Electronic invoices in germany awv 2006

Verlag Exchanging Invoices Electronically in Germany A Guide for Companies Seeking to Implement Electronic Invoicing In co-operation with:

1 Verlag Exchanging Invoices Electronically in Germany A Guide for Companies Seeking to Implement Electronic Invoicing In co-operation with:

2 Imprint Publisher: AWV-Arbeitsgemeinschaft für wirtschaftliche Verwaltung e.V. (German Association for Economic Administration) Internet: www.awv-net.de Members of the “Electronic Invoicing” Working Group: Bernd Bösler Deutsches Institut für Normung (DIN) e. V. (German Institute for Standardiza- tion) Heinz Dziubinsky MARKANT Handels- und Service GmbH Stefan Engel-Flechsig Lawyer, chairman of the CEN/ISSS “eInvoices” Workshop Klaus Förderer GS1 Germany GmbH Manfred Frommeld DaimlerChrysler AG Georg Geberth Bundesverband der Deutschen Industrie (BDI) e. V. (Federation of German In- dustries) Franz-Reinhard Habbel Deutscher Städte- und Gemeindebund (DStGB) e. V. (German Association of Towns and Municipalities) Thomas Jäger DATEV eG Dr. Willi Kafitz Siemens AG Carolin Klas Arbeitsgemeinschaft für wirtschaftliche Verwaltung (AWV) e. V. (German As- sociation for Economic Administration) Thomas Kriesel Bundesverband Informationswirtschaft, Telekommunikation und neue Medien (BITKOM) e. V. (German Association for Information Technology, Telecom- munications and New Media e. V.) Michael Leistenschneider DATEV eG Ulrike Linde Bundesverband deutscher Banken (BdB) e. V. (Association of German Banks) Heiko Mehnen Gesellschaft für Logistik und Informationssysteme mbH Werner Mock Verband der Automobilindustrie (VDA) e. V. (German Association of the Auto- motive Industry Dr. Alexander Neeser Deutscher Industrie- und Handelskammertag (DIHK) e. V. (German Associati- on of Chambers of Commerce and Industry) Simone Schlewitz Zentralverband des Deutschen Handwerks (ZDH) e. V. (German Confederation of Skilled Crafts) Alexander Schmidt Bundesministerium der Finanzen (German Federal Ministry of Finances) Nicole Sommer Zentralverband Elektrotechnik- und Elektronikindustrie (ZVEI) e. V. (German Electrical and Electronic Manufacturers’ Association) Implementation and design: AWV-Arbeitsgemeinschaft für wirtschaftliche Verwaltung e.V. Duesseldorfer Straße 40 65760 Eschborn, Germany Karin Scheu/Gottfried Glöckner AWV Order-No.: 04620e

Contents 3 Table of Contents Foreword ......................................................................................................................................................... 5 Introduction .................................................................................................................................................... 6 Chapter 1 ........................................................................................................................................................ 8 Fundamentals of German Value Added Tax Law ........................................................................................ 8 Chapter 2 ........................................................................................................................................................ 14 Processes for Exchanging Invoices Electronically ....................................................................................... 14 1. Processes using electronic signatures ........................................................................................................ 14 2. Processes using EDI ................................................................................................................................... 19 3. Storage ........................................................................................................................................................ 23 Chapter 3 ........................................................................................................................................................ 25 Economic Environment for Utilisation ......................................................................................................... 25 Resources for Further Information ............................................................................................................... 28

Foreword 5 Foreword Over the past few decades, many industries have roughout Europe: The 6th Value Added Tax (VAT) achieved significant gains in productivity. To a certain Directive and its implementation into national law in extent, this was made possible by the interlinking of all Germany and all other Members States within the Eu- the parties that are involved in the production process ropean Union ensure that electronic invoices can be and by the higher degree of integration that accompa- used for, and are recognised for, VAT refunds. nied these changes. Nevertheless, the potential gains to be made by interlinking and co-operating offer consi- Nevertheless, many questions remain unanswe- derable advantages to all industries and companies: red, and they require a competent solution that is ori- They prevent media changes (which are susceptible to ented on the practical needs of enterprises and integra- errors) and contribute towards substantial cost savings. tes all the parties involved. Increasing numbers of companies are now recognising this potential. They know how important it is to be For this reason, I commend the fact that – under able to exchange business data in a way that is fast, the umbrella of the AWV – recognised experts have inexpensive and precise in order to be able to imple- formed an initiative for tackling the technical, legal, ment intelligent measures for boosting efficiency. This and economical issues connected with electronic in- holds true for both B2C (business-to-consumer) and voicing. This document, "Exchanging Invoices Elec- B2B (business-to-business) applications. tronically in Germany", makes a practical guide available – especially for small and mid-size enterprises. In this way, companies can achieve gains in the The guide outlines the main steps required for introdu- efficiency of their everyday business transactions by cing the use of electronic invoices in a way that com- completely automating different business processes, plies with the legal requirements and fully exploits the such as the ordering of goods, the sending of delivery economic potential. advices, invoicing, and settlement of payment. In national and international trade, the electronic exchange of data for such commercial transactions as purchase orders, delivery notes, invoices, etc. has been a part of Eschborn, Germany, January 2006 everyday life for years now. Millions of transaction documents are no longer being sent to their addressees in paper form; instead, they are exchanged electronically between business partners. Many corporations are now processing 100 percent of their document transactions electronically. Dr. Winfried Materna President of the AWV And there are good reasons for doing this: The- Managing Director and Partner re are all kinds of technical processes and solutions MATERNA GmbH available for employing such processes in an efficient Information & Communications, Dortmund, Germany and cost-cutting manner. Besides the classic EDI (Elec- tronic Data Interchange) method – which is a largely automated and formatted means of exchanging data – electronic processes are being supplemented by new technologies (such as WebEDI). The sending of e-mails using electronic signatures also represents an option for exchanging invoices electronically. Besides the technical requirements, the corresponding legal framework has also been established th-

