Besides electronic invoicing, in an effort to streamline tax administration, and curtail tax evasion and fraud, governments across the world are digitalising their tax systems. This shift aims to keep pace with the ways digitalisation and subsequent real-time insights and automation have revolutionised the financial workings of many types of companies. Continuous transaction controls (CTC) bring government tax agencies in on the game.

Continuous transaction controls are a group of processes and technology that allow government tax agencies to carry out seamless real-time monitoring of financial transactions. They permit governments to look at financial transactions as they are taking place and regulate them at the same time.

Tax reporting has traditionally been carried out through periodical invoice reporting and end-of-period returns, but all this is changing. Where continuous transaction controls are in place companies must provide mandatory real-time invoice reporting to government tax authorities using electronic invoicing (e-invoicing) or transaction listings.

The monitoring of companies’ data management systems and business transaction processes enables tax authorities to directly obtain tax-pertinent data, and in some configurations to regulate sales and invoicing.

The pressing need for a modernised tax system including CTCs has come about through the rapidly changing landscape of financial transactions. The worldwide shift toward digital transactions and the ever-more borderless nature of business practices means that tax systems must adapt.

Real-time monitoring of financial transactions gives government tax authorities the ability to calculate tax liability on a transaction-by-transaction basis, bringing the same degree of accuracy and punctuality to the taxation process that companies benefit from in their digitalised, and real-time, automated financial processes.

Continuous transaction controls enable tax authorities to promptly identify and address any discrepancies, reducing the risk of tax evasion, avoidance, and VAT fraud, which, according to the European Commission’s 2023 rep

In short, yes, they are. Not only for governments but for the companies mandated to use them. Traditional after-the-fact tax submissions are inefficient, time-consuming, and costly and always foster the possibility for inaccuracies and costs related to correcting them. 

CTCs deliver a reduction of the administrative burden by eliminating many of the routine tasks associated with tax management, allowing government agencies to focus on more strategic aspects of revenue collection and companies to assign fewer resources to tax accounting.

The accurate and real-time prediction of tax liabilities and revenue brings benefits to both the government and to companies, allowing deficit-burdened governments to make better financial predictions and companies to leverage accurate tax calculations and the possible benefits of early payment. 

One of the main arguments by governments opting to implement continuous transaction controls is the VAT gap: The difference between what a government collects in VAT payments and their predictions for VAT revenue. 

In the UK alone, Her Majesty’s Revenue & Customs’ (HMRC) preliminary estimation of the VAT gap for the 2022-23 tax year was £8.8 billion, representing a 5.3% discrepancy.

Whilst in the European Union the figures published in late 2023 by the European Commission show a VAT gap of €61 billion corresponding to 2021. Although a startling figure representing 4.3% of the expected VAT it, in fact, represents an unprecedented improvement on previous years, thanks in part to the implementation of CTCs.

CTCs first took a foothold in Latin America where in Mexico and Chile CTCs are a legal requirement. Following this, several European countries have followed suit where a steady rate of adoption is occurring.

Italy is the forerunner, where the Sistema di Interscambio (SdI) was implemented in 2019, making e-invoicing and CTCs mandatory for all domestic transactions between businesses and Italian residents.

Spain has followed suit with sharp progress towards mandatory e-invoicing with the FACe system (Spain’s E-invoicing platform, similar to Germany’s ZUGFeRD) for business-to-government (B2G) e-invoicing and the FACeB2B for business-to-business (B2B) e-invoicing. Planned law changes will make CTCs mandatory for companies with a turnover above €8 million.

In France, continuous transaction controls will be introduced for all B2B transactions from the 1st of July, 2024, alongside the implementation of compulsory e-invoicing for all businesses.

Further countries like Turkey, Greece, Bulgaria, and Poland are at various stages of CTC adoption, including Hungary where the Real Time Invoice Reporting (RTIR) system is in use and mandates the immediate reporting of invoice data.

In Germany, where e-invoicing has already been largely adopted by the government, the urgent need for CTC adoption is being called for by the FDP political party. In fact, the EU as a whole 

Is looking to adopt each nation-state’s CTC system, with the eventual goal of modifying the EU VAT Directive 2006/112/EC, and using the PEPPOL Network as central infrastructure, with a possible implementation date of 2024.

Where UK companies are trading with regions or countries where CTCs are in place, they may be subject to a greater burden in terms of compliance and tech interoperability. Several considerations come into play in this fast-changing landscape: local tax requirements must be met including e-invoicing and the ability to report to local tax authorities in real-time for which effective interoperability of technology is essential. Local partnerships are proving effective in overcoming these barriers.

CTCs and tax compliance

Where CTCs have been introduced, government tax authorities throughout the world are leveraging technology to enforce tax compliance, close the VAT gap and eliminate VAT fraud. This in short means that businesses will have to comply to be tax-compliant with countries where CTC is a legal requirement.

Mandatory e-invoicing

Mandatory e-invoicing is the cornerstone of CTC and is in the process of being adopted in much of Europe for B2G invoicing. It requires both the buyer and seller/sender and receiver to use electronic invoices and is the foundation upon which real-time invoicing reporting (CTC) is built.

Various models of continuous transaction controls have been implemented globally. In Latin America, countries like Mexico, Brazil and Chile utilise a clearance model built on automation, by which businesses authorise transactions with the government before they reach the client. The principal aim of the clearance model is the prevention of fraud. The reporting model describes a less restrictive form where transactions take place before they are reported, although reporting still takes place in real-time.

The EU Procurement Directive mandates public entities to accept electronic invoices, making B2G e-invoicing increasingly obligatory. Several European countries, including Italy, Belgium, France, Portugal, Spain, and soon Poland (mandatory for VAT transactions in July 2024), have adopted a centralised model for CTC practices, reflecting the regional trend towards standardised e-invoicing.

A fourth model, Real Time Invoice Reporting (RTIR), implemented in Hungary and South Korea initially, means that the seller must report part of the invoice including VAT amounts and numbers for buyer and seller. This was an early model developed prior to the introduction of more established CTC mandates.

Yes, they do. While in the existing four-corner model where sender and recipient operate using their own PEPPOL access point, the new, five-corner upgraded model will add government tax agencies to the network as audit points.   

CTCs represent a major paradigm shift in tax compliance throughout the world, bringing governments the means to fight deficits and tax fraud. For businesses operating in regions where CTCs are in place compliance requires the right systems, solutions and expertise, but once in place offers the benefits of more streamlined business processes and greater openness and accountability.