For nearly 20 years, the world’s leading companies have used sophisticated electronic billing, matter and vendor management systems to govern large budgets and legal spend initiatives—but in a largely U.S.-centric way. As companies expand their global footprints, they are running into uncharted territory for legal and e-billing policies. It often comes as a surprise to corporate lawyers to discover just how out-of-compliance they are, but the fact is, they are just one revenue audit away from disaster.
The global e-billing process—that of creating, submitting, auditing, correcting and approving invoices for local or cross-border transactions in countries and regions around the world—is subject to stringent reporting requirements, and requires a mastery of intricate and varied jurisdictional rules, policies and laws that confound the very definition of an “invoice.” It is essential that legal ops teams not rely solely on their e-billing vendor who may not understand the inherent risks involved in the complicated web of compliance issues around the globe.
One of the first challenges to U.S.-based businesses is the complex regulatory environment inherent to international invoicing. The most complicated aspects of international electronic invoicing are the regulations controlling the Value Added Tax (VAT). Here are the five things that law departments, general counsels and legal operations technologists need to know about VAT compliance and recovery:
1. Meeting VAT Standards: Corporate law departments must meet the standards set forth in the European Commission’s Directive on the Common System of Value Added Tax, and subsequent amendments. Local jurisdiction and VAT liability is determined by “place of supply” rules, which means that local rules apply in the country in which services were provided. For example, if a U.S.-based company sells services in France, the company has to comply with French local VAT rules. Why is this important to legal departments? Law firms have particular reporting requirements related to the place, type and value of services provided to their clients.
2. Core VAT Compliance Requirements: Authenticity, integrity and legibility are the three core VAT requirements that are mandated in Europe. These requirements establish a basic framework, and serve as excellent ‘best practices’ to follow elsewhere to meet the goal of ensuring a compliant legal e-billing system:
- Authenticity relates to assuring the accurate and traceable identification of the parties, and all transaction information required to audit VAT compliance.
- Integrity of content drives how law departments design the mode of transmission and the archival storage of the electronic invoice data.
- Legibility relates to the ability to render an electronic invoice that is comprehensible.
3. Time Management: Given the complex and demanding nature of compliance requirements, on average, it takes longer to comply with VAT taxes than corporate income taxes. Estimates show that while it takes approximately 74 hours to prepare corporate taxes, it can take up to 125 hours to comply with VAT requirements.
4. VAT Recovery Rules: International legal fees and expenses are taxed at an average of 20 percent of VAT, but did you know these taxes can often be reclaimed? The process of reclaiming VAT requires stringent and defensible controls. Keep in mind that VAT is charged in more than 160 Countries. U.S. organizations can generally recover these taxes from 18 countries, but surprisingly, 58 percent of what is paid is never reclaimed. In fact, an estimated $23 billion goes unclaimed in corporate VAT each year. This is just the tip of the “unclaimed iceberg,” in that this number accounts solely for expenses and not the fees that are commonplace to legal e-billing.
5. Preparing for VAT Recovery: Reclaiming VAT requires invoice compliance and data integrity. Direct filing and submission protocols may have been devised by Revenue Services to be complex because they don’t want to refund VAT. Recovery periods generally follow annual fiscal periods, though numerous exceptions and alternate paths can exist.
Overcoming the Global Challenges of Electronic Invoicing
In order for businesses to design, configure and deploy an integrated global electronic invoicing system, they must first identify and define financial, tax and other business and compliance requirements for all jurisdictions in which their law department operates. An effective program must be properly and comprehensively informed by, and compliant with, the various international laws and regulations that impact all facets of the process, including:
- Country-by-country invoice requirements (required data elements, proof of origination, data privacy, storage and archiving, etc.);
- Tax and compliance regulations;
- Business process for intake, processing and payment of legal spend;
- Business processes for vendor master records; and
- Business processes for finance.
The technology for global e-billing hinges on the design, specifications and build of legal payments processing interfaces. Specifically, the data interfaces between e-billing and a company’s AP systems must be configured and deployed in accordance with financial and compliance requirements. This involves:
- End-to-end data lifecycle design, including interface data requirements and validations;
- Oversight and coordination of tax codes and tax code definition logic for each country;
- Development of defensible processes for the coordination of data security, data residency, data integrity and original invoice compliance requirements;
- Coordination of corporate entity, cost center, and matter information in the e-billing system; and
- Accounts payable interfaces and the flow of financial and tax information.
Success in the global business arena is complicated. The risks of non-compliance in global invoices may be great, but the rewards of global e-billing are greater.
As President and CEO of Hyperion Global Partners, Eyal Iffergan leads the premier global consultancy for legal business strategy and operations. With over 20 years of leadership in advising the legal and intellectual property business communities, Iffergan brings broad-based legal process and technology experience to managing influential global practices and companies, including founding and building several market-revolutionizing enterprises.