What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

In the last few days we have seen a number of proposals being made ahead of tonight’s extraordinary budget. Later today, the Government will be presenting measures to continue to assist businesses and taxpayers as a response to the economic pressures brought about by COVID-19.

 

During times of crises, survival mode is the first instinct which kicks in – this is true both for businesses and also governments. Whilst it is crucial that businesses are provided with the necessary support to survive in the short term, it is equally important that the Government also focusses on the long-term economic vision of the country.

 

Seed has already made a number of proposals, most of which are included in our Agile report which was published during the month of April, and some others in our article published yesterday on the Sunday Times. One of the proposals which we touched upon in the Agile report was the reduction in Malta’s corporate tax rate.

 

 

Malta’s standard corporate tax rate is of 35%, which is well above EU’s average corporate tax rate being 21.3%. Furthermore, whilst the effective tax rate for the shareholders could be reduced by virtue of the Full Imputation System and the Tax Refund System, this would typically apply when a company distributes profits (bar the changes as a result of the introduction of the Consolidated Tax Groups). In the coming months and years, we would expect companies to re-invest their profits and reduce the amount which is distributed to shareholders. Having a lower corporate tax rate, would incentivise companies to re-invest and would also reduce one of their most material costs, which will be crucial for many of them to survive, and strive, in the years to come.

 

Our proposal is for the corporate tax rate to be reduced to 25% over a 5-year period with the reduction as follows:

 

2021

33%

2022

31%

2023

29%

2024

27%

2025

25%

The highest rate applicable to individuals would remain 35%, and the additional tax (being the difference between the reduced corporate tax rate and the highest rate applicable to individuals) will be paid by the shareholder upon a dividend distribution. 

 

This reduction will see companies continue to invest and create more jobs as it provides a much-needed relief by reducing the corporate tax rate by (almost) one-third. 

 

Although we are aware that this will affect Government revenue, past experiences have shown that any reduction in direct taxation will create additional investment which will not only recoup that lost revenue but will actually generate more. We believe that this long-term vision will help support local businesses in their growth and investment efforts thus creating new opportunities for Maltese workers and students.

 

Malta’s continued economic success depends on the private sector and its ability to continue to invest and create jobs. Other countries have adopted similar models and today have created a dynamic private sector which itself attracts further foreign investment thus building a virtuous cycle of investment and job creation. A key example remains Estonia where it imposes a corporate tax only on distributed profits meaning that any profits which are re-invested or retained are not subject to tax. Whilst our proposal doesn’t go this far, the concept is similar. The idea is to allow companies to re-invest by reducing their tax burden, which today is excessively high when compared to other countries, or to the EU average. 

 

Nicky Gouder

 

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

Following the publication of legal notice 187 of 2020, ‘Rent subsidy regulations’, Malta Enterprise launched a rent subsidy scheme, which supports undertakings engaged in eligible activities who require industrial space as a temporary or permanent solution for the following activities:

 

  • Establishing a new business
  • Implementing growth plans
  • Handling an increase in orders
  • carrying out innovation geared at increasing efficiency

 

This scheme is applicable as from 1st February 2020 through till 31st December 2022 and has a total budget allocation of €2.5 million

 

SMEs need to satisfy all of the following criteria in order to be eligible:

 

  1. Legal form: the applicant must be incorporated under the Companies Act as a partnership en nom collectif, en commandite or a limited liability company, or must be registered as a Cooperative under the Co-operatives Societies Act. Self employed individuals registered with Jobplus are also eligible;

 

  1. Activity: the applicant must be engaged in the following sectors: manufacturing, maintenance and repairs of motor vehicles, repair of machinery and equipment and other industrial activities

 

  1. Employment: the applicant must be a single undertaking, which in the two fiscal years preceding the date of application, employed 100 individuals or less on a full-time basis;

 

  1. Annual turnover: must not exceed €10 million in the 2 fiscal years preceding the year in which the application is submitted

 

  1. Balance sheet total: should not have exceeded €10 million in the 2 fiscal years preceding the year in which the application is submitted

 

  1. State aid: applicant must abide by the applicable state aid regulations

 

Malta Enterprise may support costs incurred for the rental of industrial premises required to carry out or to facilitate the provision of eligible activities. In order to ensure the rental agreement is considered for assistance, the identified property must be rented from a third party in the private sector which is not, in any way, related to the single undertaking. The rental agreement must have commenced not earlier than one year prior to the date when the application was submitted to Malta Enterprise.

 

The total aid which may be granted to a single undertaking over a 12 month period is capped at €25,000. Support may be approved for a period of 3 consecutive years, bringing the maximum aid per single undertaking to €75,000.

 

Should you wish to learn more about this scheme and find out if you are eligible for rent subsidy, please contact Daniel Attard.

 

 

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

In various conversations that we have had with various Boards and business leaders following the publication of our report Agile, we have come to realise that the adaptive challenge that COVID-19 posed to businesses have caught many business leaders unprepared for the strategic conversations that had to happen. As discussed in an earlier article, businesses today operate in a VUCA (Volatile, Uncertain, Complex and Ambiguous) environment whereby such adaptive challenges are going to be more and more frequent.

