Continuous Transaction Controls’ Role in Tax Compliance

Tax compliance is a complex field that every business needs to contend with, like it or not.  Businesses selling across multiple regions have an even more complex challenge to stay compliant.  At Corcentric, we partner with Sovos to remove the stress of regulatory tax compliance for our clients and their customers.

Our relationship with Sovos means that we are ready to prepare you for tax compliance changes before they happen, such as the move towards continuous transaction controls (CTC) in EU countries including France, Germany, and Italy.

What are continuous transaction controls (CTC)?

Traditionally, the tax revenues owed by a business was calculated from invoice reporting.  This meant that tax calculations were supplied and paid retrospectively by taxpayers. As business financial processes shift towards real-time insight and automation, law enforcement strives to keep pace.

Continuous transaction controls (CTC) are a set of processes that enable law enforcement agencies, such as tax administrations, to view real time or near-real time financial data relating to business activity in their countries.

Unlike previous methods of tracking tax owed from transactions, data is obtained directly from business transaction processes or data management systems in real time or near-real time.

Types of continuous transaction controls

Transaction data must be submitted to a tax authority platform before, during, or immediately after the supplier sends each invoice to a buyer.  Clearance models are the most strict implementation of CTCs, requiring transaction data to be cleared by the tax authority before the corresponding invoice can be sent to the buyer.

Continuous transaction controls are either centralized, requiring suppliers to send e-invoices through a centralized tax authority system, or decentralized, where suppliers are allowed to e-invoice buyers directly, but must simultaneously send reporting data to the tax authority.

Why are CTCs needed for tax compliance?

Continuous transaction controls are seen by some tax authorities as a more accurate and timely way to gain insight into transactions that are liable for taxation.  Countries introducing CTCs see them as a way of reducing the so-called VAT gap (the difference between expected VAT revenues and the amount actually collected through VAT returns).

In Europe, the VAT gap is estimated to be approximately €140 billion every year (according to the latest report from the European Commission). This figure is equivalent to a loss of 11% of the expected VAT revenue each year in Europe.

It is the continuous character of continuous transaction controls that allows tax administrations to monitor transactions in real time or near-real time and build up a clearer picture of tax owed in their jurisdictions, and the transactions on which this is owed, without the risk of the discrepancies in VAT reporting and payment that lead to the VAT gap.

When do continuous transaction controls come into force?

For many countries, particularly those in Latin America, such as Mexico and Chile, CTCs are already a requirement.  Europe is starting to follow the same path.  Perhaps not unexpected, as European nations have embraced business-to-government (B2G) e-invoicing in recent years, following the success of this in Latin America.

France

France will introduce continuous transaction controls from 1st July 2024. France require all B2B transactions to be invoiced electronically, via a central e-invoicing platform or connected service providers.  At the same time, France will require complementary e-reporting for these transactions.

Germany

There is no formal timeframe for the implementation of CTCs in Germany, but the move to e-invoicing has already been embraced by government administrations and a record of political discussions indicates interest from significant political parties, as is reported here by Sovos.

As part of a parliamentary process, the Free Democratic Party (FDP) called  for “an electronic reporting system comparable to the Italian SdI to be introduced nationwide as quickly as possible, for the creation and testing and forwarding of invoices”. The leading German industry association, the German Association for Electronic Invoicing (VeR), welcomed the proposal acknowledging the numerous advantages to companies and the German economy associated with it.

Italy

Italy has led the way in electronic invoicing and associated legislation in Europe.  Italy even went beyond the EU mandate to require businesses to deliver invoices electronically from January 2019.  Italy’s mechanism for e-invoicing, the Sistema di Interscambio (SdI), operates a clearance model via a national hub.  Consequently, CTCs have been a requirement for all domestic transactions between Italian residents or businesses since 2019.

Spain

Spain has made significant progress towards mandatory e-invoicing in recent years, with two e-invoicing platforms in place: FACe for B2G e-invoicing (mandatory for central government and optional for regional and local governments) and FACeB2B for B2B e-invoicing.

It is the changes to the “Ley Crea y Crece” draft law, after the Spanish government published new proposals, that will drive the timeline for adoption of CTCs in Spain. The FACeB2B system will become mandatory for companies with a turnover of EUR 8m, one year after the draft law gets published in the State Official Bulletin, smaller companies will have two years to comply.

Other Countries

Poland, Bulgaria, Hungary, Turkey and Greece are at various stages of CTC adoption for tax compliance; more detail can be found in this article on mandatory B2B e-invoicing in the EU. Outside of Europe, Brazil, Chile, and Mexico have led the way in digital tax reform through mandatory e-invoicing, but countries such as Saudi Arabia, Egypt, and Vietnam have recently taken a similar approach and many more are likely to rollout CTCs for tax reporting and more dynamic tax collection in the coming years.

If you want to make sure you are ahead of the curve, feel free to get in touch with one of our tax compliance experts today.

The future of CTCs for tax compliance

Digitalization of tax reporting is inevitable, wherever you do business. If your supply chain or customer base requires cross-border transactions in Europe, you are already likely to be looking at digital transformation of your VAT compliance and reporting requirements.

Corcentric can help lift this burden, ensuring invoice data is delivered automatically as needed for VAT compliance wherever you send invoices to or from. Our partnership with Sovos ensures maximum interoperability with all CTCs as part of the business process to send electronic invoices. Corcentric provides technology-enabled managed services to ensure you attain your e-invoicing and VAT compliance goals quickly and easily, ensuring the fastest possible time-to-value and ongoing project success. Find out more with a free one-to-one consultation today.

Download our guide to Converting Your Customers to e-Invoicing.