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Executive summary

Each year, German companies send out over 6 billion (thousand million) invoices. Here, the trend is clearly moving towards electronic exchange of these invoices. Four out of five companies cite cost advantages as the decisive factor for switching media for invoices, because this makes it possible to eliminate the printing, distribution, and postage costs.

Consequently, electronic invoices and the exchange of electronic invoices have to meet high expectations. Nevertheless, in order to be able to realize the savings potential offered by electronic invoices without having to risk losing the deduction of input tax, several technical, legal, and logistical questions have to be answered:

1. How can the invoice recipient be certain that the integrity of invoice content is not compromised during its digital journey?

2. How is it possible to confirm the identity of the invoice originator?

3. What legal requirements must be observed in order to ensure that neither the state’s tax revenue nor the company’s entitlement to claim a deduction for input tax are endangered?

When we look beyond the mere exchange of invoices to other areas that are directly linked to this process, additional questions arise with regard to secure long-term archiving of the data and availability of digital invoices for internal accounting and for external examiners (tax advisors, auditors, public tax authorities and social security organizations). Furthermore, the process of coordinating the electronic accounting of transactions with other parts of a company, such as warehousing systems and existing e-business platforms, also requires clarification.

However, the experience that has been gained in the use of these electronic systems is very diverse and heterogeneous: Many companies (especially large corporations) have been successfully exchanging data electronically for decades, especially in the area of large purchasing/retailing organizations or in industrial sectors.

For many small and mid-sized companies, on the other hand, transitioning from existing, well-proven invoicing procedures represents a tremendous challenge.

Despite these issues, the electronic exchange of invoices can make it possible to achieve an enormous boost in efficiency coupled with considerable cost reductions in the communication between and among businesses and administrative bodies.

This overview shows which elements of the VAT framework require compliance when transitioning to electronic invoicing, and presents the technical and managerial solutions that are available and ready for use. Furthermore, it provides information about the economic framework for the exchange of electronic invoices.

Invoices as a core element of the value added tax system:

1. Invoices are a core element of the value added tax system in Germany. They document the buyer’s right to deduct input tax.

2. A business that is part of a value added chain can, under certain circumstances, charge its clients value added tax for the services that it provides and deduct the value added tax that it pays for services as input tax. Nevertheless, the business only has a right to deduct input tax (or be reimbursed for it) if, among other things, the business involved is able to present an invoices that documents the amount of value added tax that it paid.

3. If a business supplies goods or services for which it must issue an invoice, it must archive a copy of this invoice and, upon request, present it to the tax office for examination.

In a study performed in 1999 that served as preparation for Council Directive 2001/115/EC on invoicing and was commissioned by the EU Commission, figures were cited for the first time that made it possible to assess the cost-savings potential for electronic invoicing.

In the meantime, there are also additional scientific studies and published project results available, which further differentiate, but fundamentally corroborate, the EU Commission’s estimate.

For Germany, remarkable statements were made in a study published in 2003 by E- Finance Lab, a joint institution that is run by the Universities of Frankfurt (am Main) and Darmstadt and is supported by renowned companies.

This study surveyed Germany’s 1,000 largest companies (not including banks) to determine their estimate of the potential for optimizing subprocesses in financial chain management:

1. 26% (which was the largest share) view invoicing as offering the greatest potential.

2. As far as invoice volume is concerned, the survey revealed an average of 68,000 invoices per month with a wide bandwidth of up to 2 million invoices per month.

3. More than 2/3 of all invoices are still being sent out through the postal system.

• An invoice sent out through the postal system costs an average of 16.16 Euros overall compared to 2.00 Euros for the standardized electronic exchange of data.

This figure is confirmed in additional “Electronic Data Interchange” literature, which establishes the basic validity of this cost assessment beyond the economic segment of large corporations. Project experience from BCG / Platinion has shown that the “invoice output” subprocess (with the steps of printing, enveloping and mailing) offers the greatest potential for optimization.

