Combatting E-commerce VAT Fraud: The Implementation and Impact of the Central Electronic System of Payment Information (CESOP) in the European Union

In an era dominated by digital transactions, safeguarding the integrity and transparency of cross-border payments and card transactions has become a paramount concern for governments worldwide. Acknowledging this imperative, the European Union (EU) took a significant stride on 18 February 2020, with the Council's adoption of a legislative package aimed at bolstering the scrutiny of cross-border payments to combat VAT fraud in e-commerce. Central to this endeavour is establishing the Central Electronic System of Payment Information (CESOP) – a centralised database crafted to gather, store, and analyse data on cross-border payments and card transactions.

Background and objectives 

The legislative package mandates payment service providers operating within EU countries to furnish tax administrations of their registration nation with information concerning their beneficiary clients who receive more than 25 cross-border payments and card transactions per quarter. It further stipulates the provision of details regarding payments and card transactions from payer clients to accounts outside the EU if exceeding 25 such transactions per quarter per recipient.

Cross-border payments encompass transactions between individuals or entities in different countries, encompassing diverse operations such as purchasing goods or services abroad, money transfers overseas, or payments for subscription services. The inaugural report deadline is set for April 30, 2024, for the first quarter of 2024. Clients are relieved of obligation as banks autonomously collate requisite information about the recipient and the payer’s country, subsequently channelled to CESOP. Herein, it undergoes aggregation and cross-referencing with data obtained from tax structures across other EU nations. Access to CESOP is facilitated for anti-fraud experts from EU member states through the Eurofisc network, rendering CESOP a potent instrument for identifying and probing potential VAT fraud within and beyond EU boundaries.

The primary thrust of this initiative is to equip tax authorities with the necessary tools for effectively detecting and combating VAT fraud in the e-commerce realm. This innovation holds promise in safeguarding the integrity and transparency of the European market, fostering equitable competition, and enhancing tax revenue collection efficiency for EU member states.

Personal data protection and compliance 

An indispensable facet of CESOP and its operational framework is its adherence to stringent data protection regulations. Payment service providers exclusively transmit data about clients’ business endeavours to tax authorities, ensuring consumer privacy and safeguarding the confidentiality of payment particulars. This equilibrium between combating fraud and upholding privacy rights underscores the EU's steadfast commitment to personal data protection while simultaneously addressing the scourge of tax evasion.

Implementation strategy 

Implementing CESOP necessitates collaboration between the European Commission, tax administrations of EU member states, and payment service providers. An expert group comprising representatives from these stakeholders assumes a pivotal role in this endeavour. Their remit encompasses:

• Devising an electronic standard form for data transmission by payment service providers.
• Identifying technical measures for instituting, sustaining, and managing CESOP.
• Drafting guidelines on reporting obligations and liaising with the payment sector and EU member states for seamless implementation.

Additionally, an expert cohort of IT specialists from Member States is entrusted with formulating the technical prerequisites for CESOP's establishment, ensuring the system conforms to the most exacting efficiency and security standards.