Continuous Transaction Control: a look into the future

The benefits of Continuous Transaction Control for any country are obvious and recognized by many experts, although it must be stressed that their actual implementation depends on how the CTC system is implemented and what forms it takes within a given country. As we have already mentioned in a previous post, Continuous Transaction Control does not require a unique implementation, although many countries are starting to implement this type of controls over time, the adoption process is still long and in many ways not very harmonized. 

In spite of this, there is no doubt that Continuous Transaction Control is the future that every industrialized and financially evolved state must strive for to have beneficial relations with other nations, but above all to boost its own economy – which is not bad considering the Covid period and the prospect of a delicate international political situation. 


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Digital transformation also involves control systems 

Digital transformation is a phenomenon that has been taking hold for some years now and has affected almost every sector of the economy and society across the board. It’s no surprise that the tax sector has also been affected by this change, modifying its tools and procedures over time in order to take full advantage of the benefits of digitization. 

From this point of view, Continuous Transaction Control is part of this transformation, which has been initiated at various levels and can no longer be stopped. It should be emphasized that CTC systems are only one aspect (albeit a very important one) of this transformation: just think of all the projects planned and implemented in recent years by Italy for digitizing the Public Administration. A system of continuous digital control of transactions cannot exist without institutional adaptation done in the right way. Such an adaptation must increasingly consider digital as the main way to operate and interface with other subjects. 

This is why a three-year IT plan for IT was launched in 2021, which aims to accelerate the digital transformation of the Public Administration by setting precise and verifiable stages of evolution. In particular, one of the objectives of the strategy is “to contribute to the diffusion of new digital technologies in the Italian production system, encouraging standardization, innovation, and experimentation in the field of public services.” After all, productivity, technology, and institutions must all work together and in unison to enable the greatest benefits to be derived from digital transformation. 

Among other things, Italy is in an excellent position in this process, as it has already taken giant steps forward. In this sense, think about the country’s well-established adoption of electronic invoicing, a historical step that first involved the Public Administration and supplier companies and was later extended to all invoicing activities for both B2B and B2C. 

The results of this were soon to follow. Within just a few years – taking into account that the last “relevant” implementations date back to 2019/2020 – the level of VAT tax evasion has dropped to 20%, which has reduced the national VAT GAP with other European Union member countriesThis very fact introduces the first formidable advantage that can be obtained as a country system once you decide to adopt a Continuous Transaction Control model. 


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Continuous Transaction Control increases a country’s revenues 

As the Italian example demonstrates, for those who implement them, the digitization of transaction and control systems is extremely beneficial. Electronic invoicing, on the other hand, is a preparatory measure that can be assimilated to Continuous Transaction Control systems and, as such, makes it possible for a country to increase its tax revenues. Improving the effectiveness of controls allows a country’s tax authorities to gain access to tax revenues resources that previously went uncollected. 

From this point of view, Italy represents a perfect case study once again. To date, Italy has obtained €3.5 billion from the digitization of controls, and to this, we must add the gains linked to VAT revenue, which have increased to over €2 billion. These figures are confirmed by the Director of the Revenue Agency, Ernesto Maria Ruffini, who underlined how the introduction of digital solutions in the tax sector has not only withstood the blow of the pandemic, it has also provided a key simplification tool fit for these times. 

Continuous Transaction Control improves the efficiency of government controls 

As we can see from the data reported in the previous section, the introduction of a Continuous Transaction Control system allows all countries to see a significant increase in their cash flows and also to improve the efficiency of certain internal processes, such as fiscal control. In fact, in the majority of countries, controls are carried out by the authorities only after the time of the transaction, which means that assessment is not always easy or effective. To this, we should add that the checks carried out suffer from another major limitation, that of being, at least initially, limited to the documents and reports presented by those involved in the transactions. 

This means that the assessment is necessarily limited and everything that does not have an immediate documentary record must be recovered and verified with further inspection. This translates into additional time and resources that must be deployed by the authorities. Continuous Transaction Control systems, on the other hand, have the great advantage of changing this type of approach, putting the authorities in a position to carry out their verification and monitoring functions in a way that is no longer “passive,” but in a proactive and timely manner. 

This benefit is perfectly captured in the main ways that CTC processes operate. 

