As governments implement digital approaches to tax filing, reporting, operations, and management, standardization remains elusive—from requirements surrounding e-invoicing to continuous transaction controls (CTCs) and even to interpreting these terms themselves. To unpack the complex regulatory landscape, Sam Hoffmeister, Tax Executive senior managing editor, sat down with Nazar Paradivskyy, Thomson Reuters’ new director of regulatory affairs, for his insights into where things stand—and where they’re headed.
Sam Hoffmeister: Could you give readers an overview of e-invoicing and CTCs? And where have they spread?
Nazar Paradivskyy: Absolutely. For me, “What is e-invoicing, and what are CTCs?” is an important terminology question, because depending on who you talk to, when using these terms, they might mean different things or might mean the same thing.
“E-invoicing” is probably the term most people are familiar with, and I am guilty of using it to simplify when I talk to clients. But when I talk with tax administrations and fellow colleagues in the industry, I’m talking about CTCs.
The use of the term “e-invoicing” is especially problematic, depending on who you talk to. Depending on geography, where people are located, and what function they belong to, they are likely to mean very different things. Everyone is likely to think of Latin America when they hear “e-invoicing”—Mexico, Brazil, Chile—but it’s important to keep in mind that in this region e-invoicing is very much driven from a fiscal perspective, from tax administrations. So, someone from Latin America will definitely think of an e-invoice primarily from the fiscal perspective, as the document one first of all needs to send to the respective tax administration and later provide to their trading partner, as it holds certain commercial information, too. Whereas if you talk to anyone in the US, Canada, Europe, many countries in Asia, they will say an e-invoice is a commercial document exchanged between the trading parties—suppliers and buyers—that happens to carry some fiscal information relevant to their tax administrations. In the US and most of Europe, you will not have the obligation to get your invoice approved by the tax administration prior to sending it to your buyer. This is why the approach implemented in Latin America should rather be referred to as “e-reporting” to give e-invoices their fiscal validity, whereas in Europe or the US “e-invoicing” is about efficiency, business processes, optimizations by digitizing exchange of an invoice among the trading parties, but without necessarily having to obtain prior governmental approval for each individual document.
To bring some clarity around the term e-invoicing, a couple of years ago several associations began working on systemization of e-invoicing and various real-time reporting regimes. We wanted to structure terminology. Especially, as from a real-time reporting or e-invoicing perspective, there’s different models. For instance, in some countries you need to send an invoice first to the tax administration and then to your trading partner, while in other countries, you send the invoice to the trading partner first and only afterward to tax administrations. In a third group of countries, they even want to obtain additional supply chain information—invoice statuses, payment information, freight information—so it goes beyond invoice. So, when we kicked off this work, and then joined forces with the International Chamber of Commerce, we introduced the term “continuous transaction controls,” CTCs, to differentiate e-invoicing that involves governmental controls (such as in Latin America) from e-invoicing in Europe and North America, where there have been no real-time government controls. CTCs are, simply put, e-invoicing including this governmental control. We introduced the word “continuous”because the control might happen at a different point in time—before, after, in between transactions—and the word “transactions” because the regulations have started evolving outside of invoices and into orders, freight documents, payments. Then “controls,” obviously, because there is the governmental control aspect. So, you hear specialists talk more and more about CTCs when there is a real-time data exchange with governmental platforms of the underlying business transaction.
To make things even more confusing, two more terms have started to be used recently. So, let’s clarify them too. In the EU context, it’s “DRR,” or digital reporting requirement. It was introduced by the [EU’s] ViDA directive, VAT in the Digital Age, but importantly DRR only refers to the connection to the government. It doesn’t regulate e-invoicing as the business process between the supplier and the buyer. The EU makes a very clear distinction: e-invoicing is the commercial transaction. While DRR is, simply put, sharing some data elements of the underlying commercial transaction with the government. And then the OECD in parallel is working on a new report where they want to introduce recommendations to ministries of finance globally on implementation of real-time controls, and they talk about “DCTR,” or digital continuous transaction reporting. The scope of DCTR is exactly the same as DRR. It’s only the government reporting piece, but not e-invoicing or invoicing itself.