6 Introduction Introduction As our society becomes digitalised, information having to risk losing the deduction of input tax, sever- in any form flows more quickly, is more readily acces- al technical, legal, and logistical questions have to be sible, and is easier to exchange. Accounting data that answered: is sent between companies or between companies and tax authorities represents one portion of this stream of How can we ensure that data can be exchanged information. Digital invoices are at the focal point of smoothly between different accounting systems and this exchange of data. platforms? See the study commissioned by the European Commission: "Study on the requirements imposed by the Member States, for the purpose of charging taxes, for invoices produced by electronic or other means", 1999 Each year, German companies send out over 6 How can the invoice recipient be certain that the billion invoices. Here, the trend is clearly moving to- integrity of invoice content is not compromised during wards electronic exchange of these invoices. Four out its digital journey? of five companies cite cost advantages as the decisive factor for switching to a different media for invoices, How is it possible to confirm the identity of the because this makes it possible to eliminate the prin- invoice originator? ting, distribution, and postage costs. Consequently, electronic invoices and the ex- What legal requirements must be observed in change of electronic invoices have to meet high expec- order to ensure that neither the state’s tax revenue nor tations. Nevertheless, in order to be able to realise the the company’s entitlement to claim a deduction for in- savings potential offered by electronic invoices without put tax are endangered?

Introduction 7 When we look beyond the mere exchange of in- purchasing/retailing organisations or in industrial sec- voices to other areas that are directly linked to this tors. For many small and mid-sized companies, on the process, additional questions arise with regard to se- other hand, transitioning from existing, well-proven in- cure long-term archiving of the data and availability voicing procedures represents a tremendous challenge. of digital invoices for internal accounting and for external examiners (tax advisors, auditors, public tax Despite these issues, the electronic exchange of authorities and social security organisations). Further- invoices can make it possible to achieve an enormous more, the process of coordinating the electronic ac- boost in efficiency coupled with considerable cost re- counting of transactions with other parts of a compa- ductions in the communication between and among ny, such as warehousing systems and existing businesses and administrative bodies. e-business platforms, also requires clarification. This guide shows which elements of the VAT However, the experience that has been gained framework require compliance when transitioning to in the use of these electronic systems is very diverse electronic invoicing and presents the technical and and heterogeneous: Many companies (especially large managerial solutions that are available and ready for corporations) have been successfully exchanging data use. Furthermore, it provides information about the electronically for decades, especially in the area of large economic framework for the exchange of electronic invoices. Definition of terms and abbreviations used in electronic invoicing E-billing and e-Invoicing both refer to the receiving and sending of invoices electronically. The German Turnover Tax Act (Umsatzsteuergesetz, UStG) sets forth the requirements for the form and content of invoices in Germany. The invoice – or more specifically the VAT document – must maintain a specific form, and thus has the nature of documentary evidence; electronic signatures are legally required as evidentiary value for electronic invoices that exist only in electronic form (without accompanying paper documents). Summary (or collective) invoices serve as the periodic documentation that is transmitted in the EDI process; § 14, subsection 3, no. 2 of the German Turnover Tax Act also refers to these documents. EDI (Electronic Data Interchange) refers to the exchange of structured data from computer system to computer system by electronic means and with a minimum of human intervention. Invoices are transmitted, for example, in the UN/EDIFACT format with the INVOIC message type; remittance advices, for example, are transmitted with the REMADV message type. GDPdU (Grundsätze zum Datenzugriff und zur Prüfbarkeit digitaler Unterlagen / Principles for Data Access and Auditing of Digital Documents): This document defines archiving requirements for tax-related electronic data, such as information required for external tax audits.

8 Fundamentals of German Value Added Tax Law Chapter 1 Fundamentals of German Value Added Tax Law Invoices as a core element of the value added tax system Invoices are a core element of the value added tax system in Germany. They document the buyer’s right to deduct input tax. A business that is part of a value added chain can, under certain circumstances, charge its clients value added tax for the supply 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 invoice that documents the amount of value added tax that it paid. 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. The role of invoices in value added tax law This requirement makes invoices a core element within the VAT system. They serve as the foundation European VAT law is designed so that only the and the evidence for the buyer’s right to deduct input tax. end customer, and not the businesses involved, bear Correspondingly, civil law protects the right of the economic burden (in keeping with the principle of the party receiving a taxable supply of goods or ser- a maintaining a neutral VAT burden for businesses). vices to be issued an invoice. This right arises out of Ultimately, every business should be able to pay the the secondary contractual obligations. On the basis of “net” price to acquire or use the goods and services these principles, supply recipients can demand that the that it employs or consumes in the course of the business legally required invoice data be sent to them in the le- activities that it performs to generate taxed turnover. gally required form. 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 § 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 (§§ 14 and 14a of the German Turnover Tax Act).

Fundamentals of German Value Added Tax Law 9 Options for transmitting invoices In Germany, four methods are approved for the transmission of invoices: Physical conveyance of a paper document, Electronic transmission from one standard fax machine to another standard fax machine, Electronic transmission of a file that bears at least a qualified electronic signature, or Electronic transmission of the invoice file utilising an EDI process with the additional transmission of a summary invoice. The obligation to issue an invoice Nonetheless, the parties must have agreed before- hand to reverse the direction of the invoicing process In keeping with the buyer’s right to receive an in this manner. This agreement does not require a specific invoice, the supplier is obligated to issue an invoice. form (and can, therefore, be made orally, for instance). Nevertheless, this obligation is only unrestricted when the both the service recipient and the service provider As far as the content, form and transmission of are businesses or legal entities (§ 14, subsection 2, the self-billed invoice are concerned, the same require- sentence 1, no. 2 of the German Turnover Tax Act). ments apply as with an invoice. Furthermore, an invoice must be issued for business transactions conducted with businesses in other EU Finally, an external service provider (ASP) can Member States (§ 14a of the German Turnover Tax also be engaged to create and send invoices, including Act). If the business that provides the service does not self-billed invoices (§ 14, subsection 2, sentence 4 of fulfill its legal obligation to issue an invoice, it is not the German Turnover Tax Act). Data that the service fulfilling its legal obligations and can expect to pay a provider requires to prepare the invoice can be sent to fine of up to 5,000.-- euros (see § 26a of the German that service provider without regard to the form. The Turnover Tax Act). service provider then puts the invoice into the legally required form – for instance by certifying it with a Nevertheless, under certain conditions, § 14, qualified electronic signature (hereafter also referred subsection 2, sentence 2 of the German Turnover Tax to as a qualified signature) – and sends it to the service Act also makes provisions for the possibility of the recipient on behalf of the service provider. supplier shifting the obligation for issuing an invoice to the supply recipient (self-billing; in German: “Gut- Transmission of an invoice in compliance schrift”). In such cases, the supply recipient creates with the legal requirements the invoice and sends it to the supplier. As long as the business providing the supply does not object to the The German Turnover Act considers the sending invoice, it is considered an invoice that entitles the sup- of a paper invoice to be the norm, and therefore requires ply recipient to deduct input tax. the invoice recipient’s consent when alternative methods