Two CTC models for real-time monitoring  

The efficiency that Continuous Transaction Control (CTC) systems are able to ensure to tax control authorities is linked to the fact that each transaction can be verified in real time or even approved in advance. This immediacy of control is made possible because of how CTC models operate, which are divided into two macro-categories.

First, there is the reporting model, which is based on a system of reporting where companies must transmit their transactions to the supervisory authorities in real time and without the need to receive prior approval (which comes at a later stage) or continuous processing of company data in order to be considered valid from a fiscal point of view. Then there is the clearance model, which requires that the data related to each transaction is uploaded to certain platforms and is subject to prior approval in order for that same data and its continued business processing to be valid from a tax perspective. 

Although the role of the supervisory authority and of the economic players involved changes in the two systems (in the first, it’s up to the company to prove the validity of the data and transactions carried out, while in the second case it’s the central bodies that can move proactively), in both cases the data becomes immediately available on the interchange platforms. 

This means that authorities can easily retrieve all the information they need without the need for targeted investigations, but by simply accessing the digitally uploaded profiles and data. 

Continuous Transaction Control decreases tax irregularities 

If one of the main benefits of CTC systems is to make the work of the control authorities more efficient, the direct consequence is to reduce tax irregularities committed during transactions or at the reporting stage. After all, this is perhaps the strongest motivation that has pushed (and is pushing) many countries to adopt these solutions.  This is the case with Mexico, Chile, and other Latin American countries, which were the first to implement Continuous Transaction Control to address tax evasion and avoidance that was diverting vital resources from a healthy economy. 

The result of this choice showed significant results: Mexico significantly reduced the number of incidents of tax fraud, increasing revenues by around $300 million. The same thing happened in Chile, which collected $194 million from digital services. Ecuador recently adopted these solutions and estimates that it will collect more than $19 million in additional revenues. 

The same positive impact was seen on the other side of the world among European Union member countries. For example, Romania is accelerating the adoption of a Continuous Transaction Control system, as it finds itself in a real “VAT emergency” with one of the largest revenue gaps in Europe. Slovakia has also implemented these measures, resulting in a positive trend that is leading it to lower the VAT gap, which is currently over 20%; in just a few years it should be in line with the European average. 

Continuous Transaction Control makes every country more attractive 

Another advantage that the entire country system can gain from the use of Continuous Transaction Control systems is that of facilitating transactions with foreign countries, making them safer and more traceable. In fact, one can imagine that the various CTC systems that have been implemented in the various countries will gradually be brought back to shared forms and processes of operation. This should allow for the creation of international platforms that can record the various transactions, thus making them easily traceable.

Any country that conforms to this mechanism would have a clear competitive advantage over others, since it would offer a safe and controlled exchange ecosystem, sheltering any foreign buyers from fraud or risky transactions. In addition, it would be much easier for central authorities to reconstruct transactions involving more than one country, as they would be able to rely on international collaboration that is made even more effective by the possibility of quickly sharing relevant data in digital format. 

In addition, countries with a Continuous Transaction Control system will appear more attractive to possible investors, also thanks to the reduction in tax pressure that the CTC is able to generate. In fact, it is possible to imagine that in countries where Continuous Transaction Control is active, the “cost” of tax evasion is much lower; consequently, tax revenues will be higher and more constant and, therefore, tax rates will be lower, not having to compensate for budget shortfalls caused by fraudulent behavior. 

Continuous Transaction Control is a driver for digitization 

Implementing a CTC solution would also provide a strong motivation for a country to complete its digital transformation.Ernesto Maria Ruffini explains this well, in the context of digital invoicing: “in a long-term perspective, the aim is to encourage the birth of a digital culture that pervades not only the production sector, but the entire Italian society.”

In fact, introducing a CTC system requires financial operators to change how they manage their transactions and to move toward a model where bureaucracy is reduced to a minimum, controls are more effective and less costly, and the private and public sectors work together. 

It should be emphasized that this virtuous circle, made up of bureaucratic simplification, efficiency of controls, and the resulting increase in revenue (incentivizing lighter tax policies) can become the basis of a structural revolution in any country, transforming the tax sector into a formidable economic engine of domestic growth and investment from abroad.