TBI Expert View is our focused look into the ever-evolving world of global VAT and what changes companies should be making for 2022.
In Episode 4 of Series 2 – TBI Expert View, Lisa Dowling, our Senior Global Director – Head of Indirect Tax, Advisory and Compliance discusses ‘Continuous Transaction Controls (CTCs)‘, their meaning, country-specific approaches and what’s next for businesses.
In Episode 4 of Series 2 – TBI Expert View, Lisa Dowling, our Senior Global Director – Head of Indirect Tax, Advisory and Compliance discusses ‘Continuous Transaction Controls (CTCs)’, their meaning, country-specific approaches and what’s next for businesses.
Have a read of Lisa’s in-depth discussion here:
Hello, everyone and welcome to Episode 4 of TBI Expert View. I’m going to talk today about Continuous Transaction Controls and what they are, and I’m going to really bring it back to the basics to give a background and an understanding to where we’re going from a digitalization point of view in relation to compliance.
It’s such a topical kind of a discussion at the moment that everybody is having and everybody’s looking to Europe to see what’s going on in Europe and what’s going to happen next from a continuous transaction control point of view and what that really means. So let me just dive into the agenda:
Let’s just dive right into the meaning and the overview when we talk about CTCs, because it really is a ‘newish’ terminology – Continuous Transaction Controls. We have Digital Reporting Requirements (DRR) so these are kind of new terminology, explaining the same thing. It’s still explaining e-invoicing is still explaining e-reporting and that general move towards these kind of new reporting levels throughout Europe. I’m going to look at, number one, mandatory real time invoice reporting and validation by the tax authorities through e-invoicing and then e-reporting of transactional data to the tax authorities.
Both these forms of CTCs allow tax authorities to collect data on business transactions directly from the business management systems, as we all know, in real time, near real time, periodically or on demand. We have seen that roll out in Italy of mandatory B2B e-invoicing. We have seen SII in Spain, which is real time reporting of transactional data sales and purchases, transactions. We have seen Hungary (RTIR), which is the immediate reporting of sales invoice data.
Why are we seeing this kind of roll out?
CTCs are just another tool in the fight against fraud and the reduction in the VAT Gap. We hear this all the time, but they do offer control – control for the authorities and control for the business once they are implemented. Real time visibility – real time visibility to the tax office, there’s a benefit there, real time visibility to businesses as well, even though we have this headache of implementation and lack of harmonization, we are utilizing automation and technology. It’s unavoidable, we have to move with the times. There’s definitely cost saving once the implementation has happened and things are up and running. There is that headache initially, but the cost saving is there. It’s so much cheaper, especially when we talk about e-invoicing, it’s a lot cheaper to issue an e-invoice as opposed to a manual invoice and operate that manual process.
E-invoicing versus e-reporting, what are we talking about?
Electronic invoicing refers to the process of issuing and receiving invoices electronically through electronic data interchange or XML formats validated by the Tax Office – that gives your clearance model, the validation by the Tax Office.
Then electronic reporting is that reporting model, and it refers to the electronic exchange of tax relevant data with the tax authorities on a transactional level in real time, near real time, periodic or on demand.
We’ll just look then at what’s happening throughout Europe.
I added in a bit on Norway as well, but throughout Europe just in the current situation and coming down the line. At the moment we know that we have e-invoicing, it was introduced, mandatory B2B invoicing was introduced in Italy.
In Poland, there’s an announcement that we’ll have B2B mandatory e-invoicing from 2023. Likewise in France from 2024. For Spain and other countries, there’s consultations going on at the moment regarding the rollout of mandatory B2B e-invoicing.
Then with e-reporting, we have the near real time reporting of sales and purchases data in Spain (SII). We have real time e-reporting of sales, invoice date in Hungary (RTIR). We have periodic SAF-T reporting, which is transactions and aggregate totals in place of the original VAT return the JPK VAT files. In Norway, just this year we had periodic SAF-T reporting of aggregate totals again and it replaced the original VAT return format.
In Romania, we’re seeing SAF-T reporting in place of the VAT return for larger taxpayers at the moment from 2022 but expecting that kind of phased rollout.
