Continuous Transaction Control is a revolutionary digital technology that is spreading all over the world, starting from Latin America, to Italy. However, its application also varies greatly from nation to nation: let’s see how. 

Continuous Transaction Control (CTC) is a transaction reporting template or regime based on the invoices actually issued or a subset thereof, which is made possible thanks to digital transformation and the solutions it enables. 

In other words, CTC is a digital tool that typically leverages cloud technology to perform fiscal controls on business activities. 

Continuous Transaction Control systems make it possible for organizations to collect a large quantity of data related to company transactions that are carried out in real or near-real time. 

It is precisely this aspect that represents a strength of this digital innovation, which promises to revolutionize (and to a large extent, is revolutionizing) tax control and collection activities. 


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When tools change, the whole approach changes  

The revolution lies in the fact that such a tool radically changes what the audit and collection authority can do, since it radically changes the timelines in which the authorities carry out their activities. 

Tax control and liquidation typically has some limitations, which can make the assessment and liquidation operations anything but simple.  

For one, the assessment is tied to the declarations of the taxpayer, who provides a “report” of activities carried out, as well as documents and invoices, and the tax authorities operate based on this information. 

This means that the assessment is based on this information or, in any case, on the documents found during the verification phase. As a result, the control is limited. 

Secondly, the assessment is made equally complex by the fact that it takes place at a later date–in other words, after the transaction has concluded and after the invoice has been issued. 

As a result, any authority finds itself in the position of having to move backwards, reconstructing the intermediate steps and verifying whether legal requirements have been met, all with the “physical” limitation of the reports and documents that taxpayers provide. 

With Continuous Transaction Control systems, this changes radically, since the authorities have the ability to monitor transactions in progress and even check in advance that certain transactions are compliant with legal requirements, in order to prevent possible violations. 

Moreover, by moving the field of action directly to the cloud, all management and monitoring operations become smoother and faster. In fact, from this point of view, CTC systems bring all the typical advantages of digitization, which makes it possible to dematerialize documents and make them more easily traceable and retrievable as needed. 


Two models for a Continuous Transaction Control system  

Although until now CTC has been referred to as a single digital solution, this is not really the case. 

To get a clear idea of how Continuous Transaction Control systems are implemented (especially from the point of view of collection and control authorities), it’s important to know that there are actually two different types of CTC, which differ in their approach: the “reporting model” and the “clearance model.” 

The reporting model consists of the periodic digital submission, in real or near real time, of reports containing company data through tax authority-enabled platforms.  

This submission does not require the approval of the central authorities in order for the data recorded and for its ongoing processing at the company level to be valid for tax purposes. 

In contrast, the clearance model always involves real-time or near real-time monitoring of business transaction data that is submitted electronically within the tax authority’s platforms, but approval is required at the same time or in advance for certain data and the ongoing business processing of this data must be verified in order to be considered valid from a tax perspective. 

The first difference between the two models is that in the clearance model, the tax authority has an active role in the transaction, since it actually validates the invoice before the transaction itself is complete.  

In contrast, in the reporting model, the burden of proving the validity of an invoice is on companies at a later point in time, not during the transaction. 

Another interesting difference concerns how the relevant information is transferred between the taxpayer and the authority. 

As far as the reporting model is concerned, different compilation forms may be required. For example, Spain and Hungary have established their own specific XML standards, while Portugal and Poland use all or part of the Standard Audit File for Tax (SAF-T) introduced by the OECD. 

Among other things, this first type of approach is most widely applied in Europe and will spread most widely across the EU. 

Turning instead to the clearance model, the taxpayer is required to send only the invoice and other business data related to the transaction that the tax authority intends to receive, record, and approve. In this case, a number of standard reporting templates are used, such as the ISO20022 Invoice Tax Report, if only as a reference transmission template. 

This second system is much less common since administrations prefer to use an XML schema for invoices so that they do not have to depend on external standards. 



A South American model and a composite development 

By analyzing the different Continuous Transaction Control systems, we can highlight another very important aspect, namely that the diffusion of this technology is far from uniform; indeed, its implementation path is rather “bumpy” and presents significant differences from country to country. 

But let’s start from the beginning. 

In reality, the Continuous Transaction Control system is a less “innovative” digital solution than one might think, since the first examples of application date back to 2000. Latin American countries, including Chile, Mexico, and Brazil were among the first countries to adopt these technologies. 

It was here, in fact, that the first steps towards implementation of CTC tools were taken in a more decisive manner, with the clear aim to minimize the VAT revenue gap and even out the differences between expected VAT revenues and those actually collected due to tax fraud, evasion, avoidance, errors in declaration and settlement procedures ,and so on. 

