on the Internet - which will be equally accessible to small and medium-sized enterprises. This development, however, raises questions about its technical security. Sending invoices over an unprotected network, such as the Internet, creates risks which can compromise both the authenticity of their origin and the integrity of their contents. In addition, there will soon be a significant shift in scale. Electronic invoicing, which was long the exception, is set to become the rule, particularly given the substantial cost savings it can bring. The study carried out for the Commission has pointed out that the cost of an electronic invoice varies on average between EUR 0.28 and 0.47, as against EUR 1.13 and 1.65 for a traditional invoice.
Finally, it should be emphasised that this revolution in business practice in no way represents a threat to the tax authorities. On the contrary, as long as it remains under control, it should make tax control more effective. Thanks to the new tax-control software programmes which are now available, electronic invoicing can be checked both more quickly and more easily than can bulky files of paper invoices.
Under the Sixth VAT Directive, traders are obliged to keep a copy of all the documents they issue. However, this provision does not make much sense in relation to an electronic invoicing system. It should therefore be modernised, to take the form of a more general obligation to store information, whatever the method used.
In the first place, it should be noted that the criteria determining in which cases there is an obligation to issue an invoice at Community level remain unchanged. As far as VAT is concerned, the range of cases presently covered by the Sixth Directive is quite adequate, though it is possible that other laws may impose an obligation to produce an invoice, or a document serving as an invoice, in other cases. Of course, the conditions imposed on invoicing by Community legislation, and in particular the compulsory list of statements, would only be applicable in those cases where Community law itself imposes an obligation to issue a an invoice for VAT purposes. In other cases (for instance, invoices issued to private individuals in cases other than distance selling and new means of transport), it will be up to the Member States themselves to lay down these conditions. In such cases, it would no doubt be superfluous to apply all the statements listed in present legislation, for not all of them would be useful and they would thus constitute an unnecessary burden for traders.
On the other hand, the right to delegate the obligation to issue an invoice to a third party (outsourcing) or to the customer (self-billing) is now explicitly laid down. The Commission therefore proposes that henceforth the taxable person who carries out the transaction should simply be responsible for the issuing of the invoices, and not be obliged - in the strict sense of the words - to issue them himself. It should be noted that in any case, and whoever the physical author of the invoice may be, the taxable person carrying out the transaction must remain the only person responsible for issuing the invoice. As the same time, it is vital there should, in the first instance, be an explicit agreement to which the two parties can refer if requested by the tax administration, as well as a methodology for either implicit or explicit acceptance of each invoice by the taxable person making the supply.
In the case of self-billing, further conditions might be imposed at some point by the Member States. While the value of this billing method to business is very clear, it also brings with it certain risks. Self-billing essentially consists in having the person who has the right to deduct issue the invoice, thus breaking the rule of the separation of responsibilities between supplier and customer which lies at the heart of the VAT control system. The risk that the customer will artificially inflate his bill, in order to deduct tax which was never paid, should not be overstated. This risk is even greater in the case of intra-Community supplies where the customer is also the person liable for VAT.
In any case, the Commission believes that whatever conditions are imposed, they should not discriminate against customers established in another Member State. For that reason, it should not be possible to impose more restrictive conditions on cross-border self-billing than on self-billing within a single Member State.
However, in those cases where the third party or customer who issues the invoice on behalf of the taxable person is established in a non-Community country with which there is no legal framework for mutual assistance, harsher conditions may be justified (given the added difficulty of obtaining information from this third party or customer). This is, of course, simply a faculty that is available to the Member States.
As regards documents which may serve as invoices, this proposal provides a clear basis for summary invoicing and for the issuing of credit and debit notes.
Summary invoicing may prove economically advantageous, for example in the case of parts which are delivered in large quantity on a regular basis. It should be explicitly authorised, provided its frequency does not exceed one month.
