Big Brother is Coming for Sales Tax

I am old enough to remember having to file company VAT (sales tax) returns on paper.  Accounting software would generate the figures which I then had to transcribe onto a form, put in an envelope, and send through the postal service to the tax authorities. 

Accounting software evolved to print the tax return.  It saved transcribing the figures, but the return still had to be sent in the mail. 

The next evolution was electronic filing where tax return data could be uploaded directly to the tax authorities. 

So why are tax authorities around the world moving towards CTC or Continuous Transaction Control, a means of governments getting real-time data on sales and purchases? 

MONEY is the short answer. 

The European Union reckons it is losing €92bn annually in VAT fraud.  Some South American countries have already implemented CTC and more countries around the globe are likely to follow. 

ViDA (VAT in the Digital Age) 

The European Union’s recent initiative, VAT in the Digital Age (ViDA), coupled with the growing trend of Continuous Transaction Controls (CTC), is reshaping the landscape of accounts payable (AP) processes. 

Businesses operating within the EU must prepare for the implications of these changes, which promise to streamline VAT reporting but also require significant adjustments in current accounting practices. 

Understanding ViDA and CTC 

ViDA aims to modernize VAT reporting to enhance transparency, reduce fraud, and simplify processes. This initiative is poised to introduce real-time or near-real-time reporting requirements, mandating that businesses send VAT-related data to tax authorities as soon as an invoice is issued or received. 

Parallel to this, CTC systems demand transaction-level data reporting, often in real-time or shortly after the transaction. It enables tax authorities to review and approve invoices before they are paid, ensuring VAT is correctly calculated and reported. 

Implications for Accounts Payable 

The fusion of ViDA and CTC initiatives signifies a paradigm shift for AP departments. Here’s how: 

  1. Real-Time Data Handling 
    AP teams must now handle data with more urgency and accuracy. Real-time data entry and processing become paramount, and AP software must be equipped to communicate with tax authorities instantaneously. 
     
  1. Enhanced Compliance Requirements 
    With ViDA, the margin for error narrows. Compliance is not just about paying the right amount but also about reporting it correctly and on time. The AP staff must stay abreast of changing regulations and ensure their processes are compliant. 
     
  1. Increased Automation 
    To manage the volume of transactions and the speed at which information must be relayed, automation becomes a necessity. Robotic Process Automation (RPA) and Artificial Intelligence (AI) will likely play a significant role in enabling AP departments to keep pace with these requirements. 
     
  1. New Software 
    Integration of new software with existing ERP systems, data security, and ensuring continuous operation will be key challenges. 
     
  1. Vendor Relationships 
    Vendors must also be prepared for ViDA and CTC, as their invoicing systems need to be compatible with the business’s processes. AP departments will need to communicate these requirements and work with vendors to ensure a seamless transition. 
     
  1. Staff Training and Adaptation 
    Employees must be trained to handle the new systems and understand the regulations. This involves not just initial training but continuous learning, as tax regulations and technology will evolve. 

Big Brother is Coming 

ViDA is the EU’s approach to modernising the gathering of sales tax but it’s not a leader in this space as some countries outside the EU already have already implemented strict reporting requirements. 

The strictest approach I have seen being discussed is CTC where invoices must be approved by the tax authorities BEFORE goods are even shipped.  To me, this smacks of interference in the flow of commerce and raises very serious questions about bureaucracy, competitiveness, and espionage. 

For example, several years ago, I was made aware by someone working for a company bidding for an overseas contract, that a nation state’s espionage services stole confidential information belonging to them and provided it to a competitor to give the competitor an edge in the process. 

CTC makes espionage so much easier for unscrupulous people working in positions of authority in governments. 

The current tax audit practice doesn’t really lend itself to espionage because of the way it is conducted.  It is painful for the firm being audited (and probably for the auditors too). 

Conclusion 

Real-time reporting of VAT or sales tax values is a good idea but interfering and controlling the release of invoices from suppliers to buyers is a step too far. 

Excluding PDF invoices sent by email, which is how 80% of invoices are distributed, as an approved format without understanding how technology has evolved to process them with 100% accuracy, will lead to significant additional cost for business who will have to pay to upgrade their systems to adopt the e-Invoicing regulations that are being deployed alongside CTC. 

Check out my calendar and book a meeting with me now. 

Finbarr McCarthy