This blog was last updated on September 20, 2024
In this blog, we provide an insight into continuous transaction controls (CTCs) and the terminology often associated with them.
With growing VAT gaps the world over, more tax authorities are introducing increasingly stringent controls. Their aim is to increase efficiency, prevent fraud and increase revenue.
One of the ways governments can gain greater insight into a company’s transactions is by introducing CTCs. These mandates require companies to send their invoice data to the tax authority in real-time or near-real-time. One popular CTC method requires an invoice to be cleared before it can be issued or paid. In this way, the tax authority has not only visibility but actually asserts a degree of operational control over business transactions.
What is VAT?
The basic principle of VAT (value-added tax) is that the government gets a percentage of the value added at each step of an economic chain. The chain ends with the consumption of the goods or services by an individual. VAT is paid by all parties in the chain including the end customer. However only businesses can deduct their input tax.
Many governments use invoices as primary evidence in determining “indirect” taxes owed to them by companies. VAT is by far the most significant indirect tax for nearly all the world’s trading nations. Many countries with VAT see the tax contribute more than 30% of all public revenue.
What is the VAT gap?
The VAT gap is the overall difference between expected VAT revenues and the amount actually collected.
In Europe, the VAT gap amounts to approximately €140 billion every year according to the latest report from the European Commission. This amount represents a loss of 11% of the expected VAT revenue in the block. Globally we estimate VAT due but not collected by governments because of errors and fraud could be as high as half a trillion EUR. This is similar to the GDP of countries like Norway, Austria or Nigeria. The VAT gap represents some 15-30% of VAT due worldwide.
What are Continuous Transaction Controls?
Continuous transaction controls is an approach to tax enforcement. It’s based on the electronic submission of transactional data from a taxpayer’s systems to a platform designated by the tax administration, that takes place just before/during or just after the actual exchange of such data between the parties to the underlying transaction.
A popular CTC is often referred to as the ‘clearance model’ because the invoice data is effectively cleared by the tax administration and in near or real-time. In addition, CTCs can be a strong tool for obtaining unprecedented amounts of economic data that can be used to inform fiscal and monetary policy.
Where did CTCs begin?
The first steps toward this radically different means of enforcement began in Latin American within years of the early 2000s. Other emerging economies such as Turkey followed suit a decade later. Many countries in LatAm now have stable CTC systems. These require a huge amount of data for VAT enforcement from invoices. Other key data – such as payment status or transport documents – may also be harvested and pre-approved directly at the time of the transaction.
What is e-invoicing
Electronic or e-invoicing is the sending, receipt and storage of invoices in electronic format without the use of paper invoices for tax compliance or evidence purposes. Scanning incoming invoices or exchanging e-invoice messages in parallel to paper-based invoices is not electronic invoicing from a legal perspective. E-invoicing is often required as part of a CTC mandate, but this doesn’t have to be the case; in India, for example, the invoice must be cleared by the tax administration, but it’s not mandatory to subsequently exchange the invoice in a digital format.
The objective of CTCs and e-invoicing mandates is often to use business data that is controlled at the source, during the actual transactions, to prefill or replace VAT returns. This means that businesses must maintain a holistic understanding of the evolution of CTCs and their use by tax administrations for their technology and organisational planning.
What’s on the horizon?
As more governments realise the revenue and economic statistics benefits that introducing these tighter controls bring, we’re seeing more mandates on the horizon. We expect the rise of indirect tax regimes based on CTCs to accelerate sharply in the coming five to 10 years. Our expectation is that most countries that currently have VAT, GST or similar indirect taxes will have adopted such controls fully, or partially, by 2030.
Looking ahead, as of today we know that in Europe within the next few years that France, Bulgaria and also Poland will all introduce CTCs. Saudi Arabia has also recently published rules for e-invoicing and many others will follow suit.
Upcoming mandates present an opportunity for a company’s digital transformation rather than a challenge. If viewed with the right mindset. But, as with all change, preparation is key. Global companies should allow enough time and resources to strategically plan for upcoming CTC and other VAT digitization requirements. A global VAT compliance solution will suit their needs both today and into the future as the wave of mandates gains momentum across the globe.
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