At Seed, we believe that more companies and Boards need to build organisational resilience together with adaptive leadership. Organisational resilience is defined by the British Standards Institute as the ability of an organization to anticipate, prepare for, respond and adapt to incremental change and sudden disruptions in order to survive and prosper. It involves changing before the cost of not changing becomes too great. This requires learning to do new things by changing underlying values and assumptions, creative problem solving, innovation and learning.

The act of building resilience requires mastering various tensions within the organisation especially between flexibility and consistency and between progressive and defensive styles of management. In the former set of tensions, there has been traditionally a move towards have consistency as the main barometer with a focus on processes and routines however in today’s world flexibility is key to an organisation’s long-term success. On the other hand; the other opposing extremes are between defending the present results as opposed to a more aggressive stance with a focus on achieving more results. Organisational Resilience requires senior leaders to strike an appropriate balance between the sometimes-conflicting objectives and be both defensive and progressive and both consistent and flexible.

In our work and conversations, we realise that Boards and business leaders require an adaptive leadership toolkit which will strengthen their approach in dealing with adaptive challenges and build organisational resilience. This toolkit is best adopted by either the Board or the Executive Management Team in order to review the business in a holistic manner.

  • Foresight – Anticipate, predict and prepare for your organisation’s future. It is important that business leaders have access to market intelligence on their sector, consumers and broader operating environment.

 

  • Insight – Interpret and respond to your present conditions. This involves having a data strategy in place which not only collects various data sets from difference sources but more importantly analysing the data and deriving key insights.

 

  • Oversight – Monitor and review what has happened and assess changes. Here firms need to have a robust system of enterprise risk management practices which supports them in identifying, managing and monitoring risks to the business and operating environment.

 

  • Hindsight – Learn the right lessons from your experience. This requires a ‘no blame’ culture and a willingness to learn from both successes as well as failures. A culture of feedback needs to be instilled in order to grow from past experiences and focus on future opportunities.

Seed’s multi-disciplinary team supports companies on their path to build their organisational resilience. Our toolkit is deployed in a number of board rooms and executive management teams whereby our team contributes to shoring up resilience and to facilitate strategic conversations around the adaptive challenges each and every business face.

 

For more information on our toolkit, please contact JP Fabri or Sarah Martin.

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

The Consolidated Group (Income Tax) Rules provide the possibility for a group of companies to elect to compute their chargeable income or losses on a collective basis. 

Guidelines were issued by the Commissioner for Revenue on the 18 May 2020 on the online registration process. 

Formation of a fiscal unit

Members of a fiscal unit may be either Maltese companies or foreign entities that fall within the definition of ‘a company registered in Malta’ for the purposes of the Income Tax Act.

For a fiscal unit to be formed, the parent company must hold at least 95% of the shares of its subsidiaries. Furthermore, the election is only possible where the group companies have the same accounting periods.

Once a fiscal unit is formed, the parent company would be the principal taxpayer and the subsidiaries would be transparent entities.

The principal taxpayer would assume all the rights, duties and obligations under the Income Tax Acts with respect to the subsidiaries forming part of the fiscal unit with the exception of any rights, duties and obligations arising from the Final Settlement System Rules which would remain attached to the respective subsidiaries.

With respect to the payment of any tax, administrative penalties and interest arising under the Income Tax Act, all the members of the fiscal unit would be jointly and severally liable.

Where a foreign company is involved, it would be required to register with the Commissioner for Revenue in order to be granted a Maltese income tax registration number.

Furthermore, the fiscal unit is required to prepare audited consolidated financial statements on an annual basis exclusively for those entities within the fiscal unit. 

Computing the chargeable income of a fiscal unit

In calculating the chargeable income of a fiscal unit, the following should be considered:

  • Any income and gains earned by transparent entities is directly allocated to the principal taxpayer;
  • All transactions between members of the same fiscal unit are ignored, subject to some exceptions relating to immovable property;
  • Any balances carried forward by any of the transparent entities, such as unabsorbed losses, capital allowances and tax credits, and any profits allocated to the tax accounts, excluding the Untaxed Account, are taken over by the principal taxpayer;
  • Relief for foreign income tax suffered by the transparent entities would be claimed by the principal taxpayer.

Should the shareholder of the principal taxpayer be registered for Maltese income tax refund purposes, the Rules allow the fiscal unit to apply an effective tax rate which would have been achieved post-dividend distribution and post-tax refund. As a result, in the context of groups eligible for tax refunds, the Consolidated Group (Income Tax) Rules could help achieve a low effective tax liability, without the need for a dividend distribution to the shareholder and without the need to pay tax at the standard rate and subsequently request a refund from the Maltese Tax Authorities.

Timeline

The timeframe within which an application to form a fiscal unit may be filed with the Commissioner for Revenue is between 1 August of the calendar year of the relevant financial period and not later than 6 months after the end of the financial year.

For further information, please contact Nicky Gouder or Luana Farrugia.

 

 

 

 

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

Assistance under this Scheme is provided to undertakings employing less than 50 full-time employees and having an annual turnover of less than €10 million. 

