Member States are losing around 5 billion of VAT revenue annually on cross-border e-commerce supplies of goods. To reduce fraud in the e-commerce sector, the European Union enacted new reporting obligations for payment service providers (PSPs). The objective of these measures, which will take effect on 1 January 2024, is to give Member States detection and control instruments that will help verify whether VAT liabilities on cross-border supplies have been correctly settled.
Under the new rules, PSPs will have to record information on cross-border payment transactions and transmit it to the Member State of their establishment, which in turn will forward this data to a Central Electronic System of Payment Information (CESOP) where it will be stored for a period of five years. The payment data stored in CESOP will be used to verify information reported by marketplaces and other remote sellers with the objective of detecting foreign suppliers that sell goods to local consumers but fail to fulfil their VAT compliance obligations.
Unfortunately, the new provisions contain several features that undermine their efficiency and make them easy to circumvent. The new legislation can be circumvented completely if payments for domestic transactions are processed by non-EU PSPs that are not subject to the reporting obligations. The CESOP will store payment information for a period of five years. This is much shorter than the storage period under MOSS, which is 10 years. If tax authorities carry out MOSS audits after the five-year period, they will no longer be able to use payment information to cross-check the relevant VAT data. Finally, the new rules do not address the main cause of the slow progress in the fight against VAT fraud, which is lack of resources (people, money and tools) for tax authorities to effectively monitor e-commerce transactions. Building a central repository of payment data will not help fight e-commerce VAT fraud on its own if the lack of resources continues to prevent an efficient use of the collected information.
Getting the right data is only the first step in the VAT collection process. The next question is how to enforce the VAT compliance obligations, i.e. how to collect VAT from non-compliant remote sellers. Reliance on voluntary compliance by the supplier will continue to be the major problem for collecting VAT on remote supplies. Enacting legislation that will subject supplies by non-residents to local VAT and prescribe new reporting obligations for financial intermediaries seems to be a relatively easy task compared to the challenge of how to collect the tax due. Therefore, there is still a long journey to solve the e-commerce VAT problem for good.
If you would like to read more about the new reporting obligations for PSPs, please take a look at my article Fighting E-Commerce VAT Fraud: New EU Compliance Obligations for Payment Service Providers (Tax Notes International, vol. 97 no. 5, 3 Feb. 2020).