Continuous Transaction Controls, more often referred to as CTCs, are mechanisms that require taxpayers to submit fiscally relevant data to the tax authority or a delegated platform either before or shortly after a transaction takes place.

Key takeaways you can expect from reading this article:

• What are CTCs?: Continuous Transaction Controls (CTCs) require real-time or near real-time reporting of transaction data to tax authorities.
• Difference from PTCs: Unlike Periodic Transaction Controls (PTCs), which are reported periodically (monthly, quarterly, or annually), CTCs involve immediate reporting.
• Global Adoption: Over 70 countries have implemented some form of CTC, with the trend expected to grow by 2030.
• Evolving Compliance: CTCs are expanding beyond invoicing to include various business documents and processes, impacting how businesses manage tax compliance.

What are Continuous Transaction Controls?

CTCs are gaining popularity in the indirect tax world. To fully grasp this digital reporting concept, it is helpful to understand its origins and evolution over the years. Upcoming trends will shed light on where tax authorities see this digital reporting requirement headed in the future.

The CTC consists of 3 elements:

1. The Controls refer to tax authorities' control over tax-relevant data.
2. Transactions stands for transactional data that must be submitted to the tax authority or a delegated platform.
3. Continuous stands for transactional control being in real or near real-time.

CTCs are a type of Digital reporting Requirement (DRR). A DRR is any obligation for a VAT-taxable person to periodically or continuously digitally submit data on all or most of their transactions to the relevant tax authority.

There are two types of controls: continuous and periodic. Periodic Transaction Controls (PTC), as opposed to continuous transaction controls, require taxpayers to submit data on business transactions periodically, i.e., on a monthly, quarterly or annual basis. The frequency of remittance, periodically rather than in real-time, differentiates these two types of controls. Further information on CTCs, PTCs, and terms such as interoperability, Peppol, and clearance models can be found in our comprehensive article on Indirect Tax Controls Terminology.

Why Governments Use CTCs for Tax Compliance

Introduction of e-invoicing in Latin America

In 2001, Chile pioneered e-invoicing to address its Value Added Tax (VAT) gap, similar to how a grocery store might introduce a barcode system to keep better track of its inventory. Other Latin American countries, such as Mexico and Brazil, followed suit by introducing national e-invoicing regimes.

What is e-invoicing? Discover how this system works and its benefits and challenges. E-invoicing requires VAT-taxable persons to create a structured electronic invoice and submit it to the tax authority in a country-specific prescribed format. Invoice reporting in the tax authority format is required. Taxpayers are not allowed to submit e-invoices to Buyers before getting a success message from the tax authority on the e-invoice they submitted.

The e-invoicing system was a clearance system because invoices required real-time submission and approval from the tax authority. In clearance systems, documents gain legal and fiscal validity only after they have been validated and cleared (approved) by the tax authority. As this e-invoicing model took shape in other countries, each country defined its requirements and procedures. Like a new recipe being adopted in different kitchens, each country added its flavour, but the core process remained the same: invoices needed real-time validation by the tax authority. Adherence to this type of invoice reporting is essential for business activities to continue.

Expansion to Europe

It’s no coincidence that Turkey and Italy became pioneers of clearance model e-invoicing systems in Europe. They were like diligent students adopting a proven study technique to achieve better results. Looking to reduce their VAT gaps, Turkey and Italy implemented systems similar to those in Latin America, comforted by the success stories from across the ocean.

When it comes to e-invoicing in the European Union (EU), the process for EU member states to introduce mandatory e-invoicing was not straightforward. This was because the European VAT directive included articles that required a country derogation to introduce mandatory e-invoicing. While Italians requested derogation from the European Commission to implement e-invoicing, Hungary followed a different path. Hungary introduced a real-time invoice reporting (RTIR) requirement instead of e-invoicing. This means that taxpayers can issue paper or electronic invoices, and they are free to choose the form of invoice. However, taxpayers in Hungary have to submit invoice data electronically to the tax authority. Spain also introduced a RTIR following Hungary’s lead.

