Continuous Transaction Controls (CTCs) like e-invoicing systems will soon be widely used by tax administrations across the world giving authorities unprecedented level of control over companies’ tax obligations and drastically reducing the “colossal” VAT tax gap in the process.
A report by tax software company, Sovos, estimated that most VAT countries would have CTCs in place by 2030 as tax administrations embark on their own digital transformations.
“The end goal is that tax administrations harvest live data, real transaction data,” says Christiaan Van der Valk, senior vice president at Sovos. “No longer is it something the company decides to store, and might have manipulated, but it is the actual data for the transaction which in many cases will be approved before the transaction can even happen.”
“They’re basically saying: ‘look, we are now the source of truth. It’s no longer your systems we’re looking at and we don’t need to because we have the data already,’” he added.
As part of these developments, the onus on reporting tax will move from the tax-paying company to the tax administrator, making it difficult to dispute tax requirements set by the administrator. This is because the tax administrator becomes a real-time trading partner in business-to-business transactions.
“If you – the taxpayer – disagree with it [the tax obligation], you better come and demonstrate your view of the truth. But that’s going to be pretty difficult, knowing there will be strong identification which taxpayers can’t really wiggle out of,” says Van der Valk.
The Center for Social and Economic Research (CASE) estimates the VAT gap in the EU was €137.5bn in 2017, while HMRC estimates the gap for 2017-18 in the UK was £13.3bn. Van der Valk says this was a “colossal amount of money that just falls through the cracks”, but that tax administrators had begun to realise the benefits of using technology to close the VAT gap after seeing it successfully implemented in Latin America.
“Tax administrations have understood now, after a decade of hesitation, that using technology can increase controls quite significantly. It’s so much money at stake but knowing that there is a recipe that works it becomes a bit of a no-brainer for them to go down this route,” he says .
What is the impact on business?
Van der Valk concedes that such a large shift in procedure would inevitably come with costs to business, particularly as they might be forced to rethink their own digital transformations.
“It comes at a cost, in the sense that it’s a change in procedure and every change with technology involved obviously means that you need to think through how you’re going to be meeting these requirements.
The biggest pain-point for businesses would come if every country pursued their own separate and different tax compliance system, says Van der Valk.
“Your integration to the tax administration and the process orchestration behind it differs by country, which is where the biggest problems arise nowadays because you’ve got so many countries doing comparable consolidations of their IT systems and their processes. That contradicts business strategies which is very, very painful,” he says.