# **Optional vs. Compulsory**

Depending on the emphasis between the aforementioned two drivers, some countries stick to optional and more liberal e-invoicing systems, while others start with optional e-invoice and phase in compulsory ETI.

The optional ETIs respect market mechanism so that private businesses can decide whether to issue or receive e-invoices. Therefore, the burden of ETI issuers or receivers with an optional ETI is relatively lower than in a compulsory ETI. However, the adoption of ETI may be slower under the optional ETI. Issuing and receiving ETIs, as noted earlier, is an example of market failure that results from asymmetric information, in which market participants, knowing the benefits of ETI, fail to invest in ETI because of the uncertainty over whether their business partners would accept ETIs. Despite benefits such as lower invoicing costs and enhanced efficiency of business operations, not many companies take the risk of investing in ETIs as they are unable to ascertain whether their business partners will definitely invest in ETIs and commit to issuing and receiving ETIs. In such a situation, market participants will opt for paper invoices rather than ETIs, a safer choice than assuming the risk of making useless investment for ETIs. The outcome is similar to the one resulting from the so-called “prisoner’s dilemma.” All market participants know that the optimal choice is to issue ETIs, but they stick to paper invoicing. Korea’s low rate of ETI adoption before the compulsory ETI was an example of this. The compulsory ETIs, however, are not the only solution to such market failure. Even under the optional ETIs, the tax authority can support and facilitate ETI issuing by providing a clear legal framework for private businesses and legal certainty and getting rid of red tapes or excessive requirements as the EU has done since 2010. As discussed earlier, e-invoicing in the EU, which now relies on liberal ETIs, has been increasing since 2013 when new rules on e-invoicing allowed unstructured e- invoicing such as a PDF. However, structured and full-fledged XML-type e- invoicing in the EU, which enables substantial cost cutting with integration of tax, accounting, and other operation systems, remains in a relatively low range of 7 to 8 percent, pointing to a need for further action.

Countries that put more emphasis on combating tax frauds tend to opt for compulsory e-invoice and centralize e-invoice information into tax authority databases in order to better tackle tax evasions. Such compulsory enforcement would eliminate information asymmetry and resolve the problem of “prisoner’s dilemma” with a single stroke. It is notable that several EU countries including Demark, Finland, Italy and approximately ten others adopted, or planned to adopt, a partial compulsory e-invoice only for the government and public sectors (Gartner, 2009). Although compulsory e-invoicing has the potential to accelerate the adoption of e- invoicing, it may well also increase the burden of compliance in the short run. In addition, compulsory e-invoicing can lead to taxpayer resistance when implemented too quickly. SME, micro businesses do not have the capability or cannot bear the 27