Then we have SAF-T in its truest form, SAF-T on-demand. We’ve had it in various countries throughout Europe, including France, Austria, Luxembourg, Lithuania and Portugal. That’s the true form of SAF-T, the concept introduced by the OECD, it’s holding your VAT data in a prescribed format for transmission to the Tax Office in the event of an audit on demand. These are the different forms that we have.
Just to look at it in a bit more detail, at country specifics that we’re seeing at the moment:
We know that we have invoicing in Italy from the 1st of January 2019. The scope is limited to local businesses and foreign businesses with an Italian establishment. E-invoices have to be issued in a specific format, an exchange through the SDI portal. That’s the tax clearance model. Moving on from that now.
We’ve had e-invoicing, this mandatory e-invoicing in Italy since 2019. What are we seeing as the next developments there?
Italy plans to abolish the Esterometro by July 2022 this year and make e-invoicing reporting via SDI mandatory for cross-border transactions. That’s kind of key where we see e-invoicing moving towards because Italy is the first country in Europe to introduce e-invoicing.
What are they doing with it now?
It is starting to remove some of the listings that has been necessary. Removing some compliance obligations by adding other automated compliance obligations. You have to issue and receive your e-invoices. At this stage now we’re seeing it remove some other compliance obligations like the Esterometro.
Then in Spain, just to talk about reporting – with e-reporting we have SII which is near real time reporting for large taxpayers filing monthly returns. It’s real time reporting of your sales and your purchases data – that’s key. The purchases were the big headache for business, the implementation for this real time reporting. It’s reporting of your sales transactions within four days of the date of your sales invoice, within four days of the booked to date of your purchase transaction. That ‘booked to’ date has also caused issues for business understanding what ‘booked to’ means within your own accounting system and businesses choosing different approaches with regards to booked to date.
The question in Spain now at the moment is will it be extended to all or more taxpayers?
There was discussion going back to 2019 that there was going to be roll out of SII to other taxpayers, and it hasn’t happened. You wonder, what has been the benefit of SII? What are the statistics around the success rate of SII in reducing fraud or reducing the VAT Gap? What is the Tax Office actually using all this data for, particularly on the purchases side when reporting of purchases even down to expense level, even if you’re not deducting, the VAT has to be reported? That is a huge burdensome exercise for businesses. And what is the benefit to the Tax Office? What is the benefit to the business?
Then once we move into e-invoicing, how will e-invoicing interact with this SII?
Spain has already carried out work on the B2G platform to enable it to be extended for B2B use. It has not yet applied for the derogation from the EU Council in relation to the e-invoicing Directive. We all know the e-invoicing Directive is a B2G directive. Spain would have to apply for derogation as Italy did, to extend its use for B2B, but Italy’s derogation is only applicable for five years, so they’ll apply for an extension to the derogation again. The intention is for the FACeB2B platform to become mandatory in the next few years, but we have no definite deadline, which is really unhelpful for businesses. There’s no real planning opportunity.
And again, how will this e-invoicing solution in Spain interact with SII? Will it remove the obligation to report in real time, particularly maybe on just on your sales data?
I don’t know how I don’t know how it’ll interact, but that’s really a question that lies over our heads.
Then, we saw what Spain did and then Hungary followed suit. They introduced RTIR on the 1st of July 2018. But it was only applicable to sales transactions, so not purchases like SII.
And initially it applied only to Hungarian VAT registered entities that issued invoices with a VAT amount above 100,000 Hungarian Forint to other entities VAT registered in Hungary. Now it’s also applicable to all domestic B2C transactions, in addition to invoices relating to inter-community supplies and exports. Again, still sales, no purchases. This is real time reporting of sales data. It’s not e-invoicing, it’s e-reporting. There’s no confirmation of when it’s expected that Hungary will roll out its mandatory B2B e-invoicing.
What’s the impact it will have on RTIR? Or will we see a removal of the requirement for RTIR if e-invoicing is introduced and e-invoicing is generally introduced on a domestic level first and phased out. So, will we see then a phasing out of RTIR here as well? We have to wait and see.