10 Fundamentals of German Value Added Tax Law of transmission are employed (§ 14, subsection 1, sen- § 2, no. 3 of the German Digital Signature Act tence 2 of the German Turnover Tax Act). Nonetheless, (for further details, please refer to Chapter 2 no particular form is required for this, and consent can “1. Processes using electronic signatures”). Here, be given by simply accepting the electronic invoice accreditation of the signature provider pursuant without comment. Acceptance without comment is con- to § 15 of the German Digital Signatures Act is no sidered given if the recipient books or pays the invoice. longer mandatory. In other words, when invoice recipients do not EDI invoices are only recognised by tax law want to accept invoices in electronic form, they must when a summary invoice is also sent. express their refusal or reject the invoice and demand a paper invoice. The summary invoice must guarantee the integrity of the invoice content and the authenticity of the in- Forms of electronic transmission must guaran- voice origin (see also Chapter 2 “2. Processes using EDI”). tee the authenticity of the invoice’s origin and the integrity of the invoice content (§ 14, subsection 3 of the Transmission of invoices per fax machine re- German Turnover Tax Act). This means that it must be quires additional measures, unless the invoice is trans- possible to validate the identity of the invoice origina- mitted from one standard fax machines to another. If, tor and verify that there has been no tampering with however, a server or computer plays an intermediary the invoice content. role in the transmission, the fax invoice must bear a qualified electronic signature. To achieve this, legislators and tax adminis- trations have laid out detailed requirements. These The sender of the invoice must document the include, for instance, the requirement that invoices electronic process that it uses to send the invoice. This that are transmitted electronically must bear at least documentation must clearly show that the employed a qualified electronic signature in accordance with process fulfils the legal requirements.

Fundamentals of German Value Added Tax Law 11 Electronic signatures and the German Turnover Tax Law as of 01 January 2004 § 14, subsection 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 § 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 Official Journal, L 338, p. 98) when, in the agreement on this interchange of data, the use of processes has been planned to 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 point 1. Legal requirements for proper storage sponding input tax deduction will be retroactively di- of invoices sallowed if the invoice discrepancies are discovered in an audit performed by the tax administration. Both the business that delivers the supply and the supply recipient are obligated to keep invoices for a period of ten years. This obligation is laid out in § 14b, subsection 1 of the German Turnover Tax Act. The legal requirements for archiving are laid Since the safekeeping period does not officially begin out in: until the end of a calendar year, it can, in fact, be ex- tended to almost 11 years. The invoice must remain The German Turnover Tax Act, legible (readable) until this period is over (§ 147, sub- The German Tax Code, section 5 of the German Tax Code). The form in which Generally Accepted Principles of Compu- the invoice was sent has no effect on the obligation to store documents. ter-assisted Accounting Systems (GAP CAS, in German: GoBS) – Letter from the In the case of electronic invoices, however, cer- German Federal Ministry of Finance tain other certifying elements have to be stored in addi- (BMF) dated 07 November 1995, and tion to the invoice itself (for more information on the Principles of Data Access and Auditing of other legal requirements for storing invoices, please Digital Documents (GDPdU) – Letter from refer to the comments on page 23/24). When invoices the German Federal Ministry of Finance are not sent and stored in accordance with the legal (BMF) dated 16 July 2001. requirements, there is an impending risk that the corre-

12 Fundamentals of German Value Added Tax Law Receipt of the invoice When supplies are either delivered to the business in Germany from other EC Member States or when An electronic invoice has been delivered when it the business picks up the goods that are to be supplied, has entered the recipient’s sphere of control, so that – the recipient must pay taxes on it as an intra-Commu- assuming normal conditions – the recipient has the nity purchase. Pursuant to § 15, subsection 1, sentence opportunity to take note of it (“receiving devices”). 1, no. 3 of the German Turnover Tax Act, paying taxes Electronic mail boxes for receiving e-mails are only on an intra-Community purchase also entitles the considered receiving devices when the owners make purchaser to deduct input tax without the law requi- them public in their business and legal transactions (by ring the issuance of an invoice pursuant to § 14 of the including their e-mail address on their official letter- German Turnover Tax Act. The purchaser must sepa- head, for instance). rately record the value of the acquired goods and the applicable tax amounts according to § 22, subsection Place of storage 2, no. 7 of the German Turnover Tax Act. Any taxable business subject to VAT in Germa- When an input tax deduction is claimed for a ny must store its invoices in Germany or in another EU supply for which VAT applies in Germany and that Member State (details in § 1, subsection 3 of the Ger- was supplied by a company located outside Germany, man Turnover Tax Act). In the latter case, complete no invoice that meets the German requirements is re- remote query capabilities (online access) must be pos- quired for claiming an input tax deduction in this case sible, and it must be ensured that the local tax office either. This is because, according to § 13b, subsection can download and use them. 2 of the German Turnover Tax Act, for supplies from foreign companies, the recipient of the supply owes Input tax deductions for cross-border the VAT. The supply recipient can, pursuant to § 15, business transactions subsection 1, sentence 1, no. 4 of the German Turno- ver Tax Act, claim an input tax deduction for the taxes In order to claim an input tax deduction in Ger- paid without having to present an invoice for this. Ne- many for cross-border supplies of goods and services, vertheless, according to § 14, subsection 2, sentence 1, the recipient in Germany does not require an invoice no. 2 of the German Turnover Tax Act, the business that complies with the German regulations. Therefore, that provides the supply remains obligated to issue an non-compliance with the form requirements for an elec- invoice within six months after the supply is provided. tronic invoice cannot lead to a loss of the input tax deduction. Invoice requirements in European law The following constellations are conceivable: The basic requirements from Directive 2001/ For supplies to countries outside the EC, import 115/EC of 20 December 2001 on invoicing – which VAT is incurred, which the German business can de- was incorporated into the 6th Directive 77/388/ECC duct as input tax as soon as it is paid (§ 15, subsection for harmonising VAT – apply for all invoices issued in 1, sentence 1, no. 2 of the German Turnover Tax Act). the EU. An additional prerequisite for deducting the input tax is that the business has free access to the imported More specifically, the Directive establishes the goods. In this case, instead of an invoice, the business following requirements for the content of an invoice: submits a document from the customs authority as evidence that it is entitled to deduct the input tax. Here, Ten mandatory items (as well as four additional however, it must be noted that the recipient must sepa- items that are required under certain circumstances) rately record the value of the imported goods and the must be mentioned on the invoice (in German law, the- tax amount paid (§ 22, subsection 2, no. 6 of the Ger- se minimum requirements are found in § 14, subsec- man Turnover Tax Act). tion 4 of the German Turnover Tax Act).

