Payments industry must adjust to heightened VAT reporting

New VAT reporting procedures will place an unnecessary burden on the payments sector, says Elie Beyrouthy, board member of the European Payments Institutions Federation (EPIF) and vice president, government affairs at American Express.

“We definitely agree with the objective, but then I think the way some of the rules have been written – for instance the rule for having transaction by transaction reporting – we didn’t think was appropriate,” says Beyrouthy.

“For practicality reasons we thought we’d have lived with better rules while you keep the same objective.”

The EU’s Economic and Financial Affairs Council (ECOFIN) published its directive to combat VAT fraud on February 18, enforcing greater frequency of reporting as well as record keeping and obligations for each party involved in a single payment. The EU reports that it loses €150bn each year to VAT fraud, according to a November 2019 report by the TAX3 Special Committee and Financial Crimes, Tax Evasion and Tax Avoidance.

EPIF has worked to secure less regular reporting due to concerns that higher frequencies will burden parties involved, highlighting a barrier between regulators and the payments industry.

“We worked with the presidency [of the Council of the European Union] and we talked to the Commission as an association to make them aware. The difficulty was you had some people from taxation working there not having in mind how the payments ecosystem functions, and then in payments you have different stakeholders and then you have different parties that are involved between the different payment chains, and not all parties have all the information that is required,” says Beyrouthy.

“It hasn’t taken into account some of the specificities of the payments sector.”

According to KPMG, some payment service providers (PSPs) have been concerned about the sheer volume of information required to comply. The directive mandates that each PSP must collect, transmit and retain for three years the BIC, the payee’s business name, the payee’s VAT number, the IBAN and the identification of the payment transaction and refunds.

As a result many PSPs will need to upgrade their systems for proper data collection, which will likely lead to increased administrative costs.

Also on February 18, ECOFIN published a paper reforming VAT reporting rules for small businesses.

“The existing VAT system foresees that VAT exemption for small enterprises is only available to domestic players. The reform agreed today will enable a similar VAT exemption to be applied to small enterprises established in other member states,” ECOFIN stated in a press release.

Yet the directive has inspired discussion over different ways to detect VAT fraud, with some market participants championing blockchain as a way to record transaction in real-time. On December 6, 2019 European Commission’s Directorate for Taxation and Customs (DG TAXUD) ran a conference on VAT in the digital age, which included discussion about blockchain and other technologies as a possible alternative to reporting.

 “The difficulty with everything related to taxation as such I think is unanimity, and then changing things is not always easy,” says Beyrouthy.

“We hope in the way it is implemented by the member states, some practical aspects could be taken into account.”

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