Hoffmeister: Why and how are governments introducing these real-time controls?
Paradivskyy: Let’s start with Latin America, the region which kicked off the real-time controls. The main reason was the tax gap. They were not collecting enough taxes. I think indirect tax is what everyone immediately thinks of, but as a matter of fact, what numbers show is that the introduction of real-time controls also improves the collection of direct taxes. So, it really improves fiscal discipline from multiple angles. It is also important to flesh out, proven by a number of studies, that these tax gaps as a matter of fact are driven by intentional fraud only to a smaller proportion. The largest share of tax gap is unintentional and is driven by lack of knowledge, lack of tools, overwhelming regulatory complexities, or limited resources or time on the side of the entrepreneurs. Most businesses want to do it right.
The complexity of tax is a fact. Small and medium businesses especially have a hard time complying, and so when you look beyond Latin America and into Europe or Asia Pacific, sure, the tax gap is there, or the thinking around tax gap is there, but it’s not necessarily assuming that everyone is a fraudster in a country, but rather that businesses need assistance. They need tools—digital, intuitional, simple—to help them comply. When you look at those implementations in the EU or Singapore or Japan, it’s really about making life simpler for businesses, especially small and medium-sized businesses, so they can easily and correctly issue electronic invoices. South Korea is good to call out, because they were as early as Latin America in introducing real-time controls, but with the goal to make life easier for businesses to comply.
Now, tax is important, but at the same time it’s not the only driver for introduction of CTCs. For some countries, it’s not even a driver at all. So, if you look at Australia, Singapore, or some European countries like Norway or Finland, tax gap or tax collection is presently not an issue. But they would like to collect transactional data in real time for other reasons. Those include macroeconomics—they want to project the growth of the country better. Are we getting into a recession or not, or which industries or businesses need more support? In this context COVID has been mentioned multiple times—or similar events like large wildfires or earthquakes. Today, the government doesn’t know who needs help and who doesn’t. And then they open up the budget and start printing money, giving subsidies to everyone. We end up with inflation, which we now try to combat. It can be a vicious circle. But looking at what, for instance, Mexico and Brazil have done, because they have this data in real time, they were really surgical in identifying industries or businesses who need support. A tax auditor in those countries sometimes knocks on the door of the business asking, “Hey, I think you need help,” not because “Hey, I suspect you of being a fraudster.”
Then, on top of that, [environmental, social, and governance concerns] is a hot topic. Governments realize they can collect relevant information, as it naturally belongs to transactional supply-chain documents such as invoices or dispatch advises. Many are considering collecting CO2 emissions, dangerous goods classifications, and so on, by implementing CTCs.
And finally, we should not forget that significant data sharing happens between government agencies to find ways to improve the health care system in the country, to improve the educational system, and so on. Trying to deliver a good public service is an important driver for many countries.
Hoffmeister: Do you think the move toward real-time controls would make periodic filings obsolete? Also, how have periodic filings become modernized, and how do they coexist with CTCs?
Paradivskyy: It’s an amazing question, because I think three, four years ago—at least in Europe; I don’t know how it was in the States—everyone was talking about the death of the VAT return due to the introduction of CTCs. It will not go away. I can say that for sure. Instead, we see them evolve, we see them becoming digital. Some governments are, for instance, even pre-populating returns for businesses as they collect transactional data, such as invoices, in real-time. As a company, you have to approve or amend the pre-populated return. You might as well get an ad hoc request to provide additional information or clarifications. So, periodic returns will not go away; they’ll become digital. They’ll become more granular probably too, but I would say that currently this shift is a bit on hold as governments figure out how they can reap the benefits of real-time controls. I predict in the next five to six years CTCs will be the dominant hot topic, and when most countries have landed their CTC frameworks, they will go back and revise periodic controls and see how they can be digitized and modernized further.
