Change is the one constant in business. Not only do companies change from year to year, decade to decade, and across multiple ownerships, economic landscapes change as well. Fold in geopolitical influences and requirements lawmakers put into place, change becomes a way of life. Nowhere is change more prevalent than in implementing Continuous Transaction Controls (CTC) many countries have employed or will soon employ. While this may seem innocuous to many businesses in countries with no CTC, it still impacts companies in those countries. For example, CTC has not been implemented in the U.S. or the UK. Still, because the U.S. trades with Mexico and the UK has trading partners across Europe, you must understand CTCs and how it impacts your business.
CTC Defined, Why Countries Implement It
CTCs are a digital control mechanism implemented by individual country tax administrations to capture transactional invoice data in real or near-real time. With CTC, tax receipts can be matched with business activity, allowing countries to more accurately capture the Value Added Tax (VAT) revenue falling through the cracks during business transactions. In the EU, for example, €134 billion (the equivalent of $148.5 billion) was lost in 2019 due to tax fraud and inefficient tax collection methods. In the UK, approximately £8.6 billion ($10.5 billion) was lost from 2020 to 2021.
Capturing tax revenue is not the only reason countries have implemented CTCs. South and Central American countries such as Brazil, Chile, Mexico, and Argentina implemented CTCs several years ago to help combat fraud and corruption associated with invoicing and payment.
Capturing more tax revenue and combatting fraud are the two most compelling reasons countries have passed legislation incorporating CTCs. These measures also have an additional impact, leading to better invoice submission and payment efficiency. CTCs work by creating a transaction-reporting template that leverages cloud technology in a way that incorporates fiscal controls. In plain English, CTCs are set up by governments as an intermediary between providers and customers. This cloud-based intermediary facilitates invoice submission, captures the necessary data related to what’s been purchased and delivered, and identifies the required tax before the invoice is approved and submitted to the recipient.
For countries using VAT, tax revenue was often estimated after the invoice submission and payment, resulting in miscalculations and loss of tax revenue.
With more countries incorporating CTCs, technology companies are finding a way to leverage their services to help simplify invoice submission while helping their customers remain compliant.
The Impact of CTCs on Business
With more countries incorporating CTCs, and cross-border transactions being identified as potential tax revenue sources, more companies are preparing to roll out CTC requirements.
Where domestic and cross-border transactions are the norm, companies in South America and Europe must adhere to local requirements or risk breaking the law regarding certain business transactions. As mentioned earlier, South American countries have been leading the way in incorporating CTCs, so their mandatory controls are commonplace. Furthermore, electronic invoice mandates in these countries are more common, as this is the best way to enable CTCs and facilitate a digital record of transactions.
As countries roll out CTC mechanisms, electronic invoicing becomes mandated as a component of digitizing invoice data and collecting more accurate tax revenue. In short, this means businesses cannot submit invoices to customers unless done so through an electronic invoicing solution that facilitates adherence to CTC controls.
Companies still submitting invoices as paper and email attachments will be required to enroll in an electronic invoicing or invoice automation solution to ensure their invoices meet the requirements of their country’s CTC mechanism.
“Companies need to be prepared,” says Ruud van Hilten, VP, Product Compliance Tungsten Network. “They need a decent strategy for moving to electronic invoicing, as it’s much better to be a step ahead of the curve than to be caught on the back foot.”
For some countries, mandating electronic invoicing to ensure CTC compliance will be rolled out in stages. For example, France has designed a multi-step rollout of B2B e-invoicing requirements to ensure CTC compliance. Mandatory e-invoicing and e-reporting issuance for large companies begin July 1, 2024. For mid-size and small companies, requirements for e-invoicing and e-reporting start on January 1, 2025, and January 1, 2026, respectively. Other countries are rolling out their requirements in a tired fashion as well.
“My advice is to find a partner to do this with,” says Ruud van Hilten,VP, Product Compliance Tungsten Network. “You can concentrate on what you are good at and let the partner with experience and knowledge of e-invoicing help.”
CTC and Peppol
As more countries roll out CTCs, an obvious question companies may have, especially in Europe, is how might these requirements align with Peppol? CTCs and Peppol are not mutually exclusive. In fact, they work well together.
Peppol (The Pan-European Public Procurement On-Line) is an international network that facilitates the exchange of electronic business documents between business partners on the Peppol network. According to its website:
Peppol enables trading partners to exchange standards-based electronic documents over the Peppol network (based on a 4-corner model). These documents include e-Orders, e-Advance Shipping Notes, eInvoices, eCatalogues, Message Level Responses, and more.
Regarding CTCs, Peppol enables the introduction of a global solution for CTS that benefits the global business community and respective tax authorities. In addition, Peppol and CTC foster interoperability for domestic and international B2B and B2G trading.
CTC and Peppol can, and should, work together – especially in the EU. Because they are not mutually exclusive, companies should view both as validating one another.
How to Prepare for CTC
Companies that rely on cross-border transactions must prepare to ensure they are in compliance. This includes EU-based companies and those with AP, AR, or shared services departments located in countries where VAT is implemented and CTC is a reality or an inevitability.
Part of that preparation must include:
- Equipping and deploying compliance personnel to understand the legislation and requirements being implemented in each country that impacts your organization.
- Creating and adhering to a timeline associated with compliance within each jurisdiction.
- Communicating necessary changes to customers and internal staff, ensuring involved parties are aware and equipped.
- Engage with solution providers and partners that can automatically ensure your company complies with local CTCs when using their platform to share business documents, such as electronic invoices.
“My advice is to find a partner to do this with,” adds van Hilten. “You can concentrate on what you are good at and let the partner with experience and knowledge of e-invoicing help. Do your research and find a partner who can help in the majority of your jurisdictions, then get local help in territories they don’t cover. But brace for change. It is coming, so companies must be well prepared.”
The global economy is changing, and many countries are taking steps to capture previously lost tax revenue. It’s essential to understand how tax legislation in different countries drives requirements around the exchange of business documents, how it impacts domestic and international business transactions, and what your company must do to prepare.
Ernie Martin is Founder and Managing Director of Receivable Savvy. He brings over 25 years of experience in financial supply chain management, marketing and communications and draws upon his extensive experience to share knowledge and best practices with AR professionals. He previously chaired the Vendor Forum of the Federal Reserve Bank of Minneapolis and his resume includes time at several well-known brands and companies such as Tungsten Network, Delta Airlines, CIGNA Healthcare and Georgia Pacific as well as a number of years as an independent consultant.
