In Briefings, Payment Services

On 12 December 2018, the European Commission proposed a new Council Directive that would impose obligations on payment service providers (“PSPs”) to record and report transaction information to Member States in order to improve monitoring of VAT fraud throughout the EU (the “Proposed Directive”). Back in December 2017, the European Union (“EU”) adopted the Council Directive (EU) 2017/2455, known as the VAT E-commerce Directive, which was intended to simplify value-added tax (“VAT”) obligations for businesses and established new VAT obligations for online marketplaces. However, at the time, the European Council indicated that it still needed to improve anti-fraud tools, as VAT compliance in the e-commerce world is mainly reliant on businesses voluntarily registering and paying the VAT. Thus, this Proposed Directive seeks to address that deficiency in the EU VAT regime.

VAT fraud in the cross-border supply of goods in the EU is a serious issue which is estimated to cost EUR 5 billion a year. The risks of fraud are accentuated in the e-commerce space, where certain businesses take advantage of not having a physical retail presence to avoid their tax reporting obligations. E-commerce presents particular challenges to tax authorities. E-commerce businesses can hide their identity, their location, and their turnover behind a domain name. In these cases, the Member States where the VAT is due lack the necessary information to collect the tax. Even if these Member States knew that the VAT was due to them from a particular online seller, without the identity and the location of the business behind the website, they will not know which other Member State to request cooperation from.

The solution put forward in this Proposed Directive is to impose reporting obligations on PSPs, who manage more than 90% of online purchases. As the European Commission observed in the Proposed Directive, Member States that already impose similar obligations on PSPs at the national level have been successful in combating VAT fraud in e-commerce. The Proposed Directive, if adopted, will oblige PSPs to make payment transaction data (as explained further) on cross-border transactions available to the Member State where they are established, so that Member State can collect that information and share it through a central repository at EU level to be developed by the European Commission. Not all payment services are relevant for the control of cross-border supply of services and goods. The European Commission observed that the only payment services that are relevant are those that result in a cross-border transfer of funds to the payee (or to the payment services providers acting on behalf of the payees) and only when the payer is located in one of the Member States.

Under the Proposed Directive, PSPs, as defined under the revised Payment Services Directive (PSD2), must keep detailed records of the payees and payment transactions they execute for each calendar quarter. This record-keeping obligation is activated when (a) the funds are transferred by a PSP from a payer located in one Member State to a payee located in another Member State, third territory or third country, and (b) where the PSP has executed more than 25 payment transactions to the same payee in the course of the calendar quarter. This second condition was put in place to capture only payments that are potentially linked to commercial activity, and to exclude cross-border transfers executed for private reasons. According to the Proposed Directive, the PSPs must keep these records in electronic format for two years, which the European Commission considers is proportional to give sufficient time to the tax authorities to detect VAT fraud.

For PSPs to know when a payment transaction is cross-border and triggers the record-keeping obligation under this proposed Directive, the Proposed Directive defines the location of the payer and the payee. The location shall be based on:

  • the International Bank Account Number (“IBAN”) of their respective payment accounts (or for the payee, since they can be located in a third country or territory, any other payment account number identifier which unambiguously identifies an individual payment account), or
  • the Business Identifier Code (“BIC”) or any other business identifier code that unambiguously identifies the PSP acting on behalf of the payer or payee.

The reason for the latter, as explained in the Proposed Directive, is that certain payment transactions such as money remittance involve the transfer of funds without any payment account being created in the name of the payer or payee.

When recording a payment transaction, the PSPs must include:

  • the BIC or any other business identifier code that unambiguously identifies the PSP;
  • the name of the payee or business name, if appropriate;
  • the VAT ID of the payee, if available;
  • the IBAN (or any other payment account number identifier which unambiguously identifies the payment account of the payee), the BIC or any other business identifier code that unambiguously identifies the PSP acting on behalf of the payee where the payee receives funds without a payment account (such as in money remittance);
  • the address of the payee in the PSP’s records;
  • any payment transactions which fall under the record-keeping obligation, and
  • any executed payment refunds for those transactions.

The information on the payment transactions which fall under the record-keeping obligation must include:

  • the date, time, amount and currency of the payment transaction or refund, and the Member State where the funds  received by the payee or on his behalf originated from;
  • the Member State, third country, or third territory of destination of the refund, and
  • the information used to determine the origin and destination of the payment transaction or payment refund (whether through the IBAN of the payer or payee or their PSP’s BIC).

The Proposed Directive comes on the heels of new reporting obligations for PSPs such as the fraud reporting obligations under PSD2, which all increase compliance costs for PSPs. If this Proposed Directive goes through it would amend Directive 2006/112/EC and Regulation 904/2010, which harmonize VAT within the EU and establish a system of administrative cooperation to combat VAT fraud, respectively. If approved, Member States would have until 31 December 2021 to transpose its provisions, and would have to apply those provisions from 1 January 2022 onwards. Given that the United Kingdom is bound to exit the European Union on 29 March 2019, and it is unlikely that the Proposed Directive will be approved or enter into force before that date, the United Kingdom will most likely not have to transpose it into domestic law (unless the United Kingdom and the European Union agree on a withdrawal agreement before exit day that binds the United Kingdom to new EU directives during the implementation period).

DALIR is available to assist PSPs with their legal and regulatory needs regarding any new requirements at the EU level. Do not hesitate to get in contact with the team if you have any questions.