VAT evasion in Europe will be impossible

The EU has maintained consistent VAT regulations for an extended period, yet the degree of scrutiny by tax authorities regarding adherence to tax laws differs across countries. Monitoring the compliance of non-EU registered companies with European VAT requirements is especially challenging. These obligations come into play when companies offer for instance electronic services to final consumers within the EU. Up until now, numerous companies have exploited the complexities in tracking information about their European customers, thereby enabling them to dodge VAT payments.

In an effort to counteract this type of fraud, the European Commission has established the Central Electronic System of Payment Information (CESOP). This system will enable European tax authorities to gain access to transaction data of companies and individuals that have accounts with European banks and alternative payment institutions.

Who will be affected by the new regulations?

While the new regulations are designed to monitor taxpayers, the actual obligations will be imposed on payment service providers, including banks, e-money institutions, and other payment entities, irrespective of their scale. These providers will be mandated to provide standardized electronic reports every quarter to the local tax authorities in their home member states and, if relevant, in any host member states where they conduct business. The tax authorities will then verify the data’s quality and forward it to the central European database, CESOP. As evident, legislators have chosen to take an alternative approach and gather information on payment transactions directly from payment service providers. It becomes challenging to refute that a service was rendered in the EU if the payment originated from a European account.

What type of information will be shared?

The standardized report will encompass information about cross-border transactions conducted by the payment service providers and their beneficiaries. This information will include specifics such as:

• The identifier of the beneficiary’s payment institution (BIC, IBAN, or other);
• Data about the payee (name, address, VAT number or tax number, account identifier);
• Transaction details (transaction ID, amount, currency, date and time, country of origin, refund information).

A payment is deemed cross-border if the payer and the payee are situated in different Member States or if the payee is in a third country. The location of the payer will primarily be ascertained using the IBAN or BIN number.

When will the new regulations be implemented?

The legislative amendments introducing these requirements were passed in February 2020:

• Directive (EU) 2020/284 of 18 February 2020, which modified the VAT Directive 2006/112/EC by incorporating new obligations for payment service providers;
• Regulation (EU) 2020/283 of 18 February 2020, which adjusted the Administrative Cooperation Directive Regulation No 904/2010 by instituting “CESOP” to tackle VAT fraud.

Member states were granted until the end of 2023 to harmonize their laws with the new regulations. From January 2024 onwards, payment service providers are required to report to CESOP, with the initial reports being due by 30 April for the first quarter of 2024.

How will the information from CESOP be utilized?

The information gathered via CESOP will be employed by several governmental entities, encompassing tax fraud specialists, tax authorities, financial regulators, and personal data protection regulators. Tax authorities will scrutinize the data to pinpoint potential VAT malpractices or mistakes, whereas financial regulators will use it to identify fraudulent transactions and other infringements by regulated financial institutions.

Clearly, European tax authorities will now have an expanded pool of information to scrutinize for discrepancies or mistakes in levying and remitting VAT. To guarantee adherence to tax regulations and minimize potential hazards, businesses selling goods and/or services to the EU are advised to carry out internal audits. Enlisting the help of third-party experts proficient in tax affairs can aid in detecting any irregularities and formulating strategies to alleviate risks, ultimately conserving company resources and upholding a positive reputation.