Today we will be looking at ten crucial summarized by our member Bird & Bird on the topic of CESOP, VAT, and PSD2. As of January 1, 2024, the European Union will introduce a new tax reporting requirement, heralding significant changes for payment service providers (PSPs), including card issuers, acquirers, and other entities engaged in payment processing. These changes are encapsulated within the Central Electronic System of Payment information (CESOP), an initiative aimed at enhancing tax compliance and combating fraud in cross-border B2C e-commerce.

Here are ten crucial summarized by our member Bird & Bird on the topic of CESOP, VAT, and PSD2 that PSPs and e-commerce merchants should be aware of before the go-live date:

1. Commencement of CESOP Reporting: Starting January 1, 2024, PSPs will be obligated to monitor their merchants involved in cross-border payments and report related payment data to EU Member States. This data will be consolidated in the CESOP database, accessible to anti-fraud experts across the EU.
2. CESOP’s Purpose: CESOP’s primary objective is to identify and combat VAT non-compliance and fraud in cross-border B2C e-commerce by merchants located in EU Member States or non-EU countries. As PSPs have access to the underlying payment data, they are now entrusted with this tax reporting requirement.
3. Scope of CESOP: PSPs covered by Article 1(a) to (d) of EU Directive 2015/2366 on payment services in the internal market (PSD2) are within the scope of CESOP. This includes credit institutions, electronic money institutions, payment institutions, and more. Even small PSPs benefiting from Article 32 PSD2’s exemption fall under CESOP.
4. Applicable Payment Services and Payments: PSPs authorized to provide payment services detailed in points (3) to (6) of Annex I of PSD2 are covered by CESOP. These services include payment transaction execution, acquiring, and money remittance. Payments in scope are generally those under Article 4(5) PSD2 or money remittance under Article 4(22) PSD2.
5. Trigger for CESOP Reporting: PSPs must fulfill multiple criteria for CESOP reporting. They need to be within CESOP’s scope, offer relevant payment services, execute payments subject to CESOP, and engage in more than 25 cross-border payments per calendar quarter to the same merchant.
6. Definition of Cross-Border Payments: A payment qualifies as cross-border for CESOP when the payer resides in one EU Member State, and the merchant is located in another EU Member State or a non-EU country. This determination relies on proxies like IBAN or BIC, and may not necessarily align with actual locations.
7. Exceeding the Threshold: The threshold for CESOP reporting involves having more than 25 cross-border payments to the same merchant per calendar quarter, per EU Member State. Consolidation may apply on the merchant level if a merchant in one EU Member State uses various payment methods.
8. Responsibilities for Recording and Reporting: PSPs should maintain comprehensive records of merchants and payments. While the tax reporting responsibility primarily rests with the PSP of the merchant (e.g., the acquirer for card-based payments), it may shift to the PSP of the payer (e.g., the card issuer in card-based payments) in cases where the PSP of the payee is located in a non-EU country.
9. Data to be Reported: PSPs are required to report an array of payment data to tax authorities, both in their home EU Member State and, when applicable, in their host EU Member States. There is no One Stop Shop, so PSPs may have CESOP reporting obligations across multiple EU Member States. Reporting periods will be quarterly, with the first reporting deadline set for April 30, 2024.
10. Implications for E-commerce Merchants: CESOP will provide tax authorities across the EU with enhanced data for auditing e-commerce merchants. Thus, e-commerce merchants involved in B2C e-commerce in the EU must ensure meticulous VAT management, given the evolving landscape of VAT regulations.

In summary, PSPs, e-commerce merchants, and all stakeholders must proactively engage with CESOP, VAT, and PSD2 considerations to ensure compliance and mitigate potential issues. Timely assessments, impact evaluations, and meticulous tax governance will be pivotal as CESOP becomes operational.

For further insights and consultation on CESOP, VAT, e-commerce, or PSD2, please reach out to Andy van Esdonk, Caroline Brown, Ferdinando Ferri, or your regular Bird & Bird contact.