How does e-invoicing work?

In today's digital economy, electronic invoicing, also known as e-invoicing, is becoming increasingly important. But how exactly does e-invoicing work? With different standards and formats, it can be a challenge to understand the details.

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In this blog post, we delve into the world of e-invoicing, explain the various standards, and outline the key components of this process. E-invoicing offers numerous benefits such as cost savings, greater accuracy, and shorter processing times, making it an important part of modern business processes.

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Find out how e-invoicing can make your company more efficient and what steps are necessary to successfully introduce the process.

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Before we go into detail...

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Before we get into the details of e-invoicing, it is important to understand what e-invoicing actually is:

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E-invoicing refers to the fully electronic exchange of an invoice document between a supplier and a buyer. This exchange includes the creation, transmission, receipt, and archiving of the invoice in electronic form. If the invoice is sent and received in a structured electronic format, it can be processed automatically without the need for traditional paper documents.

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E-invoicing is now a common practice for businesses of all sizes worldwide and has continued to evolve over the last 30 years. Find out more about e-invoicing and why it's so important in our previous blog.

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Although the concept of e-invoicing is largely the same worldwide, the legal requirements differ considerably from country to country. This concerns not only the formats and procedures, but also the local regulations for e-invoicing. In many countries, governments have started to define their own formats and structures in tax laws. Many are introducing mandatory processes to close their "VAT gap" and improve overall tax compliance. For more information on the link between tax compliance and e-invoicing and the VAT gap, see our previous blog here.

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Standards for electronic invoicing

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E-invoicing standards are like a common language that suppliers and buyers use to ensure that their electronic invoices can be transmitted and processed smoothly. They define how e-invoices must be structured and formatted so that they can be read and processed by different systems. Many countries and networks have their own e-invoicing standards, which play an important role in ensuring data security, compliance and promoting interoperability between trading partners:

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European standard

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The European Commission and the EU Member States introduced a European standard for electronic invoicing for B2G (Business-to-Government) and G2G (Government-to-Government) transactions. This is set out in the European Directive 2014/55/EU.

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The European standard is a semantic data model that lists the necessary elements that an electronic invoice must contain in order to be legally and tax compliant. The data model is technology-neutral and can be used in two XML formats: UBL (Universal Business Language) and CII (Cross-Industry Invoice). Further information can be found here.

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Peppol standard

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The Peppol standard defines a uniform data format and common business rules for the exchange of procurement documents, including electronic invoices, via the Peppol network. Originally developed for use within the EU, Pan-European Public Procurement Online (Peppol) has gained worldwide acceptance and is now also used in countries outside the EU such as Singapore, Australia and New Zealand. It offers interoperability and efficiency benefits, promotes the smooth exchange of documents, and provides access to a large network of trading partners for the transmission of electronic invoices and documents.

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Companies connect to the Peppol network via an access point and all electronic invoices are processed within Peppol. There are currently more than 300 certified access point providers internationally. Find out more about Peppol on our dedicated Peppol page and in our two previous blogs ("An introduction to Peppol" and "How does Peppol work?").

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EDIFACT standard

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EDIFACT is the abbreviation for "Electronic Data Interchange for Administration, Commerce and Transport". It is a global set of rules that was developed in 1986 for the cross-company electronic exchange of data between two or more business partners using EDI. However, the process can differ from company to company.

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EDIFACT was defined by the United Nations and is widely used throughout Europe. The standard defines the type of address, the format and the infrastructure required for compliant electronic invoicing.

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Country-specific standards

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In many countries, governments have developed specific e-invoicing standards to meet the particular requirements and tax regulations of each country. These standards have often been introduced to improve the efficiency of invoicing, combat tax fraud and promote interoperability between different business partners.

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In Italy, for example, there is FatturaPA, an XML invoice format. Spain uses the equally XML-based Facturae format, while the French government uses the hybrid standard Factur-X (identical to the German ZUGFeRD standard). This is a combination of PDF with embedded XML data. Germany has introduced the German CIUS (Core Invoice Usage Specification) XRechnung alongside the aforementioned ZUGFeRD format, which is already well established in the B2B sector. The XRechnung is used by federal, state and local authorities as well as increasingly in the B2B sector. (For more information on the standards used in Germany, see our previous blog post here). These country-specific standards are each tailored to the individual requirements and legal framework conditions of the country.

