VAT Talks - Christiaan van der Valk

Christiaan van der Valk

In the ninth episode of VAT Talks, we discuss VAT with Christiaan van der Valk. We are very happy that Christiaan showed us the other side of tax law, the company side. Christiaan Van Der Valk is vice president, strategy. Elected a World Economic Forum Global Leader for Tomorrow in 2000, Christiaan is an internationally recognized voice on e-business strategy, law, policy, best practice and commercial issues. Formerly co-founder and president of Trustweaver (acquired by Sovos), Christiaan also holds long-standing leadership roles at the International Chamber of Commerce (ICC) and the European E-invoicing Service Providers Association (EESPA). In this VAT Talks, we discuss the importance of e-Invoicing and how the future of VAT and technology should look like.

For how long have you been working in VAT, and how did you end up in this field of work?

“Before I started working in VAT and e-invoicing, I worked in international law and policy – I’m a lawyer by training. In the early part of my career I focused on IT and eBusiness, or what is called today the digital economy, and via pioneering work we did for example in connection with the OECD for their 1998 Ministerial Conference on e-Commerce, I started focusing on authentication, digital signatures, and security. In 2000 I left my role as deputy director of policy and business practice at the International Chamber of Commerce (ICC) and I started working in the e-invoicing industry, when I founded a company called Trustweaver with some Swedish friends.”

“Very shortly after my somewhat unusual move from policy work to entrepreneur, the European Union introduced e-invoicing provisions in Article 233 of the VAT Directive which initially had a focus on e-signatures. We developed e-invoicing compliance as a first application for a public key infrastructure (PKI) platform that we just had started developing. In the following years, we were able to achieve rapid growth of our business with early adopters among multinational companies and working hand-in-hand with tax administrations, most of which at that time had no idea what digital signatures were or how to verify them. At that time digital signatures were not very well regulated in the sense that the 1999 Directive did not ensure clear cross-border recognition. So we developed a system which could sign with country-specific digital signatures for multinational invoice flows and worked out this huge matrix of what happens in case of cross-border transactions.”

“To get back to your question, e-invoicing in Europe at that time was legally first enabled via the VAT Directive and that is how I entered that world. We developed the business internationally and we started expanding our e-invoicing VAT compliance support worldwide, with an increased focus on countries – such as Latin America and Russia - that were early adopters of real-time or near-real-time controls. Two years ago we were acquired by Sovos which is a much broader tax compliance company. You could make the argument that I only properly entered the broader VAT space at that moment. Prior to that, I focused more on VAT compliance aspects of e-invoicing, which means we learned a lot about the world of B2B integration software such as EDI, procurement systems, etc that process invoices as part of their document exchange functionality. So the Sovos system is embedded in roughly 70 different such enterprise software systems and cloud platforms like SAP Ariba, Coupa, Tradeshift, IBM - all of those vendors use our software to make invoices compliant for the 64 countries which we support.”

So what should we call it? Continuous Transaction Controls? Real-time reporting? Invoice registration?

“We strongly advocate for calling it Continuous Transaction Controls – or CTCs for short. We have been promoting this term, and I think we’ve been relatively successful to get a number of international organisations to adopt it with a definition that encompasses both real-time and near-time systems. As soon as a system needs machines rather than people to process communications of the tax administration, it meets the definition of Continuous Transaction Controls. It doesn’t really matter if it is reporting or invoicing because there are lots of different flavours out there at this moment. Terminology will continue to evolve and the boundaries are not always 100% clear; and that is exactly what you should expect it to be in such a fast-moving field of business and government practice.”

You have been writing a lot about real-time invoice reporting and e-invoicing. Where do you see the main benefits of e-invoicing?

“To come back to definitions, if you define e-invoicing as businesses sending each other electronic invoices the benefits are pretty clear; both parties can save money because the supplier does not have to print invoices and pay for stamps, and the buyer can make huge savings by automating their workflow and postings of invoices. You also speed things up considerably.

