The last two decades have seen a growing number of tax authorities around the world seek to gain greater control over companies’ tax obligations and processes, inserting themselves ever closer to transactions in a bid to reduce fraud and close their country’s value-added tax (VAT) gap.
France has become the latest country to overhaul its tax reporting procedures. Spurred on by these international reforms for continuous controls of VAT transactions, the French government is looking to continuous transaction controls (CTCs) to increase administrative efficiency, cut costs, and fight fraud.
Starting with large companies, a planned national roll-out of mandatory business-to-business (B2B) electronic invoice clearance, coupled with an e-reporting obligation, will give France’s tax administration access to all relevant data for B2B and business-to-consumer (B2C) transactions. That is the theory, at least. However, many important questions remain around the plan’s implementation.
Context on Continuous Transaction Controls
For some time, businesses have taken advantage of ongoing developments in digital technology to reduce their administrative burden. When manual paper-based invoicing and reporting processes were replaced by PDFs and EDI (electronic data interchange) almost two decades ago, many tax authorities were left on the back foot, ill-equipped to audit these new digital tax flows. Concerned that they might lose control over revenue collection, they too began digitising their own taxation systems, using the CTC model as a basis.
The most popular form of CTC in the world today is clearance e-invoicing, in which electronic invoices are cleared directly with a tax authority or its appointed agents before or as part of the issuance process.
Among the first to adopt this approach, governments across Latin America devised regulations to mandate the use of e-invoicing in their countries. Rather than transposing traditional paper-based processes and compliance concepts to the electronic environment, they instead made it mandatory for businesses to comply with new real-time control infrastructures. The vast improvements in economic transparency and revenue collection this led to across the region meant CTC was now firmly on the radar of tax authorities around the world.
Described by the European Commission as an “estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations,” recent figures show that the EU could be facing a VAT gap of 164 billion euros ($199.3 billion) in 2020. France’s own VAT gap was almost 13 billion euros in 2018 so is perhaps little wonder that, as the EU’s second largest economy, the country is looking to follow the Latin American example and adopt continuous transaction controls.
In its recent report, “VAT in the Digital Age in France” (La TVA à l’ère du digital en France), (the report) France’s tax administration, la Direction Générale des Finances Publiques (DGFIP), describes its aim of implementing a CTC system. The report outlines how the mandatory clearance of e-invoices will lay the foundations of the system, providing the DGFIP with extracted data relating to all domestic B2B transactions.
This in itself, though, is not enough to close the country’s VAT gap. Effectively combating VAT fraud requires access to all transaction data. To address this, data that will not be received as part of the e-invoice clearance process, such as B2C invoices, intra-community and cross-border invoices not covered by domestic French mandates, will be subject to a separate, complementary e-reporting obligation, as well as payment data of interest to the tax administration.
The report reveals that the DGFIP considered two models for clearing e-invoices via its central Chorus Pro portal, the current clearance point for business-to-government (B2G) invoices. In the first of these, the public portal serves as the only point via which an invoice can be transmitted to a buyer or, where applicable, its service provider.
The second model builds upon this concept, by adding the use of certified third-party providers, authorized to extract data from and transmit the invoices between the transacting parties. Because it is not exposed to a single point of failure, this is the more resilient model. It is also the preferred option of the service provider community and the DGFIP has verbally confirmed that this is the model it is working towards.
Considerations and Planning Points
Although the report lays a solid foundation for deploying this mixed CTC system, there are many issues that need to be clarified to allow for its smooth implementation, some of which are quite fundamental.
The proposed use of third parties, for example, requires the French tax administration to decide and disclose soon the details of its service provider certification practices.
Clarification is also needed on how the proposed high-level CTC scheme sits with regard to the country’s existing rules around e-invoicing integrity and authenticity, with further consideration given to its relationship with the FEC, the French version of the SAF-T data exchange standard, and its digital VAT reporting processes. Indeed, even though it is not stated in the report, the French budget law that initiated this move toward CTCs suggested that the use of pre-filled VAT returns was among its key objectives.
Questions remain, too, about the invoice format and content, about the central archiving facility associated with the CTC scheme, while the proposed central e-invoicing address directory requires careful design to enable a seamless implementation and ongoing maintenance.
Perhaps most concerning is the proposed timeline for implementing the new CTC system. All companies will be required to be able to receive electronic invoices via the centralized system from January 1, 2023, by which date the e-invoice mandate will also come into force for larger companies. The report references the International Chamber of Commerce (ICC) practice principles on CTCs, which recommend giving businesses at least 12 to 18 months to prepare.
With the first deadline due in just two years’ time, the DGFIP has only six to 12 months to work out all the details, and push through the relevant laws, decrees, and guidelines, if they are to adhere to the ICC’s recommended timelines. With DGFIP-hosted stakeholder working group meetings starting in January to discuss the various open issues, it does indeed seem to be a tight timetable.
But, with the clock ticking, it is now time to move quickly from recommendations to actions if France’s businesses are to have a chance to adapt.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Anna Nordén is Principal, Regulatory Affairs at Sovos.
The author may be contacted at: firstname.lastname@example.org