Fundamentals of German Value Added Tax Law 13 For small businesses and for invoices with small are fulfilled. The invoice recipient may freely choose amounts, simplified processes may be implemented. the place and method of storing its incoming invoices. Electronic storage in another Member State is also A handwritten signature is not required for in- permitted. voices. The Member States are free to permit other me- The Directive on invoicing also contains new thods for the electronic transmission of invoices, even stipulations regarding the transmission of invoices. It if these methods are not as secure as EDI and electro- allows all businesses to create and send invoices elec- nic signatures. The only requirement is that the pro- tronically, as long as the authenticity of the invoice’s cess that is used guarantees the authenticity and inte- origin and the integrity of its content are guaranteed grity of the data. Thus, the Directive provides national and the recipients agree to receive the invoice in this legislators considerable leeway for establishing the re- form. quirements for electronic transmission. National legislators have made varying use of this leeway. For ex- In addition, the Directive expressly permits elec- ample, not all Member States require the use of a tronic transmission per EDI or as a file with an elec- “qualified signature” for invoices that are transmitted tronic signature. An additional summary invoice is not electronically. For this reason, the use of cross-border required by European law. The tax authorities in the electronic invoices has not been completely harmonised, Member States are obligated to recognise electronic nor has it been standardised. invoices without any further notification or approval processes in as much as the Directive’s requirements Directive 2001/115/EC on Invoicing On 1 January 2004, Council Directive 2001/115/EC entered into force (“Directive on Invoicing”, EC Official Journal, L 15, p. 24). This directive harmonises, simplifies and modernises the laws governing invoicing that businesses must observe when they sell goods or services for which VAT is due. Moreo- ver, the Directive introduces a common legal framework for electronic transmission and storage of invoices. When issuing invoices, a business in the EU shall only have to follow one set of rules, regardless of where the goods or services that it supplies are to be taxed. All invoices that comply with the new regulations shall be recognised for VAT purposes by the tax authorities throughout the Com- munity. In particular, the Directive has introduced new stipulations for the content and the transmission of invoices in Article 22 of the 6th VAT Directive for harmonising turnover tax in the EU. These requirements must always be observed when a German business supplies goods or services to a business established in another Member State (see § 14a of the German Turnover Tax Act and Article 22 (3a) of the 6th Directive for harmonising turnover tax in the EU).

14 Processes for Exchanging Invoices Electronicall Chapter 2 Processes for Exchanging Invoices Electronicall German VAT law distinguishes between two Using the hash value and the signature key, sig- basic methods for transmitting electronic invoices: The nature software creates a unique individual combination transmission of invoices with a qualified electronic si- of numbers and letters, which are sent together with gnature, or transmission using an EDI process in con- the invoice file to the invoice recipient. For a qualified nection with summary invoices. electronic signature, the signature key is stored exclusi- vely on a specially protected chip card (signature card). 1. Processes using electronic signatures The security for the transmission of an invoice Introduction to electronic signatures file with a qualified signature is achieved by enabling the invoice recipient to verify the author of the signed The requirements for electronic signatures are file and its authenticity. Part of the information required laid out in the German Digital Signature Act (Signa- for this is found on the signature certificate that comes turgesetz, SigG) and the German Digital Signature Or- with every qualified signature. dinance (Signaturverordnung, SigV). Since § 14 of the German Turnover Tax Act refers to SigG, the stipulati- The process for producing and using qualified ons in that law must also be observed in tax law. In electronic signatures always involves not only the cre- order to comply with the security requirements laid out ator and the recipient of the invoice, but also a trust in German Digital Signature Act, the invoice data that center as a neutral party. The German Digital Signa- is to be transmitted is first converted into a relatively ture Act refers to this party as the “certification-ser- short string of characters (hash value). vice provider”. For more information on this, please Electronic invoices with and without EDI

