By Karina Gutheiss and Tobias Muensterberg

The topic of CESOP has now reached the executive management floor of German financial institutions. A few days before the deadline for the 1st and 2nd CESOP reporting scheduled for 31 July, many banks are struggling with home-grown problems and their (oftentimes challenging) interaction with the Federal Central Tax Office (BZSt). Based on the feedback and experience we have received to date from the financial sector, we would like to provide you with a situational report here.

It should be noted from the outset that many payment service providers have already fulfilled their initial reporting obligations under the new EU Directive aimed at combatting VAT fraud, in good time. The information to be submitted to the Federal Central Tax Office (BZSt) in Germany via the mass data interface “DIP” (“Digitaler Posteingang” or “Digital Inbox”) is then stored in a European database – the Central Electronic System of Payment Information (CESOP) – where it is aggregated and compared with other European databases.

At the end of April, we drew attention to the fact that the feedback from national tax authorities would become a litmus test for the CESOP applications of payment service providers. This is now proving to be the case: the banks that fall under this reporting obligation are experiencing errors throughout the entire process chain – from data collection and aggregation, to transmission via the “DIP”.

Here are five selected topics that are currently causing numerous headaches for project teams:

1. Underestimated degree of complexity: the data basis for CESOP reporting is fed by numerous supplier systems (including credit card processors, giro and debit cards, SEPA, TARGET2 and AZV) – especially for larger banks and financial groups. The institutions in question exert no direct influence over the data’s delivery time, particularly in the case of external stakeholders. Some credit card processors were only able to provide the necessary input after a long delay. Furthermore, technical data was often not provided correctly from the above-mentioned systems.
2. Error source – API: CESOP is, in essence, an interface topic – from the connection of supplier systems to data submission via the “DIP” interface used by the Federal Central Tax Office (BZSt). The depth of detail underpinning the issues at hand can be well-illustrated here. A hash procedure is used to determine a checksum before data is transmitted. It was precisely at this point that some financial institutions encountered issues, as a result of which no data signature could be created.
3. Lack of overview: the aforementioned data quality problems combined with the sheer volume of information to be processed clearly indicate the need for a centralised, internal bank interface that allows the data records to be submitted to the Federal Central Tax Office (BZSt) to be checked in advance. However, some financial institutions are still operating without this overview. Subsequently, huge amounts of data have to be corrected several times retroactively; necessary deletion notifications can only be generated with tremendous effort, and much more. According to our observations, larger banks, in particular, are not considered future-proof with their own MS Access-based solutions. The CESOP Compliance Service from DPS can help here with its clearly structured dashboard.
4. Special cases and CESOP changes pushing up costs: in production, project teams repeatedly identify challenging data constellations, especially outside the “SEPA world”, some of which have to be adapted manually. These include problems in determining the country and special business transactions that cannot be clearly analysed. Simultaneously, there is a growing realisation that there will always be regulatory adjustments to CESOP along with changes to the delivery systems in the medium term. As a result, banks are likely to be confronted with recurring costs, which result, in particular, from manual or semi-automated activities.
5. Bank customers demand information on CESOP report: In the meantime, banks are receiving the first wave of enquiries from their customers regarding a potential report being submitted to the tax authorities. This evaluation option was simply forgotten in some CESOP applications, according to our observations.

In tandem with these developments, it should be noted that CESOP is also considered uncharted territory for the national tax authorities. The response time and quality of the feedback from the Federal Central Tax Office (BZSt) show clear potential for optimisation. Those stakeholders subject to reporting requirements refer, in particular, to the communication challenges faced when dealing with the authorities. According to some payment service providers, there was no “direct line” to the Federal Central Tax Office (BZSt).

The findings of CESOP “in production” described here make it clear that tax reporting obligations combine a high level of inconvenience with a lack of added business value. Ultimately, payment service providers will be obligated to support the work of tax authorities at their own expense. It is, therefore, understandable that the expenses incurred in fulfilling the obligations should be kept as low as possible.

The results stemming from the first round of CESOP reports are likely to lead to a reassessment in some cases. The manual effort and human resources tied up as a result are significantly higher than expected.

Reduce recurring expenses to almost zero

With our CESOP Compliance Service – available as SaaS or on-premise – banks can reduce these recurring expenses to near zero. The centrepiece of this software solution is a clearly structured dashboard that intuitively displays the status of the CESOP report and the associated work steps; it provides an overview of the import status – including an automatic check for duplicate processing and a correction option; it enables the straightforward management of payees and the manual processing of legal entities; and, at the same time, it offers the monitoring of all CESOP reports and the option to correct reports.