What are Continuous Transaction Controls (CTC)?
In the past, companies in most countries reported and paid their tax obligations retrospectively, i.e., after a business transaction was conducted. This approach often led to inefficiencies regarding tax collection and tax audits as auditors could only capture transactions after they were completed and had to rely on information provided by the audited companies. Moreover, it opened the door for fraud as companies could provide false information, potentially receiving money via claiming input tax in value-added tax (VAT) returns.
In recent years, several governments have put a substantial amount of effort into imitating current business practices by shifting their processes more toward real-time/near-time data collection and automation. In this regard, the term Continuous Transaction Controls (CTC) emerges and refers to obligatory transaction-based reporting, verified by tax administrators through electronic invoicing (e-Invoicing) or transaction listings in (near) real time.
What’s the Advantage of CTC?
The CTC approach should help the tax administration to conduct VAT compliance checks and validations, ultimately leading to a more efficient tax collection process and less tax evasion and fraud. More specifically, countries hope to reduce the so-called VAT gap, which refers to the difference between the expected VAT revenues and the money actually collected. The figures in various countries seem to support this assumption: Brazil noted an increase of 58 billion US-Dollars in tax revenue as a result of their CTC approach. Chile and Mexico also reported positive effects of CTC as they documented a reduced VAT gap of approximately 50% [1]. There is also good news regarding CTC coming from Poland: The country’s VAT gap decreased from about 25% ten years ago to 10% [2] in 2020, making it one of the most successful countries in the European Union regarding eliminating the VAT gap. The European Commission estimates that the VAT gap in the EU amounts to approximately 61 billion Euros in 2021 [3]. This means that the expected VAT revenue is about 11% higher than the VAT revenue actually collected. Thus, there is much potential for CTC to save governments in the European Union a lot of money through an increase in tax compliance. This also applies to countries in other regions of the globe as the worldwide VAT gap is estimated to be between 15 and 30% [4].
Which Countries Have Already Implemented or Plan to Implement CTC?
The first countries which implemented CTC were Mexico and Chile in the early 2000s. Not long after, other Latin American countries followed their way. This trend has also inspired governments in Europe: In recent years, several European countries have already implemented or are currently pursuing CTC solutions, for example, France, Germany, Hungary, Italy, Poland, Romania, or Spain [5]. Thus, it seems evident that an increasing number of countries in Europe and beyond are going to adopt various forms of the CTC approach in the forthcoming years.
Types of Continuous Transaction Controls
The biggest challenge for a tax function is the lack of harmonization of both the legal framework (at the end the data model required) and the technical processes and data formats.
CTC models are country-specific and vary from each other in detail, nevertheless, there can be four core models identified based on their most typical features [6]:
- Interoperability model
- Real-time Invoice Reporting model
- Centralised Exchange model
- Clearance model
As a first step, companies must therefore understand that the entire process logic is going to change. A compliance process that could be completed at the end in the past in weeks with (very high) manual effort will be transformed into a technology-based near/real-time process to submit large data volumes.
This has of course also consequences for the management and the operationalization of a company’s tax control framework.
In addition, companies have to focus in the first place on data management, especially on data quality for the whole data model (master-, organizational- and transactional data). Increasing and maintaining data quality is and will be the biggest challenge. In parallel, companies have to deal with the changes in the process itself. One focus has to be on checks and validations, especially on preventive controls to make sure to provide the correct (tax) data to the tax authorities but also on reconciliations. Last but not least, it makes sense to invest in change management resources to pick people up and take them with you.
In terms of technology, companies look for a comprehensive platform solution to be able to fulfill as many as possible of the various compliance and reporting requirements (all over the world) not only in terms of CTC but maybe also in other fields like ESG.
In terms of a business case for implementing a new CTC process, the focus is not only on fulfilling compliance obligations, but also on the potential for integrated collaboration with finance, controlling and the business. CTC requirements can be the basis for generating insights with using analytics, for a more integrated planning and for better decision-making.
Conclusion
Taken together, the evolution toward CTC represents a transformative shift for all stakeholders: tax administrations need to establish a CTC process approach to increase tax collection effectivity. The tax functions within the companies have to adapt in various ways to be able to stay compliant. The smarter ones will gain some insights and use them to be or to become an in-house advisor to the business.
[1] https://www.billentis.com/The_einvoicing_journey_2019-2025.pdf
[2] https://news.bloombergtax.com/daily-tax-report-international/continuous-transaction-controls-changing-the-vat-landscape
[3] https://taxation-customs.ec.europa.eu/taxation-1/value-added-tax-vat/vat-gap_en
[4] https://sovos.com/blog/vat/understanding-ctcs-and-their-impact-on-vat-compliance-today/
[5] See for example https://www.corcentric.com/blog/what-are-continuous-transaction-controls-ctc-and-their-role-in-tax-compliance/, https://taxbackinternational.com/blog/what-are-continuous-transaction-controls/, or https://news.bloombergtax.com/daily-tax-report-international/continuous-transaction-controls-changing-the-vat-landscape
[6] Peppol, Continuous Transaction Controls – Reference Document September 2021, p. 9