Processes for Exchanging Invoices Electronicall 15 refer to the “Elektronische Signatur” section (in Germ- order to fulfill the requirements of both civil and tax an) of the www.bundesnetzagentur.de website. law, their legal significance in tax law can differ from their legal significance in civil law. The trust center issues and manages the qualified signature certificates required by the German Di- In civil law, a qualified electronic signature re- gital Signature Act as well as the private signature keys. places a handwritten signature for electronic documents Managing them also includes, for instance, maintai- and thus confirms the efficaciousness of a legally bin- ning accessibility of the information that is contained ding statement. in the signature certificates for queries from the invoice recipients. The trust center’s intermediary role In value added tax law, on the other hand, the increases protection against forgery and misuse of elec- signing of an invoice has no legally binding effect. In- tronic signatures. In part, the trust centers and other stead, qualified signatures on invoices only serve to providers also supply the required components. guarantee clear identification of the party issuing the invoice and verification of the integrity of the invoice Although qualified electronic signatures are cre- data. The owner of the signature is by no means perso- ated in the same way and in compliance with the same nally liable for the correctness or completeness of the stipulations of the German Digital Signature Act in invoice. How Electronic Signatures Work Private key Public key Signature creation Signature verification Plaintext Plaintext + Signature Plaintext A one-way function is used to turn the plain text into a compressed version that is unique to this plain text (hash value). This bit string is encrypted using the private key and then transmitted as an “electronic signature” accompanying the plaintext. Using the signing party’s public key, the recipient can decrypt the hash value and compare it with the hash value that he or she has generated for the plaintext. If the two hash values match, the plaintext is authentic and the text was not altered during transmission. This clearly demonstrates the authenticity of its origin and the integrity of its content. How cryptographic process are used for electronic signatures

16 Processes for Exchanging Invoices Electronicall Creating, sending and verifying invoices A qualified electronic signature is only conside- that have a qualified signature red legally compliant when it is unambiguously linked to a natural person. This link must also be documented In order to exchange invoices that bear a quali- in the signature certificate. For this reason, during the fied signature, those who issue and receive the invoice registration process, the trust center also verifies the must fulfill certain requirements with regard to hard- signature owner’s identity. ware, software and documentation. Exchanging invoices using a qualified signature a) Invoice originator b) Invoice recipient Digital signature card and certificate (issued by Not required the trust center) Approved reading device Not required Software for digital signatures (signature ap- Software for verifying the signature plication components) Electronic contact address (such as an e-mail Electronic contact address (own e-mail address/ address for the recipient and an e-mail address/ EDI address) EDI address of its own) Recipient’s declaration of consent for the ex- Submission of declaration of consent (no parti- changing of electronic invoices (no particular cular form required) form required) Suitable archiving capabilities (archiving me- Suitable archiving capabilities (archiving me- dium) for the archiving period dium) for the archiving period Ensuring that the invoice recipient can access Access to the invoice originator’s public certi- the public certificate (on a central server or by ficate attaching it to the invoice) Creation of process documentation (significant Creation of process documentation (significant for audits by the tax administration) for audits by the tax administration) In order to be able to sign electronic invoices in Creating the signature requires a chip card and a way that complies with the law, the party issuing the a class-2 chip-card reader, which means that the de- invoice requires a qualified signature certificate and a vice has its own keypad. The chip card stores the sec- secure signature creation device (§ 2, no. 3 of the Ger- ret combination of characters used for the signature man Digital Signature Act). The signature creation (private key) and the verification key for decrypting device is usually a chip card. Qualified signature certi- the signature (public key) as well as the trust center’s ficates can only be issued by a certification-service certificate for the given signature user. Finally, signa- provider (trust center). ture software is needed to generate the signature. The

Processes for Exchanging Invoices Electronicall 17 software links the signature that has been generated in thenticity of the origin and integrity of the content can the approved reading device to the electronic document also be verified automatically. The signing of electronic invoices in batch pro- The role of service providers in invoicing cesses is also possible and permitted for a large number of invoices. To do this, the signature owner can The business making the supply may either is- “activate” the qualified signature for a pre-defined pe- sue an invoice directly or commission a third party to riod or for a pre-established number of signing proces- do so in its name and on its behalf (§ 14, subsection 2, ses. Nevertheless, in such cases, the user must ensure sentence 4 of the German Turnover Tax Act). that the signing is accomplished in a secure processing environment. In such cases, the ordering party gives the service provider a power of attorney for creating or recei- The sending of a signed electronic invoice re- ving electronic invoices. quires that the invoice recipient agrees to participate in the electronic exchange of invoices. This consent is The supplier outsources the creation of invoices considered given if the invoice recipient does not ob- to a service provider. The service provider accepts the ject to the electronic invoice. Nevertheless, in order to data, converts it into a standard format (if required), avoid disagreements, the party issuing the invoice and signs this data. The invoice data is then sent toge- should request the invoice recipient’s consent before ther with the signature to the invoice recipient or to the the electronic invoice is sent. service provider that the recipient has charged with this task. The recipients of electronic invoices can only verify the signatures when they are in possession of The invoice recipient, too, can charge a service the public key, the signed invoice and the signature provider with the responsibility of verifying the trans- certificate for the party that has issued the invoice. The mitted signature data and with other services that might invoice originator can transmit the public key together be required, such as converting and archiving the data. with the invoice. Nonetheless, the public key and the rest of the data that is included in the signature certifi- It is also possible for the service provider to per- cate can also be accessed through the trust center. form both the signature creation and verification func- tions – on behalf of the sender and on behalf of the The business providing the supply must docu- recipient as well. ment the process that it uses to send electronic invoices. The electronic invoice itself must be copied and stored E-mail processes electronically together with the signature certificate. Sending electronic invoices by e-mail is clearly The invoice recipient must document the results one of the simplest methods for electronic transmissi- of the signature verification process that it has perfor- on. The invoice is usually sent as an attached file (in med (see the diagram on page 15) and log the receipt PDF format, for example). and processing of the invoice. This process lends itself particularly well when This documentation must be stored together with document volumes on the recipient side are low and the signed electronic invoice itself, and with the public greater automatic integration of the data would not be key, for the legally required period of 10 years (see “3. economical. E-mail is especially well suited for situa- Storage”, p. 23f.). For this reason, both parties invol- tions in which the invoice recipient is not entitled to ved in a turnover transaction must have a plan covering deduct input tax and, therefore, does not require a sig- process documentation and invoice archiving. The au- nature – as is the case, for example, with telephone