More details: www.awv-net.de

Legal aspects

European VAT law is designed so that only the final consumers, and not the businesses involved, bear the economic burden (principle of a neutral VAT burden for businesses). Ultimately, every business should be able to pay the “net” price to acquire or use the goods and services that it employs or consumes in the course of the business activities that it performs to generate taxed turnover.

This neutral tax burden for businesses is achieved by enabling them to deduct input tax. When a business receives a supply of goods or services for its enterprise, it is entitled to claim a refund from the tax administration or to have the sum be subtracted from the taxes that the business owes (deduction of input tax).

The requirements for the deduction of input tax are laid out in Article 15 of the German Turnover Tax Act. According to this law, a business may only deduct as input tax a VAT sum that it pays to another enterprise in conjunction with the purchase price if – among other things – it is able to document the legality of the input tax deduction by presenting a proper invoice (Articles 14 and 14a of the German Turnover Tax Act).

This requirement makes invoices a core element within the VAT system. They serves as the foundation and the evidence for the buyer’s right to deduct input tax.

Correspondingly, civil law protects the right of the party receiving a taxable supply of goods or services to be issued an invoice. This right arises out of the secondary contractual obligations. On the basis of these principles, supply recipients can demand that the legally required invoice data be sent to them in the legally required form.

The obligation to issue an invoice

In keeping with the supply recipient’s right to receive an invoice, the service provider is obligated to issue an invoice. Nevertheless, this obligation is only unrestricted when the both the service recipient and the service provider are businesses or legal entities (Article 14 (2) (1) (2) of the German Turnover Tax Act). Furthermore, an invoice must be issued for business transactions conducted with businesses in other EU Member States (Article 14a of the German Turnover Tax Act). If the business that provides the service does not fulfill its legal obligation to write an invoice, it is not fulfilling its legal obligations and can expect to pay a fine of up to 5,000.-- euros (see Article 26a of the German Turnover Tax Act).

Nevertheless, under certain conditions, Article 14 (2) (2) of the German Turnover Tax Act also makes provisions for the possibility of the business providing the supply to shift the obligation for issuing an invoice to the supply recipient (credit note). In such cases, the supply recipient writes the invoice and sends it to the service provider (self-billing). As long as the business providing the supply does not object to the invoice, it is considered an invoice that entitles the supply recipient to deduct input tax.

Nonetheless, the parties must have agreed beforehand to reverse the direction of the invoicing process in this manner. This agreement does not require a specific form (and can, therefore, be made orally, for instance).

As far as the content, form and transmission of the credit note are concerned, the same requirements apply as with an invoice.

Finally, an external service provider can also be engaged to create and send invoices or credit notes (Article 14(2) (4) of the German Turnover Tax Act). Data that the service provider requires to prepare the invoice can be sent to that service provider without regard to the form. The service provider then puts the invoice into the legally required form – for instance by certifying it with a qualified electronic signature (hereafter also referred to as a qualified signature) – and sends it to the service recipient on behalf of the service provider.

Transmission of an invoice in compliance with the legal requirements

The German Turnover Act considers the sending of a paper invoice to be the norm, and therefore requires the invoice recipient’s consent when alternative methods of transmission are employed (Article 14 (1) (2)). Nonetheless, no particular form is required for this, and consent can be given by simply accepting the electronic invoice without comment. Acceptance without comment is considered given if the recipient books or pays the invoice. In other words, when invoice recipients do not want to accept invoices in electronic form, they must express their refusal or reject the invoice and demand a paper invoice.

Forms of electronic transmission must guarantee the authenticity of the invoice’s origin and the integrity of the invoice’s content (Article 14 (3) of the German Turnover Tax Act). This means that it must be possible to validate the identity of the invoice originator and verify that there has been no tampering with the invoice content.

To achieve this, legislators and tax administrations have laid out detailed requirements. These include, for instance, the requirement that invoices that are transmitted electronically must bear at least a qualified electronic signature in accordance with Article 2 (3) of the German Digital Signatures Act.

