The clearance model is gaining a stronger foothold in Europe
What is the clearance model?
There are different models out there that ensure compliance in electronic invoice processes. There is for example so-called post-audit approach, in which basically trading partners need to archive invoices and they also need to be able to present them for future proof for up to 10 years after the invoice date. This model is based in the world of paper invoicing and in the countries which have basically copied the old processes to the new world.
But with new technological possibilities, governments are looking at new ways to tackle the so-called VAT gap. And this is where the clearance model comes in. The clearance model has its origins in countries that have, to put it mildly, a rather high VAT gap. Or in other words, in countries where a lot of money is channeled past tax authorities costing the state millions. Thinking further, it causes the state to have less money to invest in education, healthcare, and the like, further manifesting the equality gap. Does it feel like I sound too much like Marx already? Don’t worry, that’s not going to be the case. Still, I feel it’s important to highlight that the VAT gap has clear implications on the lives of people in different countries and that it’s important to look for better solutions to solve this gap.
And this is what the Continuous Transaction Control ( CTC) model is about. In countries that operate under the clearance model, the tax administration requires that invoices are approved before the supplier can send them to the buyer. There are several ways of doing this. But the two most spread CTC processes are either “Real-Time reporting” or the “Clearance model”. In the case of Real-Time reporting, the supplier sends the copy of the invoice (or most important VAT-related data of that) to the government at the time when the invoice is issued and respectively the buyer reports the same information at the time of receiving the invoice. In this way, the public sector can compare the invoice data and has online visibility into the VAT situation of the country. In the case of the clearance model, the control from Tax Authority (TA) is even stricter – at the time the invoice is issued it is sent to the TA for approval and the supplier cannot deliver invoices to the buyer before the TA accepts the invoice. In some cases, such as Italy, a government channel is even used to transfer the invoice to the buyer. In short, instead of proving later that all taxes are paid, it is checked upfront and it has proved in the countries where it is already in use that VAT collection has improved remarkably effective.
The clearance model in a way is a perfect win-win situation for the government, countries and businesses alike. It pushes countries further ahead on their digitalization curve to electronic invoicing and at the same time businesses can use these technologies to make life easier because they can deal with their VAT upfront without having to store a massive paper trail with the ghosts of invoices past. And lastly of course the state (and thereby the citizens) benefit because the clearance model helps to close the VAT gap.
Real-time VAT control taking hold in Europe
In March this year, we took a look at Italy which was implementing the clearance model on this blog. Already before that another European country, Hungary, has implemented a lighter version (Real Time reporting) of CTC. Back in spring, we wondered if it would be a sign that the CTC is gaining a foothold in Europe if big countries and economies like Italy are taking the model into use. Now France is following suit and has published their draft budget for next year in which they mention that they will start to implement the clearance approach, just like Italy did last year. In my opinion, it supports what I wondered about in March. Other European countries have been following the development of Italy and probably many of them will follow in their footsteps.
France is now the first country that is doing so. They explain that their aim is to reduce the VAT gap.
I was at the e-invoicing Exchange Summit in Vienna this year and there it was also quite clear that the clearance model is one of the top discussion points right now. I would go so far as to guess that 2 out of 3 countries that think about e-invoicing are considering the clearance model in parallel. It’s easier to list out the countries who don’t seem to be looking at it: Northern Europe (did you know that they say – Sweden has a negative VAT gap :)), Australia, New Zealand, the US, and probably some more.
I strongly believe France is not the last country we see moving towards the clearance model. I believe the next countries to follow suit within the next 2-3 years will be Benelux countries, Spain and Portugal.
The clearance model enables a digital future
I have often been asked if we at OpusCapita are in favor of the clearance model and CTC and it’s an interesting question. For us as a company, it’s really more the outcome that matters rather than which model is used. At first, it might even sound counterintuitive. The clearance model creates a standardized market with relatively low transaction prices, which of course lowers the earnings per transaction for service providers like us. But on the other hand, I clearly see it as an enabler to help us digitalize global trade which on a larger scale is much more important. With the clearance model, the market is highly standardized and all the suppliers are on board. In other markets, supplier onboarding is one of the biggest challenges when it comes to electronic invoicing. It’s not that the companies don’t want to become digital, it’s because they are working with many different suppliers, some of which don’t yet send electronic invoices. The clearance model will make it easier also to allow companies to trade globally, because the more standardization there is, the easier it will be to exchange messages such as invoices and the like.
I only hope that Tax Authorities around the world will reach some consensus on how the CTC and clearance models should work. Today there are as many variations to CTC models as there are implementations in the world – every country has thought out something new. In the regional sense, it doesn’t matter but it is a disaster for Global companies. One could only dream about harmonized processes. I am happy that both of the leading industry associations EESPA and OpenPEPPOL have shown some initiative to standardize that globally and also ICC (International Chamber of Commerce) is dealing with that topic. Let’s see what the future brings and how many more countries there are using some sort of CTC model in a year from now – bet that the number is bigger than 10.