Where CTCs Stand Today

As of today, more than 70 countries have introduced some form of CTC mandate. The number continues to increase yearly as tax authorities and governments push for digitalization. By 2030, most countries are expected to adopt a form of CTC. Initially, CTCs primarily impacted invoicing processes. However, as these systems evolved, their reach expanded to a broader range of document types and processes, including accounts payable, logistics, payrolls, and tickets.

Adopting CTC mandates means that tax authorities worldwide collect vast amounts of data related to various business processes. This extensive data collection provides several benefits:

• Fraud Detection and prevention of tax evasion
• Precise Tax Revenue Calculation and tax collection
• Taxpayer Risk Scoring
• Analysis of Economic Performance etc.

While e-invoicing and digital tax reporting benefit tax authorities, businesses face challenges complying with ever-evolving compliance requirements. CTC compliance is becoming one of the major issues for global companies regarding VAT compliance. CTC compliance is becoming an essential part of the digital transformation strategy for multinational businesses.

What CTCs Mean for Tax Compliance: A Shifting Tax Landscape

As we enter the era of real-time compliance and more countries adopt e-invoicing regimes, we gain awareness of future trends and strategic insights for real-time indirect tax compliance.

Learn below some of the most relevant trends related to CTC compliance.

Expansion of CTCs to new document types

Tax authorities seek more comprehensive and instant data to enhance control and oversight of business activities. This expansion allows for a more holistic view of business operations and improves the accuracy of tax assessments. For businesses, this means adopting new technologies and processes to comply with the broader scope of CTC regulatory requirements.

Pre-population of VAT returns

A revolutionary development in CTCs is the pre-population of VAT returns based on the invoicing data collected. This trend leverages the vast amounts of data submitted through electronic invoices to streamline the tax return process. Countries that have started populating the returns are Turkey, India, and Italy. Tax authorities across jurisdictions are looking to leverage data and automation to prevent fraud and increase tax collection.

E-invoicing roll-outs Impacting SMEs

E-invoicing regulations are usually introduced through rollouts. The initial scope of e-invoicing regulations impacts larger businesses and usually comes with an annual threshold limit. With time, the tax administration reduces this threshold to cover more businesses. As the threshold is reduced, medium and eventually small taxpayers are impacted. Some countries take a big bang approach in that the mandate applies to all businesses regardless of turnover. Romania is an example of this phenomenon.

In countries where e-invoicing has already been in place for a while, regulations started to cover SMEs (e.g., Italy, Turkey, Colombia, etc.). Tax authorities usually offer manual e-invoice upload options, free of charge, for these taxpayer segments.

Adoption of Decentralized CTC Models

One of the most significant trends in Continuous Transaction Controls (CTCs) is the adoption of decentralized models. Most CTC systems were initially centralized, with all data flowing through a single governmental system. However, decentralized models have become prevalent as technology and business processes have evolved.

Decentralized models allow or require taxpayers to submit their data to authorized service providers. These providers are private entities, are usually local, and have been certified by the Tax Authority. These decentralized platforms take charge of validation and clearance, ensuring integrity and authenticity, and sending the data to the tax authority. This model is adopted in Mexico, with the Authorized Certification Providers (PACs), and in Peru, with the Operators of Electronic Services (OSEs).

European countries proposing new e-invoicing models in line with the VAT in the Digital Age plan to introduce decentralized e-invoicing models. France and Spain are examples of such countries.

Partner with Fonoa to Get Ahead of the Tax Curve

Keeping up with new tax rules and e-invoicing requirements can be challenging, but Fonoa is here to help. Our solutions are designed to make managing requirements such as Continuous Transaction Controls (CTCs) easy and efficient.

With Fonoa, you get:

• Real-Time Compliance: Ensure you meet CTC (and more) requirements with automated, up-to-date solutions.
• Streamlined Invoicing: Simplify your invoicing with tools that adapt to changing regulations.
• Expert Guidance: Our team provides support to help you navigate the complexities of tax compliance.

Partner with Fonoa to simplify tax compliance and stay ahead of the curve.

Contact us today to see how Fonoa can support your tax and invoicing needs. Contact us today!