Digital transformation is now a transversal phenomenon in the current social and economic context. This is demonstrated by the fact that there is not a single sector that has not been touched by this change and that does not have to deal with new technologies, both in the private and in the public sector.
On the other hand, both national Public Administrations and international institutions (European and non-European) find themselves increasingly in the position of having to adopt specific technologies in order to keep up with changes in financial sectors and, above all, to make their work more effective, efficient, and reliable.
From this point of view, Continuous Transaction Control is a perfect example of how digital innovation can change the approach of the Public Administration for a particularly sensitive issue such as the control and fiscal management of the various economic activities.
On the other hand, Continuous Transaction Control also represents a considerable challenge that each country must face and overcome in its own way, since the implementation of new digital solutions like this is not always easy and must deal with internal resistance, structural delays in development, and the lack of specific skills for using certain tools.
This is in addition to the fact that digitization often entails expanding the operational frame of reference, which is no longer just national, but requires harmonization with other countries.
In fact, while digital technology makes the world smaller by facilitating operations and transactions that cross borders, it also makes it necessary to develop uniform systems and platforms with which to interface, regardless of the countries involved.
It’s precisely this aspect that is one of the most problematic in Continuous Transaction Control, especially in Europe.
Continuous Transaction Control: The global shift in revenue management
EESPA (the European E-invoicing Service Providers Association) defines Continuous Transaction Control as a form of transaction-based reporting or settlement, based on invoices actually issued or a subset of the invoice.
In other words, Continuous Transaction Control is a digital tool that has been developed and adopted by some states that makes the fight against fraud and tax evasion more effective and reduces the gap in VAT calculation during invoicing.
Continuous Transaction Control, however, is only the “last mile” of a path that many countries have been following for some time now to make the control of domestic and international transactions more efficient and to prevent fraudulent behavior at the invoicing or tax return stage.
In fact, there have always been structural problems with this activity.
Moreover, as it is traditionally conceived, the mechanism of monitoring and tax assessment puts the control authorities in a difficult position, since the regularity of transactions can be verified only after the fact, since you have to wait for the taxpayer’s report before being able to act, if necessary.
However, this is a problem in many ways.
First of all, acting ‘late’ means that the authorities have to employ more resources to retrieve the relevant information by reconstructing movements and transactions going back in time.
Secondly, verification can often depend on reports made by the taxpayers themselves whose report are naturally limited, cover only a given period and, therefore, pose the authorities with a verification “boundary” that is not easy to extend by requiring documents that are not always available.
Finally, this kind of approach makes prevention very difficult and limits the authorities’ intervention to a subsequent verification and, possibly, to a sanctioning activity.
To overcome these “issues,” the authorities have embarked (as mentioned) on a path of innovation that has led to the adoption of some digital solutions that soon became shared.
Think, for example, of the obligation of electronic invoicing, which after a path that started with Legislative Decree 127/2015 in implementation of the delegated law of Tax Reform, was finally introduced in Italy, first for transactions made with the Public Administration and later also for those between private individuals.
Data at the service of efficiency
This type of measure falls squarely within the functional and conceptual framework of Continuous Transaction Control, since it exploits digital transformation to improve the efficiency, effectiveness, and quality of public services.
In this sense, a fundamental role is played by digital platforms and cloud management systems that guarantee the authorities in charge (such as the Internal Revenue Service) the possibility of collecting a large quantity of data to which they can have rapid access at any time.
But what is most important is that this data is obtained practically “live,” at the same time as the invoice is issued or at a time immediately following.
Continuous Transaction Control systems make it possible to collect and, if necessary, extract the most relevant information through a recognized digital platform where transactions are recorded and updated in real time, and which reports all the activities of a given company.
Beyond the technical component, the interesting aspect is the novelty of the approach: a static approach is abandoned, and the supervisory authorities become a proactive part of the process, carrying out verification and collection activities more quickly and effectively.
It is easy to believe that, just as electronic invoicing has had a positive effect in terms of revenue, so too Continuous Transaction Control systems can bring to light hidden revenue from fraud and evasion, transforming a fiscal policy choice into an opportunity to generate revenue for the State and, at the same time, lower tax pressure, thus triggering a virtuous circle.
Not everything is as simple as it seems
While the advantages of a Continuous Transaction Control system are undeniable, it must be stressed that obtaining this type of benefit is anything but simple, since the implementation of CTS technologies is a major problem that must be faced.