“If you define e-invoicing more the Latin American way, as part of the CTC concept, then it becomes less simple. Clearly, in theory the benefits are the normal automation savings and process gains, except that it’s a different process you’re focusing on automating. Instead of – or in addition to - sending a summary level report at the end of the month with a bunch of boxes on a form, in the Latin American model you send the tax administration much more meaningful data much closer in time to the actual transaction. And crucially, what you send is the real actual data set from the transactional IT system and process as this unfolds, not second-hand data that the taxpayer first stored in an accounting system and then sat on for some time before extracting it again, brushing it up and filing it with the tax administration. These two dimensions of e-invoicing - automating the B2B portion as well as the interface with the tax administration – are increasingly viewed as two necessary components for both tax administrations and businesses to benefit from automation.”

When real time reporting was introduced in Latin America, it was in many cases immediately coupled with e-invoicing. Why was this coupling less common in the EU?

“I think there are several reasons for that. An important one is that it’s very hard to get a derogation from the EU VAT Directive. Basically the VAT directive defines e-invoicing in a very specific way. This means that as a Member State you cannot impose e-invoicing without derogation from the VAT Directive. There is much more complexity to it of course, but those kinds of rules in the Directive (which I don’t think in 2001 were designed to create these kinds of restrictions but which have this effect in the current environment) make it very hard for Member States to impose B2B e-invoicing. I suspect that this is one of the reasons why the European Commission chose to use the term reporting instead of CTC in their recent communication about the next batch of VAT fixes. Because reporting (defined as ‘fire-and-forget’ data transmission which doesn’t create a dependency on tax administration approval or acknowledgement for the invoice as exchanged with your trading partner to be legally valid) is not as tightly regulated on the EU level as invoicing, Member States have a lot of freedom to introduce CTC-like regimes without being bothered much by Brussels. Greece is a very good example, for some time it looked like they wanted to introduce mandatory e-invoicing, but they weren’t sure they could get approval from the Commission to do something that would violate the VAT Directive. To solve this problem, they came up with a rather novel, and arguably rather complex, online digital accounting scheme called ‘myDATA’. Thus, the result of a fairly innocuous rule in the Directive is that things like Greece happen and there is no way back from that. If Member States are going ahead with such solutions, the Commission can try to harmonise reporting all they want, but it is going to be very hard to turn back the clock on these kinds of deep investments in country-specific schemes.”

Do you think that in the near future more and more EU countries will adopt a real-time invoice reporting system? What do you think about that?

“France is already on the books. It is just a matter how it gets implemented. So starting 1 January 2023 that will happen, and the text of the budget law in my view clearly points into the direction of a scheme designed around mandatory e-invoicing. Countries like Hungary could quite easily use their real-time reporting scheme to subtly add an Accounts Payable (AP) automation backend to that – in a way this would introduce e-invoicing through the backdoor, generating business benefits for buyers, but without a need to ask Brussels for permission. Many CTC systems already allow taxable persons to download their invoice data, including invoices reported by their suppliers, and one can imagine it’s a small step to allow buyers to use this data for AP processing. I think that in 5-10 years from now it is pretty much inevitable that you will need to transmit data in real-time or near-real-time to the tax administrations in EU Member States, because in the end this is really what the majority of them want. Many experts are concerned about the legal regime and the fact that the European Commission has had its head in the sand concerning the global wave of CTC adoption for so long. Tax experts from individual EU Member States have been flying over to Panama for years to talk to CIAT and local governments to learn from those experts, instead of commuting to Brussels to develop a consensus vision of how Europe wants to do it.”

Real-time reporting is also on the agenda of the European Commission, as it is mentioned in their latest Tax Package. What would be most important for businesses to successfully introduce such a system?

“From our perspective the only difference between Hungary and Italy is that there is mandatory e-invoicing in Italy, in Hungary you can still send a paper invoice today. Between those two, mandatory e-invoicing has the added benefit of forcing businesses to automate, which in the longer run has macroeconomic and environmental benefits over and above just sending the information to the government.”

