This week, ICC published a set of practice principles for the implementation of continuous transaction controls. Never heard of them? While you wouldn’t be alone, CTCs are playing an increasing role in the way governments determine how much tax companies should pay – and, moreover, may be soon be used to monitor compliance in a range of other areas.
What are CTCs?
Over the years, as digital technology has become more widely available, governments have increasingly implemented cloud-managed services to improve the efficiency, effectiveness, and quality of public services. These regimes, known as CTCs, enable law enforcement agencies, like tax administrations, to collect data associated with business activities that are relevant to the exercise of their function. This data is obtained directly from business data management systems, in real-time or near-real-time.
How do they improve efficiency of tax collection efforts?
CTCs address many of the inefficiencies associated with retroactive audits, where auditors can only obtain visibility of a transaction long after its conclusion and exclusively rely upon data stored by entities whose activities they seek to audit. Under this “static” approach, tax administrations depend upon taxpayers to provide historical evidence of ledgers long after transactions are completed.
Rather than evaluate historical ledger evidence provided by taxpayers, CTCs gather relevant business information directly through a trusted business transaction ledger comprised of authenticated transaction source data. In this manner, CTCs enable tax administrations to obtain business transaction data in real-time or near-real-time, thus improving the speed and accuracy of tax collection efforts. Equally, technology-backed public revenue collection solutions, like CTCs, have the potential to reduce administrative burdens for companies and provide legal certainty.
Are CTCs coming soon to other compliance areas?
Many emerging economies have already adopted CTCs for digital tax reporting or invoices to improve the collection of VAT and similar indirect tax measures. Meanwhile, several industrialised economies are evaluating or introducing CTCs to supplement or replace existing audit approaches.
While ICC’s Practice Principles for the Implementation of Continuous Transaction Controls focus on the area of taxation, CTCs encompass all variations of transaction controls that take place before, during, or after the exchange of commercial documents between suppliers and buyers. Therefore, as CTCs continue to expand to other compliance areas, these Principles will generally apply for other types of business documents or reports outside of taxation.
At the same time, these Principles will promote consistency and compatibility of CTC processes across national borders, jurisdictions, and public sectors. The ultimate objective is that the same data be shared with a country’s public administration only once, and such in an identical or at least substantially similar manner in all countries that implemented CTCs.
Are there any downsides for business?
One of the biggest downsides for business is the existence of disharmonised CTCs among jurisdictions and law enforcement systems. If the implementation of CTCs continues to follow the same fractured approach without a consistent legal, administrative, and technological global framework, then businesses are more likely to experience future complications.
To avoid any potential drawbacks, CTCs need to be embedded into a broader strategy of the digitalisation of the public administration. In the absence of such a strategy, governments could jeopardise the benefits that can be derived from digital processes within both the private and public sectors.
What can be done to enable effective harmonization of regimes?
CTCs have the potential to increase tax collection while at the same time promote efficiency and economic growth.
On the release of the ICC report, Christiaan Van de Valk, VP Strategy at Sovos and Chair of the ICC Working Group, said, “The real-time collection and capture of data by cloud-based government platforms is creating complex dynamics between the private and public sectors. As the real-time economy takes hold across the private and public sectors, it is critical that national authorities and businesses collaborate to ensure that these tools are beneficial for all.”
To realise this unique potential, authorities that plan to implement a CTC system should consider the following principles.
Balance CTCs should consider the need for balance between the legitimate interests of tax collection and economic growth.
Efficiency Principles related to efficiency [such as provide data only once, consistency, interoperability, harmonisation, robustness and continuity] should, where possible, be considered to ensure maximum benefits of CTC systems for both the private and public sectors.
Communication A commonly shared understanding among all stakeholders of the CTC objectives from an early stage will enhance coherence and generate greater economic benefits.
Co-operation Technology-based controls need to be based on a common legal framework and a cooperative compliance regime for constructive collaboration Introducing or changing CTCs
Introducing or changing CTCs Authorities should communicate compliance timelines to the market and provide clear and exhaustive guidance for effective implementation.
Data protection and data privacy Public bodies or certified private entities operating CTC platforms must treat submitted business data in accordance with international legal norms for data protection, data privacy and data security.
Trade impact and non–discrimination CTCs should be designed to uphold the principle of non-discrimination and be implemented in a manner that does not discriminate between resident and non-resident service and technology suppliers.
The practice principles encourage governments and businesses to work together to ensure that CTCs are beneficial – not a hindrance – to business supply chains and government operations. These practice principles can be used by authorities to optimize laws and systems in the interest of supporting digital transformation with the support of business.
Access the ICC Practice Principles for the implementation of CTCs.
Read more about ICC’s work relating to taxation, digital economy and customs and trade facilitation.