Aid under this Scheme is granted in the form of a tax credit amounting to 45% (65% for undertakings operating from Gozo and in other specific circumstances) of eligible expenditure and may be utilised within a three-year period as from the year of assessment 2020.

Eligible expenditure includes:

Costs on furbishing and refurbishing of business premises 

Investment costs on new machinery, tangible and intangible IT related assets, etc. 

Purchase of commercial vehicles

An increase in wage costs of at least 3%

 

The maximum aid that may be granted per single undertaking is €50,000 over any period of three consecutive fiscal years. This capping is increased by a further €20,000 (i.e. up to a maximum of €70,000) for undertakings operating in Gozo, undertakings registered as Family Businesses and female-owned undertakings.

The deadline for submitting application forms relating to this Scheme in relation to capital expenditure and wage costs incurred during the calendar year 2019 is 27 May 2020. For further information get in touch with Nicky Gouder or Luana Farrugia.

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

 The COVID-19 pandemic has forced governments to take unprecedented measures such as restricting travel and implementing strict quarantine requirements. These restrictions have led many cross-border workers to be unable to physically perform their duties in their country of employment. The Organisation for Economic Cooperation and Development (“OECD”) issued recommendations on the implications of the COVID-19 crisis on cross-border workers and other related cross-border matters. This came about after concerns from several jurisdictions in relation to matters arising out of the application of tax treaties due to the impact of the COVID-19 crisis.

The Maltese Commissioner for Revenue announced that it will be adopting the recommendations issued by the OECD on issues arising out of the application of tax treaties due to the impact of the COVID-19 crisis. 

The guidance addresses various cross-border tax issues relating to the COVID-19 crisis, including the creation of permanent establishments (‘PE’), the residence status of companies, the taxation of cross-border workers and the residence status of individuals.

The creation of PEs

Some businesses may be concerned that their employees relocated to countries other than the country in which they regularly work, and that working from their homes during the COVID-19 crisis will create a PE for the business in those countries, which would trigger new filing requirements and tax obligations. 

 

In general, a PE must have certain degree of permanence and must be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. 

 

During the COVID-19 crisis, individuals who stay at home to work remotely are typically doing so as a result of government directives: it is force majeure not an enterprise’s requirement. Therefore, considering  the  extraordinary nature of the COVID crisis,  and  to  the  extent  that  it  does  not become the new norm over time, teleworking from home would not create a PE for the business/employer, either because such activity lacks a sufficient degree of permanence or continuity or because, except through that one employee, the enterprise has no access or control over the home office. In addition, it provides an office which in normal circumstances is available to its employees. 


The same result is expected in relation to the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis.

In addition, a construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted.

The residence status of companies (the place of effective management)

The residence of a company is generally determined through its Place of Effective Management (‘PoEM’). PoEM has been defined as ‘a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made’. The COVID-19 crisis may raise concerns about a potential change in the PoEM due to a relocation, or inability to travel, of chief executive officers or other senior executives. The concern is that such a change may have as a consequence a change in company’s residence under relevant domestic laws and affect the country where a company is regarded as a resident for tax treaty purposes.

This potential change of circumstances may trigger an issue of dual residence. In such cases, tax treaties provide tie breaker rules to ensure that the entity is resident in only one of the states. There could be instances where, as a result of a change in treaties following the OECD Base Erosion and Profits Shifting (BEPS) Project, the competent authorities would deal with the dual residence issues on a case-by-case basis by mutual agreement. This determination will take into consideration  all  of  the  facts  and  circumstances, including where the meetings of the company’s board of directors or equivalent body are usually held; where the chief executive officer and other senior executives usually carry on their activities; where  the  senior  day-to-day  management  of  the  company  is  carried  on; where  the  person’s headquarters are located; and other similar matters. It is important to note that all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.

The taxation of cross-border workers 

The income that an employee receives from the employer should be attributable, based on the OECD Commentary on Article 15, to the place where the employment is exercised.   There are conditions attached to the place of exercise test.  The source state may exercise a taxing right only if the employee is there for more than 183 days or the employer is a resident of the source state, or the employer has in the source state a permanent establishment that bears the remuneration. 

 

The application of this rule in the current context may lead to employers having new withholding obligations and employees having new or enhanced liabilities in different countries. The OECD calls for an exceptional level of coordination between countries to mitigate the compliance and administrative costs for employers and employees associated with involuntary and temporary change of the place where employment is performed.

 

Furthermore, where a government has stepped in to subsidise businesses in order for them to retain employees on theirpayroll during the COVID-19 crisis, the payments that employees are receiving in these circumstances most closely resemble termination payments, which according to the Commentary to the OECD Model should be attributable to the place where the employee would otherwise have worked. In most circumstances, this will be the place the person used to work before the COVID-19 crisis.  

The residence status of individuals

For the purpose of a tax treaty, an individual can be resident in only one country at a time. The starting point is domestic law - if the person is resident in only one country, the matter ends there. If the person is resident in both countries being tested, the tie-breaker rules in the relevant treaty are applied. There is a hierarchy of tests, starting with the question in which state does the person have a permanent home available to them.

 

In response to the COVID-19 crisis, the OECD’s