As the world of international commerce and banking and financial services continues to expand, securing cross-border transactions becomes increasingly paramount. In this landscape, the Central Electronic System of Payment information, or CESOP, is poised to play a pivotal role. This EU regulation, introduced in 2020, has already been the subject of discussions, as it mandates payment service providers (PSPs) to report specific payment data to their local tax authorities. One of its primary objectives is to bolster the security of cross-border transactions, with a particular emphasis on combating e-commerce VAT fraud.
The CESOP regulation was born out of the need to tackle the rampant issue of VAT fraud within the European Union. Each year, the EU faces substantial financial losses due to this fraudulent activity, costing billions of euros. The CESOP regulation aims to empower tax authorities with enhanced payment data, making it easier for them to identify and investigate VAT fraud cases. This game-changing regulation is scheduled to come into force in 2024, with the requirement for PSPs to start reporting data from January 1, 2024.
Under the CESOP regulation, PSPs are mandated to report specific information about cross-border payments made in euros. This data includes the payer’s name, address, VAT identification number, as well as the payee’s name, address, and bank account details. This information will be stored in a central database operated by the European Commission. The countries impacted by CESOP include the European Union, Iceland, Liechtenstein, Norway, and the United Kingdom.
The Challenge for PSPs and Tax Authorities
The implementation of CESOP presents a significant challenge for both PSPs and tax authorities. The short timeline for compliance has left many stakeholders apprehensive. PSPs must review their systems to identify in-scope establishments, branches, and payments. They need to assess whether their existing systems capture the required data for each in-scope payment and establish processes to collate, process, and report this data in all the EU Member States where they operate. For some PSPs, this could entail impacting a substantial number of systems and reporting over a billion payments annually.
Simultaneously, national governments are working diligently to amend their legislation and establish the necessary infrastructure to handle the massive influx of data that CESOP will generate. While countries like France and Germany have already finalized their legislation, others are in the process of drafting and ratifying their legislation to meet CESOP requirements.
Are You Impacted by CESOP?
One of the initial steps in determining whether a business is affected by CESOP is to ascertain if it falls under the regulatory umbrella of PSD2. This includes credit institutions, electronic money institutions, postal giro services, or payment institutions operating within the EU. Once it’s established that a PSP is in-scope, the next step is to assess whether their payment services fall under the CESOP reporting obligation.
In-scope payments are essentially cross-border fund transfers from a payer in one country to a payee in another. This category encompasses credit transfers, direct debits, card payments, money remittances, payment instrument issuance, and payment transaction acquiring.
CESOP: An Opportunity for PSPs
While CESOP introduces new challenges and complexities for PSPs, it also offers a unique opportunity to demonstrate their commitment to combating VAT fraud. By reporting data to local tax authorities, PSPs play a vital role in ensuring the fairness and efficiency of the EU’s VAT system. This regulatory change not only enhances transparency in cross-border transactions but also underscores the financial industry’s dedication to upholding the highest standards of integrity and security.
In conclusion, the CESOP regulation is set to be a pivotal development in securing cross-border transactions and combating VAT fraud within the EU and associated countries. PSPs must gear up to adapt to the new reporting requirements and play their part in safeguarding the financial integrity of the region. The short timeline makes preparation and compliance crucial, and it is an opportunity for PSPs to not only meet their obligations but also showcase their commitment to a transparent and efficient financial ecosystem. As the world of banking and financial solutions continues to evolve, CESOP represents a significant stride towards a more secure and resilient global financial landscape.