If it is true that all European countries, and not only, have been strongly committed to adopting digitized solutions to improve the efficiency of tax management, often choosing Continuous Transaction Control systems, it’s equally true that this process has often been disharmonious and uncoordinated.
Instead of following a single, shared plan for digital transformation in this area, each European state has preferred to preserve its own “tax sovereignty” by carrying out different interventions, at times disorganized and in all cases differentiated from country to country, sometimes taking steps forward or preferring to slow down or delay implementation according to national political interests.
This has been possible because at an international level, there is no real technological, administrative or legal frame of reference on which everyone can move and adopt the same measures.
The result of this disorder is clear: while digitization certainly has positive effects at the national level, when transactions move to the international level, the risk is that of not having adequate control and verification systems.
Even worse, this disharmony also represents a significant competitive disadvantage, since it makes it more complex to carry out transactions between countries in different areas, consequently making them less “inviting” in favor of others that are able to attract investment more easily.
The principles of necessary harmonization
To address this complex situation, which could potentially undermine the benefits of continuous transaction control systems, the International Chamber of Commerce has developed a list of principles that should help make the implementation of CTC models more uniform.
First, however, a premise must be made.
The International Chamber of Commerce (ICC) is a private organization that represents all sectors of business activity worldwide and works to “promote investment, the opening of markets for goods and services, and the free movement of capital.”
Therefore, even though it is a private organization, the ICC has an absolute authority that is recognized throughout the world, which allows it, among other things, to draw up policies and establish standard norms for international trade to which all other countries must conform.
Therefore, the harmonization principles listed for national Continuous Transaction Control systems are not a theoretical exercise, but a very stringent indication with which all countries must comply.
Going into detail, the ICC states that any implementation of national CTC solutions must respect the following values:
- Balance: each system must strike a balance between the need to increase the efficiency of tax collection and the goal of keeping growth high and steady;
- Efficiency: the solutions adopted must guarantee maximum harmonization, interoperability, continuity, and reliability, intended for both public and private sector players
- Comprehensibility: everyone must be able to understand exactly the reasons for and benefits provided by Continuous Transaction Control systems;
- Cooperation: the verifications carried out through the CTC systems must be based on a common legal framework and on a cooperative compliance regime so that any change occurs without upsetting the overall harmonization framework;
- Transparency: the requirements, deadlines, and operating procedures foreseen by one’s own Customer Transaction Control system must be communicated to the relevant authorities in such a way that they are comprehensible to all (in this sense it may be necessary to draw up a clear and comprehensive guide);
- Privacy: all data that the authorities or operators in the sector receive or handle through CTC systems are and must always be protected by the international regulations in force to safeguard privacy, protection, and data security. Moreover, continuous controls do not mean invasive controls.
- Principle of least impact and non-discrimination: obviously the application and implementation of CTC systems must take place not only in compliance with the principles listed above, but also ensuring that the measures do not cause discrimination between resident and non-resident service providers. In other words, it must ensure competition that is as fair as possible so that technologies develop freely and meet the needs of each individual country.
Continuous Transaction Control: a challenge for the future
These principles, while not binding, are nonetheless essential to follow to ensure that all countries are able to carry out an implementation that is as organic and harmonious as possible.
But of course, principles are not enough: developing and implementing a system of Continuous Transaction Control is a far from simple task, which will almost certainly take a lot of time and will engage most countries in the near future.
After all, it is enough to think that Mexico, one of the first states to move towards the adoption of CTC solutions, took almost 10 years to complete this decisive transformation and still plans to commit to improvements in its technologies in the coming years.
This means that CTC will be a challenge that will will be high on everyone’s agendas: it’s estimated that the main emerging economies and most of the fully industrialized countries will be engaged in this path at least until 2030, the year when it is estimated that an acceptable level of maturity and awareness will be reached.
On the other hand, it is unthinkable to renounce a challenge of this kind, given the great benefits that this type of innovation brings.
United work for a unique result
Precisely because the objective to be pursued is by no means obvious and the stakes are rather high, the implementation of an effective Continuous Transaction Control system cannot only concern the Public Administration.
The same international authorities should move to facilitate the adoption of CTC regimes by providing framework provisions or by taking action to imagine a shared European digital infrastructure to refer to.
Some work has been done, especially from the point of view of consultancy and collaboration with some technical partners to understand the state of the art and to imagine possible interventions.
However, consultancy and collaboration are not enough; companies must also move in advance, taking advantage of the acceleration of digital transformation in recent years to implement fintech solutions (such as digital tax compliance systems) in order to be ready when they have to deal with the new requirements of a CTC system.