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An increasing number of tax administrations are introducing digital VAT reporting requirements in an effort to reduce instances of VAT fraud and under-collection. So far, countries have implemented their own legislative obligations along with bespoke technological requirements. This is causing a significant challenge, both operationally and from a systems and technology perspective. Establishing a scalable solution to satisfy these obligations is now a critical task for organisations.
To combat VAT fraud and under-collection, tax administrations have introduced different measures such as real-time reporting and mandatory electronic invoicing (e-invoicing).
Real-time reporting is the requirement to communicate income and/or outgoing transactional data to the tax authority in (near) real time in a pre-defined format.
Mandatory e-invoicing is the obligation to electronically exchange invoices and transactional data using a pre-defined format, sometimes via a government portal or platform. These reforms are often referred to as Continuous Transaction Controls (CTC).
In implementing varying e-invoicing and CTC models, tax authorities are making it very challenging for multinational organisations to deal with several different models at once.
While existing e-invoicing and CTC models vary significantly based on national design and implementation, they can be divided into the following broad categories:
Each model differs in terms of its specific function and varies from reporting only or reporting with validation or approval to the provision of a centralised delivery capability or decentralised exchange model with the addition of CTCs.
With interoperability, organisations use a service provider to exchange e-invoices based on formats that are agreed among themselves. Interoperability is technically not considered a CTC model due to the fact that the tax invoice audit happens after transactions occur.
Real-time reporting, as described above, requires the supplier to submit a report containing a subset of invoice information in a pre-defined format; albeit, there is no invoice exchange regulation.
The clearance model can consist of pre- or post-validation, where the invoices are approved in real-time or near real time, before or after going to the buyer.
With the release of the EU Directive 2014/55/EU, which obligated public entities in Europe to accept e-invoices, European countries began to implement new requirements. Some countries, such as Italy, have selected a centralised model where a government-issued platform is used to transmit the transactional data. Others are adopting a decentralised model where a government outsources data collection to a platform service provider.
Many European countries—including Finland, Sweden, and Norway—have chosen the Peppol format to exchange data. Peppol (Pan-European Public Procurement Online) is a network established in 2008 by the EU for the exchange of business documents, such as various electronic formats, through a secured international network. It is important to note that Peppol is not a CTC model, as there are no tax authority controls in place. When connected to CTC, this provides a more automated solution for organisations with the added control benefits tax authorities are seeking.
There are many opinions on which CTC model is most effective. Regardless of the model being implemented, it is important that companies monitor developments and understand the models in order to conform within each market.
Depending on the international VAT footprint of your organisation, it can be a significant challenge to track and monitor the various CTC developments that are evolving. Unfortunately, understanding where you are subject to such obligations is only the beginning. The data needed, and the frequency with which it is required, adds to the challenge.
Considering the respective data sources, the engineering task to extract such information and the stakeholders involved can result in quite the headache.
The EU public consultation on "VAT in the digital age" closed for contributions on 5 May 2022. The output of this feedback will likely influence the direction of travel for future regimes at local levels.
Now more than ever, it is important that CTCs become a recurring agenda item for tax functions, especially where organisations are undergoing large-scale enterprise resource planning (ERP) system upgrades or transformations.
Businesses can take a number of important actions today:
Where do you operate? What are the current and future CTC obligations in those countries?
Understand exactly what data is required, in what format and on what frequency.
Put a process or partner in place to maintain content and manage future developments.
Consider the systems or technology solutions required to manage obligations in an efficient and scalable manner.
We know that it is difficult to manage the technology-initiated challenges presented by the changing VAT landscape. There is undoubtedly more to come in the months and years ahead. We can help; contact us today.