In early 2019, Italy introduced mandatory e-invoicing for all domestic transactions. In this article, we look back on two years of mandatory e-invoicing in Italy and reflect on what other countries can learn from the Italian experience.
What exactly do the mandatory e-invoicing regulations in Italy involve?
Over the past few years, all EU countries have been busy introducing mandatory e-invoicing. Italy, however, has gone the furthest. Italian regulations stipulate not only that public contracting authorities must be able to receive e-invoices, but also that all invoices must be sent in electronic format — including invoices sent to companies and private citizens.
The prescribed format for e-invoices in Italy is FatturaPA, a machine-readable XML file. In addition to specifying the format, Italian regulations require that e-invoices be submitted via the state-run exchange system SdI (Sistema di Interscambio).
Why was mandatory e-invoicing introduced in Italy?
Under EU Directive 2014/55/EU, all public contracting authorities and entities must be able to accept and process electronic invoices. This was the case in Italy for some time before the EU directive came into force; since June 2014, all invoices sent to the Italian central government had to be in electronic format. In March 2015, this requirement was extended to all public agencies. So complying with the EU directive was not the motivation behind the new regulations in Italy.
A key reason for introducing mandatory e-invoicing for all transactions in Italy was the clearing system that was facilitated by the SdI. This system functions not only as a platform for submitting invoices; it also checks the invoices. An invoice is only valid if it has been submitted via SdI, which means that recipients are only eligible for input tax deductions for invoices that have been sent via the system. E-invoicing as a part of the clearing system was therefore primarily introduced as a tool to combat VAT evasion in Italy.
How has the Italian experience been?
Italy already had some experience to draw on, as e-invoicing had been mandatory for public procurement there since 2014/15. However, public administration accounts for only 1% of invoice recipients in Italy. When mandatory e-invoicing was extended to B2B and B2C, the number of electronic invoices being sent increased dramatically — and suddenly.
Nevertheless, things have run very smoothly. In 2019, 2.07 billion invoices were sent via the system, yet the error rate (due to incorrect invoices or duplicates, for instance) was just 2.4%. In the first five months of 2020, the rate decreased further to 1.6%. Furthermore, hopes that the new system would reduce tax evasion were surpassed. As a result of mandatory e-invoicing, tax revenue increased by €3.5 billion in 2019. Of this, €2 billion came from additional VAT revenue, €945 million from the detection of fraudulent input tax credit, and €580 million from direct taxation.
But it’s not just the Italian revenue that’s satisfied; e-invoicing and the clearing system also offer advantages to both invoice issuers and invoice recipients. As well as saving on postage costs, invoice issuers benefit from considerably faster processes and simplified receivables management (in Italy, very long payment terms of 60, 90 and 120 days and beyond were the norm). For invoice recipients, it has become much easier to process invoices automatically, as all data arrives in digital, machine-readable format. This reduces manual labor and speeds up processing times.
Outlook for other countries
Hungary has followed Italy, introducing a clearing model based on e-invoicing at the start of 2021. Other European countries, including France, Poland, and Slovakia are currently considering introducing similar models. The benefits of the approach cannot be denied, especially when it comes to standardization. With this model, the invoice issuer is obliged to use just one channel and one format. The situation is very different if we look e.g., at Germany. Due to the country’s federal structure, there is a wide variety of approaches and platforms.
With digitization continuing apace, organizations are moving away from paper — and this applies to their invoices, too. In addition, Germany as well as other European countries could potentially increase their tax revenue by billions of euros. It is therefore highly probable that sooner or later, those countries will introduce a similar clearing model with e-invoicing at its heart. The days of paper invoices are numbered; indeed, they may be gone a lot sooner than we expect.