Several countries are currently implementing CTC to fight VAT (Value Added Tax) fraud and underreporting. CTC stands for “Continuous Transaction Controls,” and describes mandatory real-time or near real-time invoice reporting and validation requirements by tax authorities.
What is CTC, and why do countries implement it?
CTC is an electronic exchange model implemented by tax authorities in a country to manage VAT reporting and invoice clearance in real time or near real time. The model assumes the implementation of a so-called CTC platform that works as a government invoice validator. The CTC model is used instead of, or in addition to, periodic reporting by the companies.
The main purpose of CTC is to provide the tax authorities with a more accurate and timely monitoring of the economic activity in the country, specifically regarding the VAT reporting - to reduce the continuously growing VAT gap. In Europe alone, this VAT gap amounts to more than EUR 140 billion a year. In addition, several countries implement CTC to fight fraud and corruption related to invoicing and payment.
Prerequisites for CTC
CTC is primarily based on the use of electronic invoicing between parties. Therefore, local authorities in Europe are now considering introducing mandatory electronic invoicing between organizations – both private and public. In a CTC model based on electronic invoicing, a company will not be able to invoice their customers unless this is done through an electronic solution that also supports CTC. Even though some models allow for other means of invoicing, the trend is towards solutions based on electronic invoicing. This means that if your company is still sending invoices as paper or e-mail, now is the time to consider moving to a solution for electronic invoicing.
Different models for CTC
- Real-Time Invoice Reporting (RITR)
- Clearance
- Centralized exchange model
- Decentralized CTC and Exchange (DCTCE)
Real-Time Invoice Reporting
Real-Time Invoice Reporting (RITR) means that the sender of the invoice also reports the invoice, or a subset of the invoice, to the tax authorities shortly after the invoice is sent to the recipient (within 24-72 hours). This model does not mandate electronic invoicing, and thus requires separate solutions for invoicing and reporting.
Examples of countries who have implemented RITR are Hungary and South Korea.
Clearance
Invoice clearance means that the invoices must be cleared (fiscal validation and approval) before or after the invoice is issued to the buyer. Such clearance may be provided by a central CTC platform or by accredited service providers. One challenge with this model is that the reporting format used for clearance is based on the information needs of the tax authorities, which does not contribute to establishing a standard for invoicing in general, nor to automation of AR and AP functions. Because of this, the parties often resort to email for electronic communication invoice data outside the reporting.
Examples of countries who have implemented a clearance model are Chile, Costa Rica, Brazil, Colombia, Peru, Mexico, and Guatemala.
Centralized Exchange Model
This model can be seen as a variant of the clearance model, but it mandates that all electronic invoices are exchanged between sellers and buyers through a central platform or network operated by the government. The model is used both for B2G (Business to Government) and B2B (Business to Business) transactions.
The invoice format is often limited, as it mainly focuses on the government's need for information rather than the trading partners' need for information, flexibility, and efficiency. The result is often that information that should naturally be communicated through an invoice must be covered by other processes.
Examples of countries who have implemented a centralized exchange model are Italy and Turkey.
DCTCE – Decentralized CTC and Exchange
DCTCE (Decentralized CTC and Exchange) is the model recommended by Peppol and EESPA (European E-invoicing Service Providers Association) as the next generation innovative exchange model to handle both national and international electronic invoicing demands – as well as electronic VAT reporting to the respective countries involved.
DCTCE is based on a so-called “five corner model,” and thus utilizes the already established and well-functioning structure from the “four corner model.”
The infrastructure of DCTCE consists of a decentralized network of certified access points that manages the invoice flows between trading partners with the information they want conveyed (as in a normal four-corner model). All relevant and required invoice information is sent from these access points to a central CTC platform controlled by the tax authorities (the fifth corner).
What are the advantages of DCTCE?
Logiq believes that DCTCE is the best option for CTC, as it has many advantages over the alternative models:
1) It offers the best of both worlds as it satisfies the relevant CTC requirements of the tax authorities, while it also meets the global economy’s need for a trustworthy exchange model with heterogeneous needs of the various economic actors.
2) It ensures that the parties (buyer and seller) can leverage existing investments in interoperability and EDI (Electronic Data Interchange) solutions, and that tax authorities can leverage existing infrastructure for e-invoicing in tax administration and public procurement (B2G).
3) It relieves the technical burden of tax authorities by assigning responsibility for the exchange and validation of data to certified service providers.
4) The model can be implemented gradually, depending on the needs and maturity of the market.
5) It ensures less strain on the economic players, as the service providers take care of maintenance and upgrades.
6) It ensures the continuity of electronic interactions by assigning the responsibility for exchange and validation of business documents to service providers. There are no breakpoints in the model, unlike, for example, the centralized CTC model.
7) It safeguards data security and privacy by allowing service providers to reduce the amount of information exchanged with the central CTC platform and assigning them with the responsibility for secure and encrypted transmission of data.
8) It enables easier cross-border trade through mechanisms that can link the different countries DCTCE models.
What is the significance of CTC to me and my company?
Now that you have learnt more about CTC, the reasoning behind it, and the different models – you may ask yourself: “what does this mean to me?”.
On December 8th, 2022, the European Commission published its proposed VAT in the Digital Age (ViDA) reforms, aiming to reduce the VAT gap in the EU. In the wake of the recommendations to member states on mandatory electronic invoicing and VAT reporting, it is assumed that an increasing number of European countries will introduce both mandatory electronic invoicing and some form of CTC model soon.
If your company is already sending and receiving electronic invoices, this means that you are well prepared but should keep a dialogue with your EDI service provider about any changes. Together, you should look out for any notifications of new regulations in the countries where you operate, so that you have time to make necessary adjustments.
If your company has not yet adopted a solution for electronic invoicing, now is the time to consider doing so. This way, you can be prepared for the introduction of CTC models. It is also important to remember that the regulations you will need to follow to be compliant are determined by the authorities in the countries you operate in, and not the countries of your trading partners.
