Finologee sat together with esteemed industry experts to delve into the complexities of the EU’s new Central Electronic System of Payment (CESOP), scheduled for implementation in January 2024. In this interview, we engage in enlightening conversations with Cédric Tussiot, partner at Deloitte Luxembourg specializing in domestic and international VAT advisory and compliance services, and Alexandre Havard, partner at Deloitte Luxembourg in banking sector consulting. Together, they provide valuable insights into the key business challenges and strategies related to CESOP compliance, shedding light onto the added responsibilities, particularly in the realms of reporting and IT operations. They also elaborate on what distinguishes CESOP from other recent regulatory requirements that allow for rather automated processes.
1) What are the key challenges faced by Payment Services Providers in complying with CESOP?
Cedric Tussiot, partner at Deloitte Luxembourg specializing in domestic and international VAT advisory and compliance services, sheds light on the critical nuances of CESOP mandated by the European Commission. “CESOP, which aims at complementing the current arsenal of available tools to the EU commission and national tax authorities in their combat against VAT fraud, is designed to help bridge the EU’s VAT gap. It is a practical yet intricate initiative,” explains Tussiot. Similar to other recent reporting methods, CESOP calls upon information detained by intermediaries (here the Payment services Providers (“PSP”s)), rather than from the targeted taxpayers themselves. In navigating the complexities of “intermediary reporting” and maintaining a proper balance between anti-fraud objectives and compliance with other regulations, such as GDPR, CESOP introduces specific conditions for reportable transactions, and, hence, “limits” the information provided.
“As such, CESOP requires PSPs to ensure they can understand and apply relevant conditions, analyse and filter reportable or non-reportable transactions, and, eventually, maintain and report relevant cross-border payments quarterly. The process involves transmitting standardised XML-format data, to possibly not only tax authorities of a PSP’s home country, but also national tax authorities of other EU “host” Member states, where a PSP may be considered as providing payment services.” He underlines that complying with CESOP presents challenges, particularly in meeting strict reporting standards and ensuring accurate data, where not all local technical details are fully known yet: “Especially the deadline of 1 January 2024 adds urgency.”
CESOP is in fact a critical business challenge, given its complex selection criteria, unique transactional data requirements, and the necessity to submit reports across multiple jurisdictions. These challenges, coupled with a tight deadline, create significant pressure for PSPs, according to Tussiot.
2) What sets CESOP apart from other regulations?
“CESOP stands out as a regulatory requirement in a somewhat different caliber,” notes Tussiot. At its core, it is a tax reporting requirement and therefore primarily a matter of tax compliance. However, Tussiot emphasises that, “failing to fully or timely comply with CESOP will attract the attention of not only Tax Authorities, but also of financial markets regulators and data protection authorities.”
“CESOP demands gathering, filtering formatting, possibly enriching and organising data for tax compliance, going beyond pure automatic payment data collection,” he continues. “Given the design of the reporting framework defined, centralised platforms and appropriate technology are, of course, key to streamline the process and to succeed in managing and filtering potentially very high volumes. But if they are key elements in this context that bring added value, due to the specific nature of the VAT reporting process, it also definitely requires sound tax expertise to meet stringent data validation and quality standards set by tax authorities.”
According to Alexandre Havard, partner at Deloitte Luxembourg in consulting for the banking sector, this sets CESOP apart from other regulations that are very much suitable for automated solutions. Unlike reporting bank account holders, for instance, which can be automated through API mode and straight-through processing, CESOP requires careful analysis and validation. “When credit institutions, payment institutions or e-money institutions are communicating – maybe for the first time – nominative information on their clients to the tax authorities, they want to double-check information transmitted to avoid any negative feedback. This is the reason why data points controls are key, as this is already the case for other regulations we are used to deal with, such as FATCA or the Common Reporting Standard”.
3) How can Deloitte ensure CESOP compliance for its clients?
In the intricate landscape of CESOP compliance, selecting the right partner is pivotal. Havard, elaborates on Deloitte’s approach: “Deloitte combines payment expertise with comprehensive consulting services coupled with tax advisory services, providing tailored technical solutions to address functional challenges.”
Havard explains, “our dedicated entity, Deloitte Solutions, holds a license of Professional of the Financial Sector (PSF) and is supervised by the CSSF, which allows us to offer specialised assistance, particularly when clients need to communicate information to tax authorities.” He goes on to say, “We have developed a CESOP reporting solution to free PSPs from the main impact and operational burden of this new regulation. This solution aims to minimise the need for internal IT or operational resources and includes data collection, transactions qualification, CESOP report preparation and where possible, submission to the tax authorities. To develop and release our solution in such a very short timeframe, we have leveraged our existing knowledge and technology built for other tax and regulatory reports that we are submitting to the tax authorities for years, since FATCA’ first reports in 2016, and CRS in 2017.”
Learn more about: Deloitte CESOP Reporting Solution and Services
4) What other aspects do PSPs need to consider when implementing CESOP?
Tussiot stresses, “The initiative’s objective is clear: combating VAT fraud. However, there are varying market opinions on whether the way CESOP’s current design and implementation will help achieve this objective. It is essential for all of us to gauge how all parties involved will respond, making CESOP reporting compliance a shifting target. Anticipating and following ongoing discussions in the upcoming year, between Member States, EU entities and PSPs, which could lead to CESOP scope adjustments or more important or fundamental changes, is critical Accordingly, flexibility is crucial. We anticipate changes in the months ahead.”
“Considering potential adaptations, choosing a partner capable of assisting at every step, both now and in the future, is essential for successful navigation of these new VAT reporting requirements,” adds Havard.