E-invoices and Their Implementation in Latvia
Since April 18, state direct administration institutions must be able to accept electronic invoices in public procurements. This is mandated by the European Union (EU) Directive 2014/55/EU. For now, there are no such requirements in business-to-business relationships, but the state administration's "shake-up" to implement innovative solutions is a great opportunity for the private sector to digitize invoice flows, thereby improving work efficiency and gaining additional working hours for more meaningful tasks.
More active implementation of e-invoices could revive the stagnant e-governance issue. A UN study shows that in two years, Latvia has dropped from 45th to 57th place globally in the development of e-governance solutions and is now ahead of only Romania among EU member states. Even Bulgaria and Greece, not typically considered technology powerhouses, are ahead of us.
Machine-readable invoices
Much has been heard about e-invoices, but various myths about them still persist. E-invoices are structured electronic documents created and processed in a machine-readable format. One of the most commonly used e-invoice formats is XML. In this format, the content of the e-invoice is described so that IT systems can process it automatically. A digitally scanned image of a paper invoice cannot be considered an e-invoice. Even if created in Microsoft Word, Excel, or PDF format and essentially digital, it is not machine-readable and therefore cannot be considered an e-invoice.
There are various standards and syntaxes for describing e-invoices in XML format. The European Electronic Invoice Standard defines the basic elements of an e-invoice (information to be included in the invoice) and a list of common syntaxes. The April 9, 2019, Cabinet of Ministers Regulation No. 154 "Applicable Electronic Invoice Standard and Its Basic Element Usage Specification and Circulation Procedure" also stipulates that "The customer, public service provider, as well as the public partner or its representative accepts the electronically prepared and issued invoice that complies with the applicable electronic invoice standard." The list of e-invoice syntaxes is determined as follows: "The applicable electronic invoice standard in the context of these regulations is a set of documents referenced in the Official Journal of the European Union and adapted to the status of the Latvian national standard as the European Union standard LVS EN 16931-1:2017 'Electronic Invoices. Part 1. Semantic Data Model of the Core Elements of an Electronic Invoice' and the related technical specification LVS CEN/TS 16931-2:2017 'Electronic Invoices. Part 2: List of Syntaxes Compliant with Standard EN 16931-1.'"
A unified standard as early as next year
Changes are also expected in the accounting law in 2020, which will define both the official e-invoice standard in Latvia and its usage and circulation procedures. The plan is to designate the globally recognized standard ISO/IEC 19845 (UBL 2.1) as the official standard in Latvia. A unified standard across Latvia will allow all involved parties—both invoice issuers and recipients, processors, and supervisory institutions—to speak the same language and create systems capable of processing e-invoices. Already, electronically prepared documents are valid as justification documents in accounting, and e-invoices will also serve as justification documents, significantly reducing the circulation and archiving of paper documents.
E-invoices not only reduce the need for paper documents but can also significantly improve the speed of transactions and cash flow in the economy overall. One of the most important aspects is undoubtedly financial. Calculations show that sending e-invoices reduces costs by 59%, while receiving and processing them reduces costs by 64%. Consequently, financial savings in large companies and state administration could be measured in thousands of euros. Equally important, these invoices can be delivered faster, processed automatically, and there is no risk of errors when manually transcribing numbers. The e-invoice system eliminates the risk of fraud. In traditionally operating companies, responsible employees must confirm that they are indeed collaborating with the invoice issuer and that the amount is correct, whereas the electronic system automatically reads data from the business management program and verifies whether the collaboration has occurred. Employees do not need to spend time ensuring that the invoice has reached the recipient, and at the time of payment, the system records the data received from the bank. This immediately reveals non-payers and payment delays.
Latvia at the level of Western countries
The implementation of e-invoices in Latvia has not been very successful so far, but there is a good starting position here. According to 2017 data, Latvia, along with Lithuania, is among the few Eastern European countries where more than 15% of companies use e-invoices. In this regard, we are approximately on the same level as most Western European countries, lagging only behind the Nordic countries and Estonia, where more than 40% of companies exchange e-invoices.
Notably, there is significant potential in the private sector. Before April 18, we surveyed nearly 350 companies and found that only 21.3% of respondents had already implemented an electronic invoice system, and 7.2% were confident they would manage to do so by the deadline. Another 15% of respondents claimed they would be ready to send and receive e-invoices themselves but could not completely abandon paper due to some not-so-progressive cooperation partner or client.
How quickly e-invoices become the main format for transmitting payment data will largely depend on the remaining 57% who still operate using traditional methods. It is possible that many technology-unrelated companies are unaware of all the advantages of e-invoices and therefore are in no hurry to implement them. However, the advantages are numerous and significantly help in the competition.
E-invoices will be mandatory in the future
The transition to e-invoices in the EU Digital Single Market is inevitable and will eventually be enforced by law. Spain became the first EU member state in 2015 where all invoice exchanges between the state and product or service suppliers occur electronically. Now, 900,000 e-invoices are processed there monthly, and the Spaniards are working to extend this practice to the private sector. In Italy, e-invoice circulation has been mandatory for all VAT payers since this year, and next year, Greece plans to join its Mediterranean neighbors. It is no secret that this is being done to reduce opportunities for tax evasion and curb the so-called VAT "carousel" schemes, which are a pressing issue in Europe. Italian authorities openly expect e-invoices to reduce the gray economy. The practices of small traders and larger companies' schemes to avoid taxes have long hindered this Apennine Peninsula country from developing at the pace it could. I believe that Latvia's state and society would also benefit from a more transparent invoice system.
Jumis already supports e-invoices
The Connecting Europe Facility finances projects proposed by EU member states for various infrastructure projects, including the implementation of e-invoices. Latvia has also received funding in one of the program's calls and is currently implementing the "European Electronic Invoice" project, which aims to promote and advance the adoption and use of e-invoices in both the public and private sectors in Latvia. The project's tasks include creating a secure e-invoice sending and receiving option in the e-address, developing a convenient e-invoice receiving and sending solution for merchants on the Latvija.lv portal, as well as establishing a PEPPOL access point to support e-invoice exchange with other EU member states. The project also plans to develop e-address and e-invoice integration in one of the most popular accounting and business management systems in Latvia – Jumis.
By the end of this year, we plan to provide all our clients with the ability to send and receive e-invoices using the e-address and other channels. It should be noted that Jumis already offers the possibility to exchange e-invoices in several e-invoice exchange systems – Telema, Fitek, and Omniva.
Now is the right time for entrepreneurs to start exploring available e-invoice solutions. This will not only allow them to choose invoice sending programs without haste, learn their features, and train accountants and other involved employees but also save money and time, thereby gaining a competitive advantage for their company.