As regards credit and debit notes, the Commission proposes that for VAT purposes they should be treated in exactly the same way as the invoices they qualify. In that case, all the provisions laid down in paragraph 3 (required statements, electronic invoicing and storage obligations) would automatically apply to such notes too.
3.1.2. Invoice contents (Article 22(3)(b)):
The Commission believes that it has become essential to harmonise the statements required on invoices, in the light of the increasing globalisation and the development of electronic commerce. Due to these two trends, it is increasingly common for a single company established in one Member State to issue invoices on behalf of several taxable persons established in a number of different countries, or on a simpler level, for a taxable person established in one Member State to have to issue invoices which comply with the laws of several Member States (because he carries on business which is taxable in several different countries).
Such harmonisation should, however, be limited to those conditions which are necessary from the VAT viewpoint. As a result, tax administrations should not have the power to require further statements for VAT purposes. In practice, this will mean that the list will apply in every case where an invoice has to be issued under VAT rules. In any case, the statements required under this proposal should be sufficient to justify the right to deduction. However, this proposal cannot forbid other statements being required for non-tax-related purposes; harmonisation of such requirements falls outside the scope of any Commission initiative on VAT.
The list proposed by the Commission contains twelve generic components. It should, however, be interpreted in the light of other specific provisions which are to be found in the Sixth Directive such as Article 26c(B) i, which bans any mention of the amount of tax to be paid (because it is not deductible) for goods which are subject to the margin scheme. This provision will, of course, still be applicable.
This list of required statements will, if the proposal is accepted, be obligatory for traders in all Member States and no other statements will be obligatory for VAT purposes. Of course, traders are free to add other statements as they wish, for example, in cases where customers might need additional information.
This list does not include all the statements presently required in all 15 Member States. It represents instead a hard-won compromise between the attempt to simplify the authorities' needs in relation to control activities and those of traders who have to be able to apply VAT legislation correctly. Too short a list would have caused problems for the tax authorities and uncertainty for taxable persons, while too long a list would have been a burden for traders.
In addition, the Commission believes that the Member States must be allowed to depart from the compulsory list in the case of invoices for smaller amounts, and that in this matter they must be allowed to reach their own decisions, on condition that they may remove, but not add statements.
It should also be remembered that the Member States can always, by virtue of the provisions contained in Article 22(9)(a) and Article 25 i, introduce simplifying measures of their own. Under these provisions, Member States are authorised to abolish obligatory statements in cases where the taxable person is carrying out only transactions which are exempt pursuant to Articles 13 and 15, is eligible for the special scheme for small undertakings, is a flat-rate farmer or does not carry out any intra-Community transactions.
The proposal also explicitly states that when invoices are sent in batches to a single recipient, the required statements may be made only once, if they are identical for all the invoices in the batch. This is quite a common practice in the context of electronic invoicing, since it enables the invoicing process to be simplified by allowing recurring elements (such as the taxable person's name, address and VAT identification number) to be mentioned only once.
In addition, Member States are not permitted to impose conditions with regard to the signing of invoices, except for those which are laid down in point (c), and whose sole purpose is to guarantee the technical security of electronic invoicing. Invoices do not need to be signed in order to be legal instruments. Moreover, it would be difficult for traders to comply with an obligation to sign their invoices only in certain Member States, as this would not only affect the presentation of paper invoices, but would also make the technical conditions of electronic invoicing far more unwieldy, and thus effectively undermine the present attempt to harmonise them.
In its approach to the question of the currency that may be used in invoicing, the Commission wishes to be extremely flexible, for it believes that no particular problems would be created by the right to use whatever currency one wishes, irrespective of whether or not it is a national currency i or a Community currency - on condition of course that the VAT amount is converted into the national currency using the conversion methods defined in Article 11(C) i.
On the other hand, the principle of subsidiarity entails that the language(s) used left to the Member States themselves, on condition that the conditions they set apply only to invoices which their traders issue, and not to those which they receive.