18 Processes for Exchanging Invoices Electronicall bills sent to private customers. A disadvantage con- rifying the validity of the signature by employing the nected with this method is that the data (as with a letter corresponding software or an Internet application. The or a fax) still has to be entered manually, which causes accompanying verification protocol and the certifica- a media change. tes are to be archived electronically in addition to the invoice. Whenever invoices are sent by e-mail, a qualified electronic signature must always be deployed in Downloading of the electronic invoice via order to enable the supply recipient to deduct the input the Internet tax. If the invoice is sent as an e-mail attachment, either the signature can be integrated into the invoice file, or two In addition to the sending of the electronic in- attachments can be sent (invoice file and signature file). voice file per e-mail, in many cases, the invoice is made available for download in a protected section of the The sender must implement the corresponding website operated by the invoice-sending business. In software, and the actual signature itself must be gene- such cases, the invoice recipients usually receive a rated using a signature card from a certification-ser- message stating that the invoices are available on the vice provider (trust center). The recipient must, as with Internet. Here too, as with the email process, the use of a any invoice that is signed electronically, observe the qualified electronic signature for the invoices is required legal requirements. These requirements include ve- to enable the invoice recipients to deduct input tax.

Processes for Exchanging Invoices Electronicall 19 EDI process with a signature Future exchange processes over the In- ternet As an alternative to the process with a paper- based summary invoice, since 2002, it has also been The technological trend is clearly moving away possible to employ a qualified electronic signature in from Value Added Networks (such as X.400) with vo- EDI processes in order to meet the legal requirements lume-dependent costs and towards Internet-based ex- for an electronic invoice. change processes. To make this possible, prior to sending, the EDI Here, the core technology of the World Wide Web invoices – which are still created in the same way – (http) is used, but in combination with the employment must be signed with a qualified electronic signature by of existing and established exchange formats. The most the party sending the invoice (by the supplier or by the important representative of this process is AS2 (Ap- service provider that the supplier has charged with this plicability Statement 2). Following a further develop- task). Here, either each individual EDI invoice or the mental step, web service technologies that are already entire EDI file is signed electronically. being used successfully in standard software architec- tures will play an increasingly important role. From a technical perspective, the signature, along with the data required for the verification process 2. Processes using EDI (such as the algorithms that are used and a reference to the signature key), can be sent in the AUTACK EDI- When EDI processes are used, it is possible to FACT message (see DIN 16560-15). As an alternati- do without the use of a qualified signature when an ve, it is also possible to use other processes, such as S/ additional summary invoice (collective invoice) is cre- MIME. ated and processes are agreed upon that ensure the authenticity and integrity of the transmission: As far as the required infrastructure is concerned, the trading partners must decide if they want to The summary invoice can be transferred to the set up their own signature infrastructure (software, partner in paper form, as a standard fax, or with a hardware, signature cards with certificates) or com- qualified electronic signature. It may be transmitted mission a service provider. along with every transmission or periodically. The lay- In the example scenario diagrammed above, the out described in E DIN 5019 can be used as a template sender passes the EDI data on to a service provider. for the summary invoice. The data is signed by a trust center and, following verification by another service provider, it is then passed on to the recipient along with the accompanying signature and verification information. EDI (Electronic Data Interchange): Electronically signed fax via a fax server Electronic interchange of structured data from Normally, invoices can only be transmitted using computer system to computer system by elec- a standard fax machine unless additional measures are tronic means and involving a minimum of hu- implemented. In order to be able to use fax servers for man intervention. sending out invoices, there are software solutions avai- Computer systems can process structured data lable that also make it possible to sign faxes electroni- automatically, and they are unambiguously cally. The invoice content and the signature are repre- identified by precisely defining the syntax (ar- sented in a special bar code that can be read by the rangement or order of the characters) and se- receiving fax software or – when paper printouts are mantics (meaning of the characters). used – with an appropriate scanner and the corresponding software, which enables signature verification.

20 Processes for Exchanging Invoices Electronicall The authenticity and integrity that the law re- Classic EDI quires for the data transmission is ensured through the use of Value Added Networks (VANs) or correspon- The use of classic EDI processes makes sense ding safety mechanisms for transmission via the Inter- when high volumes of information are regularly ex- net (such as AS2). changed between trading partners. The investments that are required for the infrastructure and for the prepara- tion of the data using in-house systems are returned by the advantages of automated processing, which ren- Transmission of EDI data to the trading ders re-entry unnecessary. partner As early as the 1980s, companies began transmitting business data through an electronic exchange When data that has been converted into a stan- using the EDI process. dard format is transmitted to the partner, both the trading partners and (when EDI invoices One of the foundational requirements for ex- are used) the law require security for the data changing data electronically with a large number of transmission. business partners is the existence of a uniform message standard. The advantages of EDI begin to pay off In an EDI exchange of data, these security re- when the parties involved exchange data in a standar- quirements are met by Value Added Networks dised format and thus make it possible to generate and (VANs), which are used to transmit the data process the data automatically. (for example, using the X.400 protocol). As an alternative, the data can be transmitted Examples for established EDI standards inclu- via the Internet. Besides transmission of the de EANCOM® in the consumer goods sector, Odette data via secured e-mail communication, AS2 and VDA in the automotive sector and EDIFICE in the is also used. In such cases, the AS2 standard – electronics industry. EDI also includes the electronic which uses the signature and encryption tech- exchange of data with XML-based standards as well nology to provide the required security – is im- as formats that are agreed upon bilaterally. plemented. When using an EDI process, it is recommended that the trading partners sign an agreement covering the electronic exchange of data. This agreement defines the method of transmission, the evidential value of the EDI files, as well as the actions that are to be taken when errors arise. A corresponding template for an EDI framework agreement (in German) can be ordered through AWV (www.awv-net.de).

