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CESOP: Enhancing Security and Oversight in Payment Systems / Payment Tax Reporting

  • Antonis Hadjicostas
  • Jun 19, 2024
  • 4 min read

Introduction


The European Union has long been at the forefront of financial regulation, striving to create a secure, efficient, and integrated financial market. Among its many initiatives is the CESOP (Central Electronic System of Payment Information), a key regulatory framework [1], [2] designed to enhance the oversight and security of payment systems across the EU.


CESOP, as already adopted by European Parliament and EU Member States, aimed at improving the monitoring and reporting of payment transactions. The system was established as part of the EU's efforts to combat tax fraud and enhance the transparency of payment operations. By centralising payment data, CESOP allows regulatory authorities to better track cross-border transactions, identify suspicious activities, and ensure compliance with tax obligations.


Objectives of CESOP


  • Enhancing Transparency: CESOP aims to create a more transparent payment ecosystem by requiring PSPs to report detailed transaction information. This transparency helps authorities to trace the flow of funds and detect any irregularities or fraudulent activities.


  • Combating Tax Fraud: One of the primary motivations behind CESOP is to fight tax evasion and fraud. By having a centralized repository of payment data, tax authorities can more effectively cross-check reported incomes and expenditures, reducing the opportunities for tax evasion.


  • Strengthening Security: The centralized nature of CESOP enhances the security of payment systems. By having a robust mechanism for monitoring transactions, the EU can better protect against financial crimes such as money laundering and terrorist financing.


  • Facilitating Cross-Border Cooperation: CESOP facilitates better cooperation among EU member states by providing a unified system for reporting and monitoring payment data. This harmonization is crucial for the efficient functioning of the single market, ensuring that all member states adhere to the same standards and practices.


How CESOP Works


Under CESOP, Payment Service Providers (PSPs) are required to report specific payment data to a central system managed by the European Commission. This data includes details of cross-border transactions, such as the identity of the payer and payee, the amount, and the nature of the transaction.


The information collected by CESOP is then made accessible to tax authorities across the EU, enabling them to monitor and analyze payment flows effectively. The system is designed to ensure data accuracy and security, with stringent measures in place to protect sensitive information.


Reporting in a nutshell


PSPs providing payment services within the EU will have to report payments on a quarterly basis when all the below criteria are met:


  • PSPs provide payment services in an EU Member State

  • In scope payment  – merely all payment types covered by PSD2

  • Payer is located within the EU

  • Payment is considered as cross-border, i.e., between EU Member States or an EU Member State and a 3rd country

  • Exceeds the 25 cross-border payments threshold to the same payee within a calendar quarter


Reporting Deadlines


To ensure timely and accurate reporting, CESOP mandates specific deadlines for PSPs, i.e.:


  • 1st period (January – March): 30 April

  • 2nd period (April – June): 31 July

  • 3rd period (July – September): 31 October

  • 4th period (October – December): 31 January



Implications for Payment Service Providers


For PSPs, CESOP represents both a challenge and an opportunity. On one hand, PSPs need to invest in systems and processes to ensure compliance with the new reporting requirements. This might involve upgrading their IT infrastructure, training staff, and developing new protocols for data collection and reporting.


On the other hand, CESOP also offers PSPs the opportunity to enhance their credibility and trustworthiness. By complying with CESOP regulations, PSPs can demonstrate their commitment to transparency and security, which can be a significant competitive advantage in the financial market.


Impact on Consumers


For consumers, CESOP primarily brings benefits in terms of security and transparency. With improved oversight of payment systems, consumers can have greater confidence that their transactions are secure and that financial institutions are adhering to high standards of compliance and integrity.


Moreover, by reducing tax fraud and evasion, CESOP contributes to a fairer and more equitable tax system, benefiting society as a whole. While consumers might not interact with CESOP directly, the enhanced security and trust it brings to the payment ecosystem are tangible benefits.


Conclusion


CESOP represents a significant step forward in the EU's efforts to enhance the security, transparency, and integrity of payment systems. By centralizing payment data and improving oversight, CESOP helps combat tax fraud, strengthens financial security, and facilitates better cooperation among member states. For PSPs and consumers alike, CESOP offers a more secure and transparent financial environment, paving the way for a fairer and more efficient single market.


As CESOP continues to evolve, its impact on the financial landscape will be closely watched. With ongoing developments and potential expansions of its scope, CESOP is set to play a crucial role in shaping the future of payment systems in the EU.


[1] Council Directive (EU) 2020/284 of 18 February 2020 amending Directive 2006/112/EC as regards introducing certain requirements for payment service providers (https://eur-lex.europa.eu/eli/dir/2020/284/oj)


[2] Council Regulation (EU) 2020/283 of 18 February 2020 amending Regulation (EU) No 904/2010 as regards measures to strengthen administrative cooperation in order to combat VAT fraud (https://eur-lex.europa.eu/eli/reg/2020/283/oj)


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