EDI invoices are only recognized by tax law when a summary invoice is also sent.
The summary invoice must guarantee the integrity of the invoice content and the authenticity of the invoice origin.

Transmission of invoices per fax machine requires additional measures unless the invoice is transmitted from one standard fax machines to another. If, however, a server or computer plays an intermediary role in the transmission, the fax invoice must bear a qualified electronic signature.

The sender of the invoice must document the electronic process that it uses to send the invoice. This documentation must clearly show that the employed process fulfills the legal requirements.

Electronic signatures and the new German Turnover Tax Law as of 01 January 2004

Article 14 (3) of the German Turnover Tax Act (Umsatzsteuergesetz) in the version of the German Tax Amendment Act (Steueränderungsgesetz) 2003 from 15 December 2003 (German Federal Law Gazette I 2003, 2645)

For invoices that are transmitted by electronic means, the authenticity of the origin and the integrity of the content must be ensured by:

1. A qualified electronic signature or a qualified electronic signature with provider accreditation pursuant to the German Digital Signature Act of 16 May 2001 (German Federal Law Gazette I p. 876), which has been amended with Article 2 of the Act from 16 May 2001(German Federal Law Gazette I p. 876), in the version valid in each case, or

2. Electronic Data Interchange (EDI) pursuant to Article 2 of Commission Recommendation 94/820/EC of 19 October 1994 on the legal aspects of the electronic interchange of data (EC OJ L 338, p. 98), when in the agreement on this interchange of data, the use of processes has been planned that ensure the authenticity of the origin and the integrity of the data, and an additionally a summary invoice is conveyed on paper or electronically pursuant to the requirements laid out under subsection 1.

Useful background documents

1 German Tax Code, Abgabenordnung (http://bundes-
recht.juris.de/bundesrecht/BMF_index.html)

2. German EDI framework agreement (www.awv-net.de)

3. DIN 5019, Business forms in German – summary invoice – collective invoice (www.beuth.de)

4. DIN 16560-15, EDIFACT – Application rules –
Part 15: Application of the AUTACK service message type for transmitting integrity and authenticity information via transmitted user data (www.beuth.de)

5. Council Directive 2001/115/EC of 20 Decem-
ber 2001 (EC OJ 2002 L 15, p. 24) for amending Directive 77/388/EEC
(http://europa.eu.int/comm/taxation_customs/taxa-
tion/e_invoicing)

6. Commission Recommendation of 19 October
1994 on the legal aspects related to electronic data interchange (EDI), OJ L 338 1994 EC, p. 98
(http://europa.eu.int/comm/taxation_customs/taxa-
tion/e_invoicing)

7. GDPdU – Principles of Data Access and Auditing of Digital Documents – Letter from the German Federal Ministry of Finance (BMF) dated
16 July 2001, http://bundesrecht.juris.de/bun-
desrecht/BMF_index.html)

8. GAPCAS – Generally Accepted Principles of Computer-assisted Accounting Systems – Letter from the German Federal Ministry of Finance (BMF) dated 07 November 1995 (in German, GoBS), http://bundesrecht.juris.de/bun-
desrecht/BMF_index.html)

9. German Digital Signature Act (Signaturgesetz, SigG)
(www.bundesnetzagentur.de)

10. German Turnover Tax Act (Umsatzsteuergesetz, UStG) (http://bundes-recht.juris.de/bundesrecht/BMF_index.html)
Useful Links

11. Website for DG TAXUD on electronic invoicing: http://europa.eu.int/comm/taxation_customs/taxation/e_invoicing

12. Website of the CEN/ISSS Workshop on Electronic Invoices: http://comelec.afnor.fr/cen/wsei

13. Website for the UN/CEFACT project:http://unece.org/
cefact/forum_grps/tbg/projects.htm

COUNCIL DIRECTIVE 2006/112/EC of 28 November 2006 on the common system of value added tax