Processes for Exchanging Invoices Electronicall 21 There are two basic types of EDI communication: 1. Maintaining an in-house EDI infrastructure: In-house data is converted into a standard format using the company’s own converter software and is then transmitted to the partner. EDI Scenario with an In-house Infrastructure In house EDI Standard In house Converter Converter EDI partner EDI partner 2. EDI via a clearing center: In-house data is sent to a service provider that converts it into a standard format and sends it on to the partner. EDI Scenario with a Clearing Cenger EDI Service provider EDI partner converts from/to partner EDI Standard In-house file EDI Standard

22 Processes for Exchanging Invoices Electronicall Other processes that use the EDI frame- require any knowledge of EDI. Installing a commer- work cially available PC with Internet access at the SME’s premises for the use WebEDI is sufficient. Neverthe- WebEDI less, an SME can only use WebEDI if one of its partners or a service provider offers such a service. Internet-based WebEDI was developed with a particular focus on enabling small and mid-size enter- For the transmission of invoices using the prises (SMEs) that have low data volumes to take part WebEDI process, the same rules apply as with the ex- in the electronic exchange of data. change of invoice data using EDI. Here, too, a summary invoice must be created for the data that has been With this method, a WebEDI provider makes transmitted electronically. In the processes that are “electronic forms” available to SMEs via the Internet currently being used, the WebEDI operator makes a (World Wide Web). The SMEs can then use these forms function available that can be used to generate and print to exchange purchase orders, dispatch notifications, out a summary invoice. The sender can then convey goods receipts and invoices. this invoice to the invoice recipient using a standard With this process, small suppliers, for example, fax machine, the postal system, or an electronically can log onto the server of a large trading partner. The- signed transmission. re, suppliers can view the purchase orders that the trading company has there for them, and can process the Method that uses the printing preparati- orders on the computer screen. Using the “turn-around on process technique”, a supplier can automatically carry over the orders into the corresponding screen masks for dispatch This method employs the pre-printing proces- notifications and invoices, and can then change them sing of existing electronic data to accomplish the com- and supplement them with additional information. After munication. Using suitable software, the corresponding manual processing, the suppliers need only press a but- invoice data is read out and transmitted to the recipient ton to send the information back to the trading company. electronically. These processes can be executed by the sender (or creator) or by a service provider that has For SMEs, using WebEDI requires only a mi- been commissioned to perform the task. Here, too, sum- nor investment in hardware and software and does not mary invoices are used. WebEDI-Scenario ASCII file WebEDI In-house mask format SME Internet Dealer Internet Server Manual processing

Processes for Exchanging Invoices Electronicall 23 3. Storage If the e-mail (and not the invoice) was signed, the e- mail must also be archived. The party issuing and the party receiving the invoice are equally obligated to keep and preserve the The recipient’s (e-mail) address is also stored wi- invoice. thin the framework of a customer information archive. Electronic invoices must be kept for the legally defined storage period and stored at a permissible lo- b) . . . for the party receiving the invoice cation in electronic form, and they must be made available immediately upon request for auditing purposes. The electronic invoice that was received, in electronic The storage period is 10 years and begins at the end of form. (A printout or microfilm is not permissible!) the calendar year in which the invoice was issued. The signature verification key for the electronic in- The place of storage for invoices must be loca- voice that was received; this key might already be ted in Germany or within the territory of the European an integral part of the invoice. Union. Furthermore, if the invoices are not stored in Germany, it must be ensured that complete remote que- If the e-mail (and not the invoice) was signed, the ries (online access), downloading and use by the local e-mail must also be archived. German tax offices is possible. The executed documentation of the signature veri- The invoices must be readable throughout the fication, in other words the verification protocol for entire storage period. Changes after the fact are not the signature at the time that the invoice arrived. allowed. If an encrypted invoice is received, both the encryp- It is also possible to outsource the task of sto- ted invoice and the decrypted invoice along with ring the documents to a service provider. This is true the decryption key must be kept. for both the sender and recipient of the invoice. In general, the in-house description of the process Due to the nature of electronic invoices and the that was in effect at the time of receipt must be different forms that they may take, the requirements documented. This description depicts the path from placed on the issuing party and the receiving party may arrival of the data to its storage in a product for differ depending on the way that the data is transmitted. further processing. (For example: How does the data Storing an electronic invoice that has a arrive? Is it encrypted/ unencrypted? Who has access?) This process documentation is valid for all invoices qualified signature that are received for which this process is used. What must be archived when electronic invoices are exchanged using a qualified signature? Consequently, besides the invoice itself, the business must also keep and preserve the evidence for the a) . . . for the party issuing the invoice authenticity of the invoice’s origin and the integrity of its data. A duplicate, in electronic form, of the invoice that was sent. If the electronic invoices are also to be used for matters covered by civil law (guarantees, lawsuits, etc.), The certificate with which the invoices were signed. it must be noted that the signatures – and thus the vali-

24 Processes for Exchanging Invoices Electronicall dity of the signature verification – are only valid for a With EDI invoices, a summary invoice must also limited period. Consequently, an additional process be sent at periodic intervals in paper form or in elec- must be used in order to ensure that, from the perspec- tronic form with a qualified signature. The storage re- tive of civil law, the electronic invoice, at any given gulations described above also apply to these docu- point, retains its integrity and still matches its original ments. state. To accomplish this, various methods (such as re- signing, archive signing, and time stamps) are used for Summary invoices in paper form long-term archiving of signatures. These invoices are to be stored in paper form. When specific process regulations are observed, they Storing an electronic invoice that uses an can also be digitalised (see GAPCAS) – using a scan- EDI process ner or digital camera, for instance – and deposited in an electronic archive. What must be archived when electronic invoices are exchanged using an EDI process? Summary invoices with a qualified electronic signature a) . . . for the party issuing the invoice Here, the same regulations apply as for invoices A duplicate, in electronic form, of the electronic in- with electronic signatures. voice. b) . . . for the party receiving the invoice The electronic invoice that was received in electronic form. (A printout or microfilm is not permissible!) If an encrypted invoice has been received, both the encrypted invoice and the decrypted invoice along with the decryption key must be kept. When the electronic data is converted into an “in- house format”, both versions must be archived. Furt- hermore, there must be documentation that records the hardware and software conversion processes that were used and whether or not this process was executed correctly. Thus, the company’s internal test logs are also important for being able to retrace the process later. In general, the in-house description of the process that was in effect at the time of receipt must be documented. This description depicts the path from arrival of the data to its storage in a product for further processing. (For example: How does the data arrive? Is it encrypted/ unencrypted? Who has access?) This process documentation is valid for all invoices that are received for which this process is used.

