CESOP and Digital Goods: Guaranteed Peace of Mind

The Central Electronic System of Payment Information (CESOP) is a significant new regulatory measure designed to combat online fraud and ensure VAT compliance in cross-border transactions within the European Union. Starting from January 1, 2024, Payment Service Providers (PSPs) must report certain cross-border payments to EU national tax authorities quarterly, with the first report due by April 30, 2024. This article provides an in-depth look at CESOP, its purpose, and its impact on payment service providers.

What is CESOP?

CESOP stands for the Central Electronic System of Payment Information. It is a system established to collect, process, and store payment data to help EU countries fight VAT fraud in cross-border e-commerce transactions. CESOP facilitates the sharing of payment information gathered by European payment service providers with EU national tax authorities.

The Purpose and Functions of CESOP

CESOP aims to enhance VAT compliance and prevent fraud in cross-border transactions. It achieves this by:

• Requiring PSPs to report detailed information about cross-border payments.
• Collecting data to identify payment recipients who should pay VAT.
• Storing and processing payment data for at least three years.
• Facilitating the sharing of payment data among EU countries.

How CESOP Impacts Payment Service Providers

European PSPs must adhere to strict data collection and reporting requirements under CESOP. This includes:

• Collecting information such as the BIC/ID of the PSP, recipient details, transaction specifics, and payer location.
• Reporting this information to the EU national tax authorities on a quarterly basis.
• Maintaining records of cross-border transactions. 

Data Collection for VAT Compliance in Cross-Border Transactions

PSPs need to report the following details about cross-border transactions involving an EU payer:

• The BIC/ID of the reporting PSP.
• Recipient information, including name, tax or VAT number, account ID, address, and BIC/ID of their PSP.
• Transaction details such as date/time, amount, currency, and transaction identifier.
• EU member country codes and payer's location.

Determining Record-Keeping Responsibility for Cross-Border Payments

The reporting responsibility under CESOP varies based on the location of the payer and payee:

• If both the payer and payee are in the EU, the payee's PSP reports the payment.
• If the payer is in the EU and the payee is outside the EU, the payer's PSP reports the payment.

European PSPs, including banks, e-money institutions, and payment processing platforms, are responsible for reporting. PSPs must comply with these reporting obligations to avoid penalties.

Example Scenario

Consider a PSP established in Germany offering e-money services to customers and merchants in all EU countries. If a customer in Belgium uses their e-wallet to pay a merchant in France, the German PSP must report these transactions to the French tax authorities if the merchant receives more than 25 cross-border payments in a given quarter.

Benefits of CESOP for Consumers and Businesses

CESOP brings several advantages:

• Consumers: Increased security and trust in cross-border e-commerce transactions.
• Businesses: Clear regulatory framework, reduced risk of fraud, and smoother cross-border operations.

Impact on Sellers of Digital Goods

Are Any Actions Required of Sellers Whose Buyers are in the EU?

Sellers of digital goods, as well as non-digital goods, are not directly required to take any action related to the CESOP reporting requirements. The obligation to report cross-border payments falls solely on the payment institutions such as banks, e-money institutions, and payment processing platforms. However, sellers must still comply with their existing tax obligations, which CESOP helps enforce.

Indirect Impacts on Sellers

While sellers are not required to report transactions, they may experience some indirect impacts due to CESOP:

• Increased Scrutiny: The enhanced reporting requirements may lead to increased scrutiny of transactions, ensuring that sellers comply with VAT regulations.
• Transparency: Sellers may benefit from greater transparency in cross-border payments, potentially reducing fraud and ensuring timely receipt of payments.
• Collaboration with PSPs: Sellers may need to collaborate closely with their PSPs to ensure that all necessary information is provided for accurate reporting.

Merchant of Record Services

A merchant of record (MoR) service can significantly aid sellers in complying with VAT and CESOP requirements. An MoR acts as the legal entity responsible for processing transactions, handling tax compliance, and managing payment processing on behalf of the seller. By using an MoR, sellers can offload the complexities of cross-border payment reporting and VAT compliance to a third party that specializes in these areas. This service ensures that all transactions are correctly reported to the relevant tax authorities and that VAT is appropriately managed, allowing sellers to focus on their core business operations without the administrative burden of compliance.

FAQs about CESOP

Who needs to report cross-border payments?

European PSPs, including banks, e-money institutions, and payment processing platforms, are responsible for reporting.

What information needs to be reported?

Details about the payer, recipient, transaction specifics, and payer’s location.

When is the first reporting deadline?

The first report is due by April 30, 2024.

Conclusion

CESOP requirement implementation is a pivotal development in the European financial regulatory landscape, designed to enhance VAT compliance and combat online fraud. By understanding and complying with CESOP’s requirements, payment service providers can ensure they contribute to a secure and transparent cross-border payment environment in the EU.

Although sellers of digital goods are not directly responsible for reporting under CESOP, they must stay informed about their tax obligations and work closely with their PSPs to benefit from the enhanced security and transparency that CESOP brings to cross-border transactions.

CESOP represents a major step forward in regulating and securing cross-border payments within the EU, ensuring compliance and protecting the interests of both consumers and businesses.