Hoffmeister: How do real-time controls affect the in-house tax professional at a multinational?
Paradivskyy: It impacts them more than they can imagine. I would like to call out a few aspects. One important to realize is that the tax administration will have data before you. Forget about post-audit, forget about getting a week, a month, or a quarter to cleanse or restructure the data. You need to send up the data correctly from that first second to the government. Then they have this data, and they can match this data, because they received it—or parts of it—from your counterparts. Tax administrations already run advanced analytics and AI, and they can send an ad hoc online audit request to you to explain a single transaction. Even the example of pre-populated indirect tax returns is great here, because they might see things you weren’t aware of. So, before contesting it to the tax administration, you need to sort things out internally.
Another interesting example is a country like Italy. They have a very high government spend. Besides e-invoicing, they have introduced ordering electronically to all suppliers doing business with the governmental health care segment. You don’t need to be a classic health care supplier, such as Stryker or Johnson & Johnson—you can be supplying pants or plastic bags to a hospital or even data servers—you need to receive orders electronically. When you get your order electronically, you will have a unique identifier on that order. Unless that unique identifier is then flipped to your electronic invoice, your company will not get paid. So, you are running into serious financial issues if you are not on top of things. You need to be in real time. And that, in turn, requires either a new skill set or change of mindset or both from tax professionals. You need to become more accustomed to IT tools and how IT people think and much more business-minded and understand the implications of noncompliance. Because unlike periodic returns, it won’t be just a penalty. It will be decreased profitability, it will be a bad reputation with your trading partners, and it could actually be imprisonment for your upper management.
And one final thing is, historically, many functions have been working very much in silos. Tax does their thing, finance their thing, business their thing. And everyone has individual KPIs [key performance indicators], with no alignment among them. Because of the implications that CTCs will have on systems, on processes, on people, such a siloed approach will not work going forward. It really requires that all functions start aligning. I’ve seen this more than once with clients, where for instance the tax function picks a CTC or e-invoicing provider without talking to others; finance will be unhappy, and they might actually buy a second solution. So, you as a company end up paying double for what you should have received from the very beginning. Again, being more business-oriented—only two KPIs matter for every company: revenue and profitability. Everything else is secondary.
Hoffmeister: That’s a great point about departments not working together to understand what works best for everyone. I also like what you said about how a tax professional needs to understand the IT perspective, too. Anything you’d like to add regarding real-time controls in the context of global tax?
Paradivskyy: There’s a misconception I would like to warn against, and that is seeing a deployment of a CTC or e-invoicing solution as a project that has an end. It doesn’t. It stays around forever—whether you want it to or not—for a couple of reasons. If a company is focused on business processes and efficiencies, obviously a solution like that will bring these efficiencies and cost-cutting and so on. But it’s important to keep in mind that as governments introduce CTC requirements, they are evolving. They will never be perfect from the beginning. So, governments will continuously introduce changes. They will extend the scope of such real-time mandates. They will start with an invoice; later on, they will top it up with electronic orders or freight documents or payment statuses. So, they will potentially capture your full supply chain, going totally outside of what normally is the tax function. It is a circular process; you need to be ready to work with it continuously.
If I can mention some statistics from our company, for instance, during eleven months of 2024, we tracked 327 notifications globally that will impact your invoicing, freight documents, payments, and so on. Some are final changes, some are proposals, some have technical implications, some have legal implications. It’s still important to keep track of all of them so you don’t get a curveball. In 2023, we captured 228, so it’s a fifty percent increase over the previous year. I don’t think it will drop in 2025. On the contrary, as more countries go in this direction, there will be more to stay updated on. It’s not about becoming compliant, it’s about staying compliant, and that’s very true about CTCs.
Hoffmeister: Excellent. Thank you so much for your time.
