E-invoicing: 5 Corner Model Explained

E-invoicing and digital reporting obligations are trendy amongst tax authorities around the world. Even though the purpose of these types of obligations are the same, governments follow different approaches as to how to process and receive indirect tax relevant data and the roles and responsibilities of each stakeholder involved (supplier, buyer, service providers, tax authority platform, etc.).

What are e-invoicing models?

Differences in the approach amongst tax authorities have paved the way for different e-invoicing models. Mainly, there are 3 different models:

• Interoperability Model
• Centralized Model
• Decentralized Model

The 5 corner model can be considered a sub-model under the decentralised model. Before we delve into the 5 corner model, let’s briefly explain all the models.

E-invoicing Models Explained

Interoperability Model

The goal of interoperability is to standardise the document format and exchange method to improve the document exchange process. Service providers play an important role as they generally map invoice data into the exchange format and help ensure an automated exchange process. The tax authority does not receive invoice data in real time. Audits happen during the storage period of fiscal documents.

The interoperability model is usually called the 4 corner model.

• Supplier (document issuer) being corner 1
• The supplier’s service provider being corner 2
• The buyer’s service provider being corner 3
• Buyer (end recipient) being corner 4

Centralised Model

The centralised model operates through a central platform often run by the tax authority. Depending on the tax authority platform functionality and requirements, a centralised platform may (Italy, Turkey, Poland etc.) or may not (Hungary, Argentina, Costa Rica etc.) handle the e-invoice exchange process.

If the central platform handles the document exchange process, the e-invoicing model is called a centralised exchange model. In the centralised exchange model, the actual invoice exchange is conducted by the tax authority platform (or hub), meaning that the seller and buyer do not exchange tax invoices directly with one another. Rather, they leverage the tax authorities' capabilities to receive supplier invoices and deliver them to the buyer. Exchanges outside of the tax authority platform often do not have legal validity.

A clearance e-invoicing system requires e-invoices to be authorised by the platform (centralised or decentralised) to gain legal validity. Most “clearance” systems today leverage a centralised platform (e.g. Turkey, Italy, Serbia etc.) that delivers documents between parties. For instance, the KSEF platform in Poland receives electronic invoices and credit and debit notes issued by suppliers and delivers them to buyers. In centralised exchange models, suppliers must submit documents to the centralized platform, and buyers must receive documents through the centralized platform after the documents are approved. Suppliers and buyers might use service providers to act on these obligations.

However, some countries have a decentralised e-invoicing model for their clearance e-invoicing system (e.g., Mexico, Peru etc.).

Decentralised Model

In the Decentralised model, certified service providers perform certain functionalities on behalf of the tax authority that would be performed by the tax authority platform in a centralised model. Tax-relevant data is submitted to the tax authority by certified service providers after the document clearance/issuance process.

Mexico is an example of a decentralised model where the tax authority outsourced service providers called “PAC” to perform clearance processes. However, service providers are not required to interoperate with each other. For example, they are not required to exchange e-invoices they receive from suppliers and deliver them to buyers.

If service providers are required to interoperate, a decentralised model can be a 5 corner model.

5 Corner Model

5 corners in the model represent each stakeholder involved in the e-invoicing workflow.

• Supplier being corner 1
• The supplier’s service provider being corner 2
• The buyer’s service provider being corner 3
• Buyer being corner 4
• The tax authority platform being corner 5

The 5 Corner Model conceptually combines the decentralized and interoperability models. Service providers must be certified by the tax authority and able to perform clearance for invoices they receive. Furthermore, service providers of suppliers must be able to deliver invoices to buyers either themselves or through other certified service providers. This requires service providers to be connected to other providers operating in the market. After performing these actions, service providers deliver invoice data they processed to the tax authority.

The 5 Corner Model relies heavily on the service provider, as it handles more actions in this than in any other model. Service providers mainly remove parts of the operational burden from the tax authorities. Tax authorities receive tax-relevant data from the service providers and handle-less support and platform maintenance work. Thus, supporters of the 5 Corner Model claim it is more efficient for the market as private enterprises keep innovating faster than the public.

Why is the 5 Corner Model important, and why are we explaining it?

The 5 Corner Model is becoming popular, especially in Europe. France’s upcoming e-invoicing and e-reporting system will be based on the 5 Corner Model, distancing itself from the centralised model adopted by Italy, Romania and Poland. Spain and Belgium are also expected to eventually adopt the 5 corner model, however, as a start Belgium has introduced an interoperability model. The UAE recently announced intentions to introduce an e-invoicing system based on the 5 Corner Model.

The 5 Corner Model is increasingly becoming the preferred approach for businesses and governments alike, thanks in part to the EU's VAT in the Digital Age proposal, which discourages clearance systems.

Understanding this model is crucial for those working in the e-invoicing and e-reporting space, especially as it continues to evolve and grow.

The 5 Corner Model proposes both a challenge and an opportunity for businesses. The increasing requirement for business documents, such as invoices, to be formally cleared by governments or approved third parties offers little benefit to businesses and is normally seen as a direct financial burden. Coupled with automated exchange between the service providers, it can help with the automation of invoice issuance and processing across borders. This automated exchange can bring rise to benefits such as:

• Time and Cost Savings
• Efficiency
• Accuracy
• Streamlined Workflow
• Improved Compliance
• Enhanced Visibility and Transparency
• Scalability
• Vendor Relationships
• Data Analysis
• Risk Management