With businesses of all shapes and sizes digitalising in order to enable and enhance trade on a domestic and international scale, tax authorities have done the same. Continuous transaction controls (CTCs) have been introduced by numerous tax authorities to obtain business transactions in real-time or near real-time to improve the speed and accuracy of tax collection efforts. But for businesses, there is an air of trepidation.
Gunjan Tripathi, an experienced chartered tax advisor specialising in European VAT, is the EMEA director of solutions marketing for Vertex, a global provider of indirect tax solutions.
In this article, Tripathi explores the history of CTCs and their continued adoption by tax authorities around the world, while also offering advice and insights for businesses: including adapting their overarching financial and IT strategies and adopting specialist tax technology.
International trade can be traced back to ancient civilisations, where different empires would exchange commodities such as spices and textiles. Today, however, the speed and scale in which international trade takes place has skyrocketed. Businesses, no matter where they are located, can sell goods, services, and digital products to customers around the world within a matter of seconds.
As a result of businesses digitalising in order to enable and enhance trade on a domestic and international scale, tax authorities have done the same. With so much technology underpinning the foundations of businesses, tax authorities have needed to evolve and keep up.
Increasingly, tax authorities are demanding access to real-time or near real-time reporting and tax data, for visibility on exactly what is being sold, what taxes should be paid, and ultimately, if businesses are abiding by the correct rules and regulations. The result? Continuous transaction controls (CTCs).
Intended to chase down inefficiencies associated with retroactive audits, CTCs enable tax authorities to obtain business transaction data in real-time or near real-time, improving the speed and accuracy of tax collection efforts. Although CTCs were initially focused on addressing inaccuracies in domestic transactions, their scope is expanding to better combat fraud and monitor compliance in a range of other areas, including international transactions, to address the thorny issue of the ‘VAT gap’.
A dynamic and evolving tax compliance landscape
We’ve witnessed a rise in CTC models around the world in recent years and in many ways, it has become the new ‘gold standard’ for tax administrative processes. They’ve been ushered in to keep up with the speed and sheer volume of transactions being processed every day, to address the inadequacies (and evasion) that was common with manual reporting processes.
We’ve certainly seen the success of these transaction-based reporting systems in combatting fraud and reducing VAT gaps. Research from the European Commission found that the digitalisation of tax has driven a 38 per cent reduction in VAT gaps across the European Union, with member states recording €61billion in lost VAT revenues in 2021 – down from €99billion in 2020.
Today, we’re seeing more countries adopting CTC models, with Spain following in Italy’s footsteps by rolling out mandated e-invoicing in July next year, and France intending to implement their mandate in 2026. Combine that with the UK’s ‘Making Tax Digital’ initiative, we can see that this near real-time and digitalised approach is highly favoured by tax authorities.
An air of trepidation for businesses
Tax teams cannot approach these new measures as isolated components of their tax reporting obligations. Rather, they should be viewed as an ongoing process, demanding a fundamental change in IT and finance strategies. To start, CTCs are not universally uniform, and each jurisdiction may have varying reporting requirements and compliance processes. This in itself is a major hurdle for businesses. If a business is trading in multiple jurisdictions, each of these will not only have their own indirect tax rules and regulations, but it’s likely that they will also have their own unique CTCs, each with their own reporting and compliance requirements.
Additionally, different CTCs can lead to increased administrative burdens for tax teams without the right measures in place. Businesses will need investment in the right technology to support with these new, more granular reporting requirements, and ensure accurate data is being produced throughout the business – from supply chain to point of sale (PoS). This way, when the authorities’ deadlines for periodic reporting closes in, tax teams can pull together the right and complete data, and build the mandated reports, avoiding inaccuracies that lead to non-compliance and penalties.
Tax technology can empower CTC compliance
One measure businesses can take to safeguard themselves in the era of CTC is implementing tax technology solutions. This specialist technology not only supports accurate VAT and sales tax determination, but it can also be seamlessly integrated to existing business systems – such as SAP – ensuring compliance without hindering efficiency.
We’ve seen the success of this approach in our recent global research, where 38 per cent of organisations based in Southern Europe and the Nordics, considered themselves ‘champions’ of managing indirect tax compliance – meaning they see themselves as protected and future proofed with an efficient tech-led approach. Additionally, 33 per cent of organisations in the Benelux region and 32 per cent of those based in UK and Ireland feel this way, demonstrating that tax technology can be successfully utilised to enhance their compliance capabilities.
CTCs are here to stay and businesses must act now, and put measures and protocols in place to ensure they meet the requirements for each and every CTC system they encounter. By investing in the right technology, supported by trusted third-party providers who have the experience and expertise in aiding businesses, they can focus on their growth ambitions with the comfort that they know their compliance obligations are being take care of.