“Some businesses say ‘in the very short term reporting is easier, because then I don’t have to rush towards exchanging structured invoices electronically with trading partners – I can keep my processes as they are today and just make the minimum adjustments for compliance purposes’. Larger businesses, who are starting to look at broadening EDI and similar B2B transaction automation processes anyway, and that have experience with doing business in multiple countries, say ‘you know what, we actually prefer the government force everyone to use full e-invoicing right away because in that way we can actually automate our business processes also with our smaller trading partners. A contact of mine working in the retail industry told me that from their perspective, in Italy, they get ‘EDI for free’, that’s how some businesses perceive the imposition of end-to-end electronic invoicing via a CTC platform. Businesses we work with also tell us that they still get handwritten invoices from small suppliers in many EU Member States, so they are advocating for CTC solutions that include B2B automation as they want to use that data for automated matching and posting of inbound invoices across all suppliers. Thus, while at first it looks like reporting is easier, in the end if you go all the way with mandatory e-invoicing – and it gets done the right way - the economy stands to benefit more as it creates a big push towards automation.”

And what about harmonisation of these systems, is the Commission too late to harmonise?

“Yes, in my view it is too late for effective harmonization in the traditional sense. We will have the same situation as with digital signatures earlier in 1999. The first directive on electronic signatures came when Germany already had a legal framework and this situation reduced Europe’s chances of uniform transposition from the start. I think there are also lessons to be learned from the development of PEPPOL. Also, keep in mind that Brussels could not force Member States to accept a single VAT return – perhaps a good indication of where we should put our ambition level. France is already actively working on a CTC solution, and then there are Greece, Hungary, Spain, Portugal, Poland and of course Italy that are all inevitably going their own separate ways.”

“So, I think a European standard CTC platform or process is not going to be established anytime soon. First it is going to be difficult to find consensus on it, and second, even if consensus can be reached, it is very hard to change the systems in which investments were already made. I have heard people say that the granting of individual Member State derogations from the VAT Directive for e-invoicing purposes are problematic for harmonization, but I actually think it’s the fact that derogations are needed, create the bigger problem – instead of being free to do the right thing, this constraint forces countries to implement e-invoicing through the back door. The approach based on reporting rather than invoicing in Hungary, Spain, Portugal are all extremely different. This diversity is in many cases worse for business than e-invoicing in Italy, which actually got a derogation.”

And what about confidentiality? Do you see, from your own experience, that companies value the security of their invoice information?

“Absolutely yes. I obviously work for a company that sells compliance systems to businesses, but I have remained active in the policy arena so I try to help companies get to a consensus on these topics and do my best to represent those consensus views in a lot of these discussions. Confidentiality is a really big concern across the board - and for good reasons as there have been incidents that are very troublesome. At the same time we are also seeing, in Latin America for instance, that large companies are going to third party providers themselves to reuse the tax data that was intended for the government. Those companies apply advanced analytics, AI, and other technologies to offer market intelligence services. The very existence of real-time economic data across sectors, based on line-level invoice data, creates entirely new opportunities for businesses and governments alike. None of that changes the paramount importance of business data confidentiality though. These concepts of exploiting data for economic or market intelligence and business confidentiality are not incompatible, really - you could still generate an enormous wealth of information from CTC data on a higher level without breaching confidentiality or without necessarily accessing competitive details. There is not enough societal discussion about these topics though, and there’s a total absence of open dialogue on this topic on the international level.”

You are a lawyer, so what do you think about the argument that when governments start to collect data that they also carry the burden of proof if taxpayers are frauding the system, since in the end they now have all the data?

“It is interesting that governments started to collect data, but are not actually using its full potential yet. Most tax administrations are still busy with getting the pipes to and from CTC systems to work, to make sure the plumbing is robust. We know from discussions with many tax administrations that they are gradually increasing the analytics side of things. Indeed one can make the argument when governments start collecting data they cannot deny having as much or more knowledge of business activities than businesses themselves. There is no doubt in my mind that once you possess certain data, it becomes much harder to deny you were not aware of the relatively easy conclusion anyone can draw from such data – a standard of ‘you should reasonably have known’ that taxpayers have historically often been held to. I think this argument, which essentially balances or even flips the burden of evidence in certain circumstances, will not be very powerful for now, but one may expect jurisprudence and ultimately laws to change to take this evolution in data availability into account.”

