In brief
According to Council Directive (EU) 2020/284 (CESOP Directive) effective from January 1, 2024, all payment service providers (PSPs) in the European Union must report certain cross-border payment transactions carried out for clients to tackle Value Added Tax fraud and abuse. The CESOP Directive mandates that PSPs compile extensive details about the payments they process. They are required to keep records of this cross-border payment information and submit to the tax authorities of EU Member States every quarter, starting in April 2024 (for the reporting period from 1 January to 31 March 2024).
In detail
In this article, we examine the practical implications and challenges of CESOP one year after its entry into force.
Operational challenges and practical implications
CESOP's implementation has revealed challenges for many PSPs, particularly regarding data discrepancies between extraction from payment systems and CESOP technical validations. These discrepancies have led to stressful situations for many PSPs. Additionally, the reporting process is complicated by national differences in submission requirements and the varying handling capacities of tax authorities' IT systems, which cause delays and inefficiencies.
Compliance and regulatory impact
Managing CESOP compliance requires substantial internal resources, including specialised personnel like IT experts, data scientists, and legal and tax advisors. PSPs typically choose between building in-house capabilities, buying tailored software solutions, or outsourcing to external service providers. Each approach has its merits and challenges, with choices often influenced by the specific needs and capacities of the PSP.
Case studies and real-world applications
PwC Luxembourg's work with various PSPs demonstrates successful CESOP integrations, where comprehensive impact assessments and pre-production data exercises have minimised disruptions and enhanced compliance. Regular data quality checks and adaptations to regulatory updates are crucial for maintaining ongoing compliance. Lately, the EU Commission has introduced new fields to the CESOP reporting grid, transitioning to a new XSD. PSPs should carefully consider these changes to avoid potential ingestion problems on reporting portals.
The Federal Fiscal Court referred the case back to the local fiscal court to determine whether the investment funds can also substantiate their claims formally (e.g., via dividend vouchers) and to determine the specific amount of interest that has been accumulated so far.
What’s next?
Future revisions to CESOP, referred to as "CESOP v2," are anticipated to extend its scope and capabilities, potentially introducing more detailed reporting requirements. These changes aim to further enhance the effectiveness of the system in reducing the VAT gap.
The takeaway
CESOP is crucial to the EU's strategy to combat VAT fraud and enhance financial transparency. As the system evolves, PSPs must continuously adapt and proactively engage with regulatory changes. Collaborative efforts to refine CESOP will contribute to a more transparent, efficient, and secure financial environment across Europe.
It is crucial for PSPs to transition to a “business as usual” model, having identified and addressed existing obstacles. PSPs should regularly benchmark their cost model to ensure that their current CESOP governance framework remains relevant and optimal.