Economic Environment for Utilisation 25 Chapter 3 Economic Environment for Utilisation Even just delivering invoices by electronic means invoices alone come to approx. 12-17 million pages of (such as e-mail, for example) offers excellent cost-cutting paper that have to be sent by a standard fax machine potential for at least the sender, because the normal or the postal system. postal costs or fax costs can be eliminated. When the entire process is performed electronically, recipients The question of which process the partners no longer have to enter the information manually into should deploy depends on criteria such as data volu- their computer application. In this way, they eliminate me, customer requirements, and the structure of the the extremely slow and costly manual re-entry process, partner companies. which is highly susceptible to errors and unnecessarily keeps them away from their actual business activities. Invoice recipients boost efficiency through the electronic exchange of invoices, because they can im- The following sample figures highlight the sig- mediately process the invoice automatically (advan- nificance that electronic invoicing has for the Germa- tage of automation). ny economy: The supplier also profits from sending out in- Currently, approx. 150-170 million invoices are voices electronically, because sending digital invoice being sent out each year in the consumer goods indus- data saves the supplier the paper printout, enveloping try alone, which corresponds to a data volume in the and postage. Beyond this, faster transmission of the three-digit terabyte range. If all of these invoices were invoice to the recipient of the supply and automated printed out on paper, they would require approx. 300 processing by the recipient make it probable that the million DIN A4 pages. The corresponding summary accounts will be settled more quickly. Potential for Efficiency Gains in the Invoicing Process Quelle: nach BCG, Platinion

26 Economic Environment for Utilisation Business considerations (am Main) and Darmstadt and is supported by renow- ned companies. In a study performed in 1999 that served as pre- paration for Council Directive 2001/115/EC on invoi- This study surveyed Germany’s 1,000 largest cing and was commissioned by the EU Commission, companies (not including banks) to determine their esti- figures were cited for the first time that made it pos- mate of the potential for optimising subprocesses in sible to assess the cost-savings potential for electronic financial chain management: invoicing. 26% (which was the largest share) view invoi- In the meantime, there are also additional scien- cing as offering the greatest potential. tific studies and published project results available, which further differentiate, but fundamentally corro- As far as invoice volume is concerned, the sur- borate, the EU Commission’s estimate. vey revealed an average of 68,000 invoices per month with a wide bandwidth of up to 2 million invoices per For Germany, remarkable statements were made month. in a study published in 2003 by E-Finance Lab, a joint institution that is run by the Universities of Frankfurt Greatest Potential for Optimation Quelle:

Economic Environment for Utilisation 27 More than 2/3 of all invoices are still being sent Studies demonstrate that, additionally, errors that out through the postal system. arise due to a change of media represent and enormous set of costs. The processing of a complaint, for instance, An invoice sent out through the postal system costs an average of 128,– euros. costs an average of 16.16 euros overall compared to 2.00 euros for the standardised electronic exchange of One factor that is hard to quantify is the speed data. increase, which at least provides a basis for faster col- lection with the accompanying gains in interest that This figure is confirmed in additional “Electro- this creates for the party issuing the invoice. nic Data Interchange” literature, which establishes the basic validity of this cost assessment beyond the eco- Thus, electronic invoices make it possible to nomic segment of large corporations. Project experi- make gains with three crucial cost factors, the first two ence from BCG/Platinion has shown that the “invoice of which can be measured well: output” subprocess (with the steps of printing, enveloping and mailing) offers the greatest potential for opti- Improved quality – lower costs – shorter wai- misation (see chart on page 25). ting periods. Share of the Different Channels in the Overall Number of Share of the Different Channels in the Overall Number of Invoicing Sent Invoicing Sent

28 Resources for Further Information Resources for Further Information Useful background documents German Turnover Tax Act (Umsatzsteuergesetz, UStG), (http://bundesrecht.juris.de/bundesrecht/ German Tax Code, Abgabenordnung (http://bundes- BMF_index.html) recht.juris.de/bundesrecht/BMF_index.html) Useful Links German EDI framework agreement (www.awv- net.de) Website for DG TAXUD on electronic invoicing: http://europa.eu.int/comm/taxation_customs/taxati- E DIN 5019, Business forms in German – summa- on/e_invoicing ry invoice – collective invoice (www.beuth.de) Website of the CEN/ISSS Workshop on Electronic DIN 16560-15, EDIFACT – Application rules – Invoices: http://comelec.afnor.fr/cen/wsei Part 15: Application of the AUTACK service message type for transmitting integrity and authentici- Website for the UN/CEFACT project:http:// ty information via transmitted user data unece.org/cefact/forum_grps/tbg/projects.htm (www.beuth.de) Council Directive 2001/115/EC of 20 December 2001 (EC EC Official Journal, 2002 L 15, p. 24) for amending Directive 77/388/EEC (http:// europa.eu.int/comm/taxation_customs/taxation/ e_invoicing) Commission Recommendation of 19 October 1994 on the legal aspects related to electronic data interchange (EDI), EC Official Journal, L 338 1994, p. 98 (http://europa.eu.int/comm/taxation_customs/ta xation/e_invoicing) 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/bundesrecht/ BMF_index.html) GAPCAS – Generally Accepted Principles of Com- puter-assisted Accounting Systems – Letter from the German Federal Ministry of Finance (BMF) dated 07 November 1995 (in German, GoBS), http:/ /bundesrecht.juris.de/bundesrecht/ BMF_index.html) German Digital Signature Act (Signaturgesetz, SigG), (www.bundesnetzagentur.de)

AWV – Arbeitsgemeinschaft für Telephone: ++ 49 (0 ) 61 96/4 95-3 88 wirtschaftliche Verwaltung e. V. Telefax: ++ 49 (0 ) 61 96/4 95-3 51 Duesseldorfer Straße 40, 65760 Eschborn, Germany E-Mail: info@awv-net.de Postfach 51 29, 65726 Eschborn, Germany Internet: http://www.awv-net.de

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