Moreover, the VAT gap is a significant problem that is widespread not only in South America. European countries must also take it into account given that it represents a negative item on the state budget, and one that weighs particularly heavily in the post-pandemic phase, where the recovery of economic resources is extremely important.  

For this reason, many European Union countries have moved (and are moving) to adopt this type of technology in order to benefit from all the advantages that Continuous Transaction Control systems provide as soon as possible. 



Continuous Transaction Control in Europe and the World: a composite picture 

In the Latin American countries that have been implementing Continuous Transaction Control systems for years, the authorities are concentrating on refining these tools to increase their benefits and facilitate their strategic use, not only to reduce the VAT gap, but also to transform them into effective economic levers. 

Many countries in this area (such as Mexico, Chile, and Ecuador) have used CTC systems to make it mandatory and more easily collect VAT for the supply of digital products and services such as website hosting, e-learning platforms, gig economy and sharing economy services, data processing services, automated technical and administrative support, and many other activities.  

They also imposed the same reporting requirements on all platforms that act as intermediaries between the user and the provider of goods and services. 

However, in the digital environment, the majority of revenue comes from the direct sale of services or products to end consumers. For this reason, many countries in the region have begun to employ CTC systems to monitor the activities of suppliers, both domestic and international, without having to rely on third parties. 

In other words, countries like Mexico and even Colombia require suppliers to issue electronic invoices that are pre-authorized by the national authorities. Based on the information obtained through these CTC systems, the same authorities prepare the periodic VAT returns of these taxpayers. 

In this way, Continuous Transaction Control solutions are becoming the central hub of the national tax compliance system, not only with respect to VAT settlement, but also regarding income, excise, and social security tax liabilities, for both domestic transactions and for economic operations of international suppliers. 

The result of these choices has been remarkable: the greater and more effective control over transactions and the effectiveness of the digital taxation services provided to suppliers has enabled Mexico to increase tax revenues by around $300 million. The same has happened in Chile, which has raised $194 million from digital services, and Ecuador also expects to raise more than $19 million with the same operation. 


Continuous Transaction Control in Europe 

Moving across the ocean, the situation is decidedly more fragmented.  

As mentioned in a previous post, the European context is rather complicated, since there is no regulatory frame of reference that harmonizes the various CTC systems that countries have implemented. 

For example, the bloc of Eastern European countries has begun its own implementation process, with different methods depending on the country: 

  • Slovakia is aligning itself with the Hungarian and Spanish models in order to reduce the current VAT gap (now at 20%) and obtain real-time information on transactions. To do this, Slovakia will require companies to report relevant data to the authorities before issuing the invoice through certified accounting software. Their business counterparts will then have to do the same, indicating that reporting invoices have been received. 
  • Bulgaria and Serbia are in an “exploratory” phase, which should end with the adoption of an e-invoicing system through an official or third-party provided platform. Serbia is further along in this process, as it has already enacted a law outlining the rules for issuing e-invoices in B2B and B2C contexts, for e-invoicing requirements and archiving, and has set up mandatory digital transmission and digital signatures for many documents. What is still missing is the actual implementation, which will come in 2023. 
  • Romania is one of the countries that are lagging behind and with the most pressing need, as it has one of the largest VAT gaps in Europe. Therefore, it’s working to adopt a digital tax control system that is based on the Standard Audit Files for Tax. 
  • In contrast, Croatia was one of the first countries to implement the CTC system and have real-time control of transactions. What’s interesting is that in the Croatian model, citizens have an active role in validating receipts through a certified online platform (that’s why a QR Code has been imposed on invoices that can be recorded simply by capturing them). 

The common thread that runs through all of these approaches is that it makes controls more effective and immediate, therefore making a country’s own taxation system more competitive by reducing avoidance and evasion. 


From “Eastern Bloc” to Western Bloc 

Obviously, other countries are also going down the same path, with different timing and modalities. 

For example, starting in 2023, France will introduce mandatory e-invoicing for domestic B2B transactions so that any relevant transaction will be authorized before the invoice is issued, while other or cross-border transactions will continue to operate as “usual.” 

Similarly, Poland, despite some delays, is also set to adopt an e-invoicing system for B2B transactions this year, with both the prior authorization model and real-time electronic notification. 

To do so, it will obviously be necessary to use a certified platform on which the transactions carried out will have to be uploaded so that the  authorities can monitor compliance with the legal requirements. 

What about Italy?

Italy, along with Spain and Hungary, has been a forerunner of these innovations, as it has imposed mandatory electronic invoicing for almost all types of transactions for some time now. 

This does not mean that the journey is over, but at least it’s going in the right direction. Now, all that is missing is European harmonization to make this transformation truly complete.