In conclusion, the Commission believes that harmonising invoice contents across the Community in this way will encourage the emergence, either at European or international level, of standardised interoperable electronic formats for invoicing.
The future legal framework for invoicing needs to take the development of new technologies into account. That is why Article 22(3)(c) will establish the general principle that an invoice can be issued on any medium, whether physical or, subject to advance notification of the customer before the transaction, electronic, so as to ensure the greatest possible neutrality.
Only through such a general principle, unencumbered by any list of acceptable technologies or methods, will it be possible to create a legal framework which will be technologically neutral, and thus able to withstand the test of time. Today, the most widely used electronic invoicing technology is EDI i. Yet other Internet-based technologies are already available and accepted by certain tax administrations.
Having established this general principle, point (c) goes on to define the legal framework within which invoices transmitted by electronic means would be acceptable.
Under the new provisions, any prior authorisation system could not be allowed, as this would constitute a serious obstacle to the development of electronic invoicing. Only a system of prior notification would be permitted, as an option that would be available to all Member States, provided it did not prove obstructive. In no circumstances would a tax administration be able to give prior refusal or impose any form of provisional suspension under such a system. Nor does the Commission favour the use of such prior notification systems, as it believes that they are unnecessary in the longer term. However, it is aware that electronic invoicing is still a relatively recent phenomenon in a number of Member States, and that therefore a prior notification facility may prove necessary during the early stages of its development. Moreover, experience has shown that those Member States which already make advanced use of electronic invoicing often started out with a system of prior authorisation, before moving on to a prior notification system which many of them now plan to abolish altogether. Ultimately, prior notification should prove to be quite unnecessary, and for that reason, the Commission proposes that its use should be prohibited after 31 December 2005.
Beyond such purely procedural aspects, the heart of the proposed legal framework consists of a number of core conditions intended to guarantee the technical security of electronic invoicing and to protect the interests of traders who are aware of the need for secure electronic invoicing, as well as those of the tax authorities.
These conditions are as follows:
- authenticity of the invoice's origin must be guaranteed, so that the recipient of the invoice can be sure that it really did come from the person who appears to have issued it;
- integrity of the invoice contents must be guaranteed (that is, all the statements included, including the invoice number).
In order to fulfil these two conditions, an electronic invoice must bear an advanced electronic signature, within the meaning of Article 2 i of Directive 1999/93/EC of the European Parliament and Council of 13 December 1999 on a Community framework for electronic signatures i. According to the terms of Article 2 i of this Directive, an advanced electronic signature is an electronic signature which meets the following requirements: it is uniquely linked to the signatory, it is capable of identifying the signatory, it is created using means that the signatory can maintain under his sole control and it is linked to the data to which it relates in such a manner that any subsequent change of the data is detectable.
In the case of invoices sent electronically from a country with which there is no legal framework for mutual assistance, Member States must be able to impose additional conditions for the acceptance of such invoices for VAT purposes.
Responsibility for ensuring that all taxable persons carrying out transactions on their territory comply with these conditions lies with the various tax administrations, who to this end should employ all appropriate means of control, including concerning mutual assistance, in those cases where invoicing has been outsourced to a third party who is not established in their country.
The purpose of this list of conditions is not only to ensure a satisfactory level of technical security from the point of view of the tax administrations, but also to send a clear message to traders who are seeking to establish what criteria they should use in selecting invoicing software. This is bound to encourage both the emergence of compliant programmes and a reduction in their price. It should also facilitate the standardisation work that is presently ongoing in this area, both at European and international level.
Of course, it will still be possible for traders who so wish to impose stricter requirements on themselves. For example, they may wish to send a qualified certificate along with the advanced electronic signature, so as to give it the same legal status as a manuscript signature. Such certificates may also contain details of the taxable person's VAT identification number. However, the Commission believes that this practice should not be obligatory, since it would be an additional and costly constraint on electronic invoicing, which is in no way essential, as there is no obligation to sign paper invoices.