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Find out more about country-specific e-invoicing standards and their impact on the business world globally in our Global E-Invoicing Guide.

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Three e-invoicing core elements

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Three core elements are necessary to enable e-invoicing:

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1. E-invoice addresses

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First, all parties involved in the e-invoice must have an e-invoice address. An e-invoice address is the digital address via which electronic invoices are exchanged between suppliers and buyers. This address can vary depending on the country and service provider, e.g. a standard email address or a specific ID number.

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2. Formats

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The formats for electronic invoices are often defined by the individual countries. A widely used European format is XML (Extensible Markup Language), which is adapted by each country to include country-specific information such as the following:

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• Tax identification number (VAT number) - a unique number that is different for each country.
• Global Location Number (GLN) - a 13-digit number that is unique worldwide.
• Data Universal Numbering System (DUNS) - a 9-digit number assigned by the credit bureau Dun & Bradstreet.

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In addition to XML, various other formats are used in different countries and contexts for electronic invoicing. Some examples are:

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• JSON (JavaScript Object Notation),
• CSV (Comma Separated Values),
• and many others.

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The choice of format often depends on factors such as legal requirements, technological infrastructure and industry standards.

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3. Infrastructure

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Traditionally, there are three types of infrastructure that are used for the exchange of electronic invoices. These are increasingly being supplemented by a fourth type:

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• 2-corner model: This is a simple P2P model (peer-to-peer) in which suppliers and buyers exchange electronic documents directly via EDI or XML files.
• 3-corner model: Here, the supplier and buyer use the same third-party service for document exchange. This third-party provider may use the cloud or a special e-invoicing software.
• 4-corner model: The 4-corner model forms the basis of the Peppol framework for electronic document exchange. It comprises four main actors: the sender, the recipient and the two respective access points. In this model, both the sender and the recipient use different service providers to process their electronic documents. These service providers work together to complete the transfer via an international network that connects companies and organizations.
• 5-corner model: This model extends the traditional interoperable 4-corner model by adding a "fifth corner" into which the tax authorities are integrated in order to gain real-time insights. This allows the tax authorities not only to collect periodic summary data, but also to monitor ongoing transaction data.

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Electronic invoicing process

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The e-invoicing process comprises several steps that describe the electronic exchange of invoice information between companies and their business partners:

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1. Creation: An electronic invoice is created either via an ERP system, an e-invoicing provider, or via a manual online form. The choice of process often depends on the number of invoices a company processes.
2. Enrichment: In this step, information is added that generally corresponds to the information on conventional paper invoices. However, additional, customised information may need to be provided to meet the requirements of the tax authorities or suppliers.
3. Conversion and dispatch: The invoice is converted into the required format, as different customers and tax authorities use different formats. It is therefore important to choose an e-invoicing provider that converts the invoice into any format required by the recipient. Finally, the invoice is distributed via the channel chosen by the recipient, be it directly into their ERP system, via a government portal, or even by post.

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Choosing the right e-invoicing provider

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Since there is no globally standardised e-invoicing format, it is advantageous to choose an e-invoicing provider who automatically converts data and supports all formats. A trustworthy provider should be connected to international networks to ensure tax compliance in many countries with different standards. In addition, it is advisable to choose a provider with a user-friendly interface, solid security measures and responsive customer service that will take care of any questions or issues.

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Services such as invoice templates, digital payment buttons, and electronic signatures can offer additional added value. A provider that also has a solution for invoice receipt, such as Unifiedpost Group can further simplify the accounts payable (AP) and accounts receivable (AR) processes.

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Our solutions make the difference

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Our all-in-one Banqup solution, designed specifically for small and medium-sized businesses, makes the process simple - without complicated implementation or development effort.

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Banqup is a ready-to-use solution designed specifically for SMEs, offering a fast and automated way to convert documents and data into any desired format. It enables seamless integration into international networks and offers numerous advantages of electronic invoicing.

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For larger companies, we also offer tailor-made solutions that meet your specific requirements and optimize your business processes. Our solutions are fiscally compliant in over 60 countries and offer you the same benefits of seamless integration into international networks.

Sign up for our free Banqup trial today and discover how easy it can be to switch to e-invoicing.