Understanding CESOP: the European strategy for combating VAT fraud in e-commerce

In an era where digital transactions are the backbone of the global economy, ensuring the integrity and transparency of information on cross-border payments and card transactions has become critical for governments worldwide. Recognizing this, the European Union took a significant step on 18 February 2020, when the Council adopted a legislative package to tighten the scrutiny of cross-border payments to combat VAT fraud in e-commerce. At the heart of this initiative is creating the Central Electronic System of Payment Information (CESOP) – a centralized database designed to collect, store, and analyze information on cross-border payments and card transactions. This article provides the creation, implementation, and impact of CESOP on businesses and the broader fight against online VAT fraud in e-commerce.

BACKGROUND AND OBJECTIVES

The legislative package mandates payment service providers operating within the EU countries to provide tax administrations of their registration country with information about their beneficiary clients who have received more than 25 cross-border payments and card transactions per quarter. It also requires providing information on payments and card transactions from their payer clients to accounts of clients outside the EU if the number of such payments and card transactions reaches more than 25 per quarter per recipient.

Cross-border payments are transactions made between individuals or companies located in different countries. These operations can include purchasing goods or services outside the buyer’s country, transferring money abroad, paying for subscription services, etc. The first report deadline is April 30, 2024, for the first quarter 2024. The client does not need to do anything. The bank collects the necessary information about the recipient and the payer’s country.

This information is then redirected to CESOP, where it is aggregated and cross-referenced with information received from tax structures of other EU countries. Access to CESOP for anti-fraud experts from EU member states is facilitated through the Eurofisc network, making CESOP a powerful tool for identifying and investigating potential VAT fraud conducted both within the EU and beyond its borders.

The primary goal of this initiative is to provide tax authorities with the necessary tools for effective detection and combat of VAT fraud in the e-commerce sector. This innovation can help protect the integrity and transparency of the European market, ensure fair competition and improve the efficiency of tax revenue collection for EU member states.

PERSONAL DATA PROTECTION AND COMPLIANCE

A crucial aspect of CESOP and its operational framework is its adherence to stringent data protection rules. Payment service providers only transmit data related to the client’s business activities to tax authorities, ensuring consumer privacy protection and guaranteeing that details regarding the nature of payments remain confidential. This balance between combating fraud and respecting privacy rights underscores the EU’s commitment to personal data protection while simultaneously addressing the issue of tax evasion.

IMPLEMENTATION STRATEGY

Implementing CESOP involves collaboration between the European Commission, tax administrations of EU member states, and payment service providers. An expert group comprising representatives from these stakeholders plays a pivotal role in this process. Their responsibilities include:

• Developing an electronic standard form for data transmission by payment service providers.
• Identifying technical measures for establishing, maintaining, and managing CESOP.
• Drafting guidelines on reporting obligations and engaging with the payment sector and EU member states for smooth implementation.

Additionally, an expert team of IT specialists from Member States is tasked with developing the technical requirements for CESOP’s establishment, ensuring that the system meets the highest efficiency and security standards.

Let’s consider a specific example to understand better how reporting for such payments works in CESOP.
Imagine there is an online electronics store based in Germany that sells products across Europe. This store accepts payments from customers in various countries — France, Italy, Spain, etc. If, within one quarter, the store receives more than 25 payments from customers located, for example, in Spain, this information must be registered and reported to CESOP. Such reporting aims to help tax authorities track cross-border payments and card transactions and identify potential VAT fraud cases. This means that payment services through which transactions are made (for example, bank transfers and payments through systems like PayPal or credit cards) must keep track of cross-border payments and card transactions made to a single recipient. If the number of such payments exceeds 25 in a quarter, tax authorities will collect and analyse information about these transactions through the CESOP system to prevent VAT fraud.

IMPACT ON BUSINESSES

Implementing CESOP entails significant changes for payment service providers serving clients operating in the e-commerce sector, affecting how payments and card transactions are processed. Payment service providers must adapt to new reporting requirements, necessitating developing and integrating technical processes and procedures to comply with legislative standards. Although the initial adaptation period may pose challenges, the evident long-term benefits of a safer and more equitable digital market are undeniable.

For merchant clients who conduct their activities transparently and within the framework of existing legislation, the new requirement to transfer information does not pose any risks. On the contrary, this regulation creates conditions for a favourable business environment in the long term, without unscrupulous merchants damaging the reputation of the market for specific goods or services.

CESOP represents a critical step in the EU’s efforts to combat e-commerce VAT fraud. The initiative aims to create a more transparent, secure, and equitable digital economy by leveraging technology and fostering collaboration across sectors and borders. As implementation progresses, the success of CESOP will depend on the ongoing commitment and cooperation of all stakeholders involved, setting a precedent for international efforts to tackle financial fraud in the digital age.