Poland really is the next country on the list in Europe that are likely to introduce mandatory B2B e- invoicing. We’re expecting that it will be made mandatory from 2023, although there are discussions that the Ministry of Finance is not quite ready for the level of data that it has to deal with and the number of businesses that will have to be registered for e-invoicing. The model to be adopted is expected to be similar as Italy, so at least we have some knowns there. The submission of the B2B e-invoices will be through the KS system managed by the National Revenue Administration. The intention will be to replace the existing reporting system, JPK-VAT, although we’re really far off this kind of solution and there’s a lot to be done before we get to that solution. So, I think that we will end up having is a parallel run. We’ll have e-invoicing, and we’ll still have this transactional SAF-T reporting in parallel for quite a few years.
Then France, they intend to introduce its mandatory e-invoicing from about July 2024. But it’s expected that France will adopt an e-invoicing model similar to Mexico and not Italy. Actually, there has been a confirmation of that. They will introduce a Y model, and so suppliers would first send their invoices to an appointed e-invoice agent of their choice. The agent would upload to the Tax Authority Portal, Chorus Pro for digital signature. Suppliers can therefore create their own invoices in existing formats and the e-invoice agent but standardize the process. It’s slightly different to the Italian model. This lack of harmonization then creates issues for businesses operating in multiple jurisdictions.
Then other countries that are not so far behind France. The German government recently announced its plan to adopt CTCS, although we don’t have confirmation of what that means yet.
Several Eastern European countries Romania, Slovenia, Slovakia, Serbia, Bulgaria have announced their same intention or have already started the implementation process. Ireland is the same they are in consultation with businesses and different groups to see what’s the best solution for them.
The Future of CTCs
There could be some form of harmonization. The EU Commission has launched a public consultation paper which amongst other things, will look at VAT reporting obligations and e-invoicing with a view to try to introduce some harmonization for DRR – Digital Reporting Requirements.
The public consultation will run till May 2022. The EU Commission is looking to issue VAT Directive amending legislation by the end of 2022 with a view to implementing any proposed change by 2024. Is it too late or how is this supposed to work when countries have already gone their own way and introduce their own solutions? We have seen an attempt by the EU Commission before trying to introduce harmonization in the form of the standardized VAT return, which wasn’t successful. But I think at that time it was a more manual process and you were trying to line up one country that had nine boxes on a VAT return with another country that had over 150 boxes on a VAT return, and we couldn’t find consensus. But maybe, because we’re dealing with transactional level reporting, maybe it would be easier to find consensus even with countries that have already come up with their own solution, because technology is advanced or more advanced. And it would probably allow this to be a more an easier adoption process. And so, we’ll follow that and see how that goes.
But just what’s next, in my own opinion. Certainly, the death of the manual VAT return, we’re absolutely going to see that. We’ll see a move towards removal of certain transactional listings. I would imagine, as we have these electronic invoices flowing through a clearance model with the Tax Offices and we’ll see, you know, possibly the death of the VAT return. We hear that a lot, but the death of the VAT return as we know it, the issuing of an e-invoice to generate sales data, the pre population of VAT return information.
This is where we’re going. We’re going from issuing of an e-invoice flowing through the tax office, pre-population of your VAT return back to you for reconciliation. It’s finding any discrepancies and fixing those discrepancies before the final submission to the tax office. It will remove the audit function down the line and hopefully more harmonization and automation for input VAT deduction, that would be nice. I think input VAT deduction gets a bit forgotten about along the way. There’s no reason that through automation and through technology that we couldn’t have automated input VAT deduction calculation of what’s deductible and not deductible calculation of a proportionate rates for VAT deduction. So hopefully we’ll see a bit of that.
Business considerations then. We’re definitely moving towards B2B e-invoicing. It’s the way forward for CTCs, in my opinion. How will businesses manage that when there’s mandatory rollout and when we have differences between countries? Hopefully the EU Commission could bring some harmonization, although the EU Commission in the use of words between May and SHAL and you know, we still end up with differences even though it’s supposed to be harmonized and the VAT compliance process will become, of course more and more automated, relying more and more on accurate data directly from the ERP system. So how good is your data? How will you manage that automation going forward?
Thank you all for your attention.
Tune in to Episode 5 of Series 2 of TBI Expert View where Catherine Quirke, CEO of Taxback International, wraps up the second series of TBI Expert View.