On 12 December 2018, the European Commission (EC) proposed amendments to existing European legislation which, if approved, would require payment service providers (PSPs) to disclose payment transaction data to Member State tax authorities.
What has been proposed and why?
Whilst the European Union (EU) clearly facilitates and encourages trade between merchants in one EU Member State (Member State) and customers in another, it has also brought challenges to Member States in ensuring that VAT on these cross-border transactions is properly collected. A number of Member States have raised the issue of the administrative difficulty in collecting data relating to cross-border transactions where the merchant is based in another Member State than the customer. The EC estimates that, in relation to the supply of goods only, EUR 5 billion in VAT revenue is lost annually throughout the EU.
The EC has proposed a number of solutions in relation to this problem but, after a period of consultation which ended in April 2018, has decided to implement a central European database (known as CESOP). Under the proposed changes, tax authorities of Member States will be required to collect transaction data from PSPs and submit this data to CESOP, which will be accessible to the tax authorities of different Member States.
What legislation is being amended?
The key pieces of legislation which will, if the proposals are adopted, be amended are Regulation 904/2010 and Directive 2006/112/EC, both of which concern VAT. There are no proposals to amend Payment Services Directive 2 (PSD2) as part of the proposed changes.
The combined effect of the proposed legislative amendments is as follows:
- Each Member State shall be required to ensure that PSPs report certain payment transaction details. This information includes, for example, the payee's name, VAT number and account number as well as the amount of the payment, currency of the payment and date of the payment. Data will be transmitted in a standardised form although this is to be finalised.
- Member States shall pass this information to the CESOP database on a quarterly basis.
- Tax authorities of all Member States can access to CESOP to investigate VAT fraud.
These requirements only apply when the payer is located in a Member State and when the payee receives more than 25 payments in a quarter.
What is the current status of these proposals?
The proposals must be approved by the EU Council (representing the Member States) and by the European Parliament. Assuming they are approved, the changes would enter into force on 1 January 2020 at a European level, although Member States will have until 1 January 2022 to enact national laws and regulations to give effect to these changes.
What are the implications for PSPs?
PSPs will ultimately need to provide payment transaction data to Member States but the exact detail of the technical standards by which the data is to be transmitted will depend on the implementing legislation introduced by the EC.
The EC argues that the impact of these proposals on PSPs will be limited due to the fact that, as part of their existing procedures, PSPs will already store much of the data that they will be required to submit to national tax authorities under the proposals. The EC has also suggested that a harmonised approach will ultimately cost PSPs less than dealing with individual requests of Member States for payment transaction data. However, it remains to be seen as to the extent to which PSPs will need to develop new technical infrastructure to submit payment transaction data to Member States.
UK's consultation on 'VAT split payments' and the impact of Brexit
The UK, through Her Majesty's Revenue and Customs (HMRC), has been consulting on a proposed 'split payments' method whereby certain intermediaries including PSPs would, under certain circumstances, be required to collect VAT on payments and transfer the same to HMRC. In a Summary of Responses document issued on 7 November 2018, the existence of the EU's proposals (discussed above) was acknowledged and will be considered in deciding the outcome of the consultation.
Although negotiations are currently ongoing, the UK is due to leave the EU on 29 March 2019 which means that there will be no requirement for the UK to implement the changes. However, the status of VAT payments on cross-border payments will be a key issue for the UK and EU to agree – the UK may therefore participate in CESOP once the UK leaves the EU.