People new to the e-invoicing market often ask – Why are the regulations around the transmission of these documents so cumbersome? For example, many countries require that electronic invoices be marked with digital signatures. Some countries require that the seller obtains a government-issued key which uniquely identifies the invoice. Others mandate that the invoices be archived for periods of up to 10 years. To further compound the challenges each different country has their own legal perspective on e-invoicing which makes complying with the regulations quite complex for multi-national companies. But back to the original question – What is the underlying motivation behind the regulation of these invoice transactions? The answer relates to the government’s desire to prevent tax evasion or other forms of invoice fraud.
Earlier today, Dominique Strauss-Kahn (DSK), the former head of the International Monetary Fund, pleaded not guilty to sexual assault charges against a Manhattan maid. These latest allegations were not the first time that DSK has been prosecuted. In the late 1990s, DSK was actually indicted for fabricating an invoice and falsifying dates on it. At the time, Strauss-Kahn was the Minister of Finance in France. The scandal involved a series of questionable payments made by a French mutual insurance company called MNEF. A payment of 600,000 French Francs was made to DSK, but did not seem to reflect any services being rendered. Using sophisticated technology the French police were able to prove that the paper on one of the invoices paid to Strauss-Kahn was manufactured at a data later than the invoice date.
If a paper invoice can be easily falsified then surely an electronic invoice would be even easier to fabricate. If the invoice DSK had submitted to MNEF were electronic would the government authorities have been able to perform the same type of sophisticated forensic analysis? Well, that is certainly the goal of many of these regulations. The MNEF affair presents a good example of why certain governments and tax authorities want to place guidelines around the exchange of invoices. Tax evasion scenarios such as missing trader or carousel fraud are more common than falsifying invoices. However, in all of these scenarios there is a need to have an audit trail of transactions.
Regulations surrounding e-invoicing typically require that companies demonstrate that an invoice sent from a seller to a buyer is authentic and was not altered in transit. Digital signatures are generally considered one of the best technologies to prevent forgery or tampering in electronic commerce. Most regulations also require that buyers and sellers be able to present e-invoices to tax authorities conducting an audit. Typically e-invoices are packaged into EDI and XML transactions which cannot be easily deciphered by a tax auditor. As a result, there is a need to create a “human-readable” version of the e-invoice. For example, a seller might create a PDF document with the invoice fields laid out in the same sequence as a typical paper document might have.
Tax authorities also need to be able to perform forensic analysis of an invoice to ensure the integrity of its contents have been maintained. How else would the French police be able to prove that DSK had falsified an electronic version of an invoice to MNEF? As a result, to comply with the directive companies must keep the original EDI or XML file that was exchanged, the digital signature credentials and perhaps even the log files associated with the transaction. Such documentation must be kept on file for a period of three to ten years to satisfy any future tax audit scenarios.
One Response to “What Dominique Strauss-Kahn (DSK) can teach us about e-invoicing”
[...] digital, e-invoicing, memberBy Basware on July 11, 2011A recent blog posted on All About B2B http://www.gxsblogs.com/keifers/2011/06/what-dominique-strauss-kahn-dsk-can… asks why e-invoicing is so cumbersome. It cites digital signatures as one barrier, the varying [...]