E-invoicing and CTC models in the Middle East

The world’s governments continue to rely to a great extent on indirect taxes as a valuable source of revenue. This is evidently one of the biggest drivers behind the rise of e-invoicing CTC or continuous transaction controls models across the world, including in the Middle East. Furthermore, the global COVID-19 crisis has presented its share of challenges, providing at the same time an opportunity for organizations to evolve and embrace a new reality where digital processes triumph.

The order-to-cash and purchase-to-pay processes in the Middle East are heavily paper-based. This means businesses continue to use forms of communication not considered 100% digital, such as PDF or scanned images. As organizations pursue digitalization strategies, e-invoicing is considered to be a fundamental instrument for optimizing business processes.

In recent years, a lot has happened in terms of digitalization in some of GCC countries, especially after the introduction of VAT in many parts of the region. Saudi Arabia was the first nation in the GCC to officially announce countrywide e-invoicing regulations. The implementation began on 4 December 2021 with the so-called ‘Generation Phase’ and will continue through 2023 during the ‘Integration Phase’. All sales transactions carried out by resident VAT registered taxpayers will be obliged to issue an electronic invoice. This is expected to be a massive challenge for businesses, as they will have to upgrade their ERP/billing systems, onboard their employees, and stay compliant with the rapidly changing e-invoicing developments.

Other countries in the region are not lagging far behind. Oman, which released a tender for an e-invoicing Project in The Sultanate in the last couple of months, is looking into a potential design for a CTC model.

This May, the National Bureau for Revenue (NBR) in Bahrain launched a digital study survey about invoicing. The questionnaire aims to assess taxpayers’ readiness for the potential introduction of an e-invoicing regime in the country.

In the United Arab Emirates and Qatar, the tax authorities have been analyzing and exploring various continuous transaction controls models. However, Kuwait has not publicly announced any CTC plans, nor has it implemented the VAT system, though this is expected in 2023-2024.

Egypt has been adopting a robust strategy and strong course of action for its digital transformation plans with several initiatives and changes to boost an entirely digital and data-driven ecosystem. The country was one of the early adopters of CTC models in the region, choosing to adopt the clearance model, similar to KSA, where tax invoices need to be cleared and approved by the mandatory infrastructure. Since 2020, the Egyptian Tax Authority (ETA) has been gradually rolling out a compulsory e-invoicing system to new taxpayer categories. According to the timelines anticipated by the Ministry of Finance, all tax invoices issued in Egypt should follow the e-invoicing mandate by 2023-2024.

As a complement to the current e-invoicing system and the national plans to curb tax evasion, Egypt introduced the ‘electronic receipt’ system, expanding the mandate scope to B2C transactions. The e-receipt system will allow the tax authority to monitor B2C transactions in real-time through an integration with the point-of-sale devices or ERP systems of the retail traders. The system adoption has been already rolled-out among certain taxpayers and is expected to be fully implemented in 2024.

Moreover, Egypt is proceeding with its digital transformation plans to go beyond invoicing. In 2021, customs practices were also going digital with the Advance Cargo Information (ACI), where shipment data needed to be submitted electronically to the Egyptian Customs Authority 48 hours prior to the shipment’s arrival.

Jordan and Israel have announced plans towards shifting to CTC model, however, with no clear timelines on the implementation roll-out. Earlier in 2020, Israel had announced its intention to introduce a CTC model in the country to fight tax evasion. The authority planned to adopt a clearance model for invoices exceeding a specific value. Further details of the proposed system are yet to be published.

The Ministry of Digital Economy and Entrepreneurship (MODEE) in Jordan has also launched two different RFP processes for procuring a central e-invoicing platform. So far, no other specific details are available on the CTC status developments in the country.

As Luis Ortega wrote in the whitepaper ‘The Digital Outlook: Middle East’, with suppliers implementing digital processes and sending e-invoices, buyers also benefit from this practice by eliminating paper and manual work.

E-invoicing mandates aim to curb the shadow economy, increase the adoption of tax returns, harmonize business processes with global practices, and promote fair business competition and consumer protection.

Through e-invoicing and automated processes, businesses can achieve savings of up to 80% on invoicing costs. It also serves authorities by facilitating tax reporting and reducing tax evasion, helping to reduce the current VAT gap, currently estimated between 20-30% or approximately half a trillion euros. Countries like Chile and Mexico have reduced their VAT gap by 50% through the introduction of e-invoicing initiatives.

Businesses connect to e-invoicing networks not only to exchange documents but also to report invoices to tax authorities in different countries in real time. E-invoicing is the first step of digitalization and automating AP processes for businesses of all sizes, markets and industries.

All in all, the Middle East region is in a position to fully embrace the disruptive potentials of digital transformation in the tax controls field. Saudi Arabia is not the first country and won’t be the last to implement continuous transaction controls in the Middle East and North Africa, as other Gulf nations also consider introducing a mandate.