Traders may also choose to go further in securing the contents of the messages they send, by using encryption techniques i. However, this practice should not be made compulsory either, since the main purpose of encryption is to ensure the confidentiality of the information sent, and in the case of an invoice such confidentiality is not essential.
The idea of an obligation to 'store a copy' is to be replaced by a more general obligation to 'store' invoices issued and received, as being more appropriate to the developing technology of electronic invoicing.
The period of time for which invoices should to be stored can only be determined by the Member States themselves, as it will depend on purely national procedures under tax control law.
The Commission considers that it is up to traders themselves to freely determine the place in which these invoices are stored; this may lie outside the national territory, especially in the case of invoices issued by a third party established in another country.
However, this freedom must be framed by the two following conditions:
- traders must have immediate access at any time from their own premises to all the information contained in the invoices, so as to be able to reply to any request for information they may receive from the tax authorities of their countries. This condition can clearly only be satisfied by electronic storage, as access to a physical filing system maintained outside the company's own premises can never be immediate and available at any time;
- the integrity of the data (that is, of all the statements including the invoice number) and its readability must be guaranteed for the entire storage period.
In addition, for effective controls to be possible and for data integrity to be guaranteed when an invoice is sent electronically, such invoices must be stored in electronic form, and the advanced electronic signature that accompanies them must be stored along with them simultaneously.
When the storage facility, that is, the physical storage medium (such as a hard disk or CD-ROM) on which the data are recorded, is located in a country with which there is no legal framework for mutual assistance on VAT comparable to that which exists within the Community, Member States will be able to impose such further conditions as they deem necessary.
Point (e) defines the concepts of transmitting and storing invoices 'by electronic means' for the purposes of applying points (c) and (d). The definitions used are based on those contained in Directive 98/48/EC of the European Parliament and of the Council of 20 July 1998 i amending Directive 98/34/EC laying down a procedure for the provision of information in the field of technical standards and regulations.
Article 22 i currently allows Member States to lay down additional obligations which they deem necessary to ensure that they collect the correct amount of tax and to prevent fraud.
It is therefore proposed that this paragraph be amended so as to indicate that it cannot be used to impose additional obligations on the invoicing procedure, as the relevant obligations have now been harmonised.
The provisions laid down in this proposal form a coherent and integrated approach to simplifying and modernising the conditions applied to invoicing within the European Community, by establishing a more fully-harmonised legal framework.
This harmonisation, however, is limited to those aspects of invoicing where it answers a real need. As far as possible, the proposal leaves the Member States to define for themselves all other conditions which do not need to be defined at Community level. In this way, the principle of subsidiarity is entirely respected. Nevertheless, this flexibility given to Member States is limited by the freedoms enshrined in the Treaty, and therefore has to respect the principle of 'proportionality' as espoused in the jurisprudence of the Court of Justice of the European Communities.
This proposal is also restricted to the invoicing conditions imposed by VAT legislation. Clearly, there are other conditions which cannot be harmonised or simplified by this proposed amendment to the Sixth Directive. The aim of the proposal is to ensure that the conditions imposed are satisfactory for VAT purposes and permit the granting of the right to deduction. It in no way affects any further need to simplify other invoicing obligations either at Community or national level.
However, since VAT lies at the heart of the regulatory framework for invoicing, this proposal should in itself lead to a substantial simplification of the obligations on traders, in particular those who conduct cross-border operations.
In addition, it should facilitate the development of electronic invoicing and thus of electronic commerce, while providing the tax administrations with sufficient guarantees that the security they require will not be compromised.
In this way, the proposal fits perfectly with the Commission's new strategy for VAT i which seeks, in the short term, to focus on simplifying and modernising the Community VAT system.
In conclusion, it should be noted that this proposal with have no impact on the Communities' VAT-based own resources.