“It’s becoming more and more clear that businesses will end up with the burden of having to audit tax administrations more than the other way around, which is another effect of this data access phenomenon. While I don’t think there’ll be a major shift in the responsibility of taxpayers to be in control of their activities and their data, I do see CTC engender an immediate narrowing of errors and minor fraud versus outright criminal activity, in the sense that pure criminal activity can only happen without invoices, CTCs squeeze out grey market activity. It is becoming really difficult if you’re a registered business and your invoices are registered in real time, and then triangulated against your trading partners’ data, to be just a little negligent in your invoicing or accounting process. The landscape is changing so dramatically but I think we haven’t even started to see the full breadth and depth of changes yet, because it completely alters pretty much the entire equation as to how tax administrations, businesses, and citizens relate to each other.”

You say companies should automate their indirect tax compliance processes, to your knowledge how much are companies in the EU already using an automated process? Could you give numbers for e.g. NL, BE, or DE?

“I don’t have any numbers on my fingertips but most of the countries are not using proper automation for their VAT returns today. I think in my experience a lot of companies really struggle with data quality, and because they feel they aren’t ready for automation they use manual processes and controls for reporting – which in many cases creates a vicious circle where data issues are corrected only for presentment to government instead of actually going back upstream into the supply and demand chains to fix the root causes. Businesses in Europe could benefit from automation but they haven’t gone down that path yet – and this vicious circle will become a huge problem as real-time CTCs get introduced. This is one of the reasons why efforts by enlightened tax administrations to rely on voluntary adoption of modern digital approaches to compliance usually yield disappointment. Many businesses feel that in order to ensure a level playing field and to reap the results of standardization that can result from ‘good’ CTCs, such methods have to be imposed on all taxpayers within a reasonable period of time. Even in countries like the Netherlands, where there is more cooperation between the public and private sector, the virtuous circle of B2B, B2G, and tax automation based on country-wide schemes is not going to happen voluntarily. Tax administrations should be very clear in their communications and make sure deadlines are feasible for all taxpayers. Recent experiences with India and Greece show that this isn’t easy for tax administrations, with the unfortunate result that in both cases we experience significant levels of legal and technical uncertainty.”

Which services offered in Latin America are made possible due to the registration there?

“We are seeing a couple of non-tax services emerge on the back of CTC systems in countries that have had such systems for some time now. The first and the most obvious service for businesses is different forms of supply chain finance offerings, particularly things like factoring are becoming very popular and are even formally facilitated by the CTC platforms. So interestingly the CTC platform has been augmented to actually support certain commercial or economic functions rather than just tax. You can – or must - flag the fact that an invoice has been subject to a factoring operation for instance. So supply chain finance is a pretty obvious one and that is why you see the CTC laws over time evolve to have richer requirements for buy-side workflow messages. So for instance in Chile, there are three different stages in buyers’ accounts payable workflow for which they need to send acknowledgement or status messages back to the CTC platform or the supplier, and that information can be leveraged for supply chain finance, because if you know that invoice is formally good to pay that radically changes the value of the invoice as financing collateral.”

Why do you think that this ‘revolution’ of reporting is led by south European countries and not by the Nordic countries?

“There are three reasons I think, one they need it more. If you have more fraud it is an easier decision. Second, and I don’t want to offend anyone, in some of the countries that adopted CTCs the tax authority has more political leverage with shorter consultation cycles. There are objectively measurable differences between, say, Turkey and the Netherlands, in decision making ability – the latter having so many checks and balances that major process re-engineering becomes difficult to implement quickly and decisively. A third reason I have observed is that a lot of tax administrations that move more quickly have younger, more technically-oriented and forward-looking executives on higher levels than you find in European countries. Eastern Europe is a very good example of the more flexible approach; the guys who drive the Hungarian real-time reporting system are next-generation engineers that think in terms of open source and loosely coupled web services. They have very modern ideas and they are modern developers.”

“More than ten years ago, when I walked into a room in Mexico with the people who developed the Mexican CTC system, I was convinced that I would meet stuffy old bureaucrats with a warped sense of reality – this is where I learned that, in fact, tax administrations in emerging economies have a major first mover advantage in digitization. The people that at that time opened the door for me were all in their thirties, often internationally educated, technical experts who knew exactly what they wanted to do and why. I believe it is a combination of those things that has created the world of tax digitization as we know it today, with previous leaders lagging and previous laggards being a decade ahead of the rest of the world.”

If you could give the European Commission one piece of advice regarding the implementation of real-time reporting throughout the EU, what would it be?

“Don’t boil the ocean. Trying to come up with a perfect all-encompassing CTC regime now is going to be politically impossible. Rather start looking at what are the smaller things we can do to create more harmonisation. In terms of data standards or authentication protocols and other things that will be common on a lower level where you can just force interoperability without facing the immediate political challenges of the European Union on the bigger pieces where investments are already made. Start with some of those practical topics and then on that basis drive broader systemic alignment. The Commission and Member States should use the ICC principles we developed for that together with experts representing stakeholders across governments and business.

“I do not believe in a wholesale, Europe-wide re-engineering of the VAT system via CTCs. It is simply too late for that, and it is unproductive to produce quasi-standards that will only be embraced by the smaller Member States. There are a lot smaller, more operational, and politically much more feasible areas that you can take and improve and they are not “quick fixes”, they are building consistency from the ground up. Look at what you already have in store, such as eIDAS, PEPPOL, EESPA interoperability assets etc instead of thinking top down and re-inventing the wheel.”

What would you say to companies to convince them that real-time reporting is coming to their countries as well? And why should they embrace it?

“[laughing] They should embrace it because when it becomes mandatory – you won’t have much choice. If it is not mandatory you should only do it if it has clear benefits, but quite frankly pure ‘reporting’ automation rarely does. Businesses have their own digital transformations and they have an existing working process from which they know how to report. If somebody says you can continue to file your taxes like you have always done or you can connect to this new real-time thing, chances are no one’s going to do it. There need to be clear business benefits combined with benevolent imposition of good practice-based CTC processes.”

“That said you can embrace mandatory CTCs in different ways. This is an irreversible trend and it’s a big mistake to live in denial of this fact and adopt changes on a country by country basis. While there’s a lot of confusing diversity, if you think about it, 80-90% of all features of all CTC systems are comparable or identical. It is structured data, it concerns digital signatures that you need to send to a portal and you need to orchestrate some back and forth data exchange with the government. If you would think about it in those terms you can actually design something and use specialized software in a way that makes CTC much less of a threat to your digital transformation. Ideally, use the e-invoicing capabilities and the automation that comes with standardisation. ”

Should this be based on PEPPOL for example? Actually is the Italian system based on PEPPOL?

“No, Italy is not based on PEPPOL – only a small part of it is. I’m not an unconditional fan across all aspects, but I do like some of the ideas that the PEPPOL community has developed in relation to marrying PEPPOL with CTCs, whereby you bring the concept of PEPPOL access points together with the registration which governments are after. Over the last decade, businesses in countries that were early CTC adopters have invested mostly in automating the business to government data exchange part of the equation. Because of that investment, they have not been automating the B2B components at the same speed. Also in the EU, you see that mandatory B2G (public procurement) e-invoicing does not logically result in a spill-over effect to B2B – most businesses stop as soon as they fulfill the mandatory part of it. As regards PEPPOL, I like the way the French tax administration appears to be thinking about this: that Chorus Pro (which has a PEPPOL gateway) should be one of the reporting nodes in an e-invoicing network, but not the only one.”

We would like to thank Christiaan again for his time and for giving his perspective on VAT. The opinions expressed in this article are personal. If you have any questions, suggestions or if you want to be our next interviewee, do not hesitate to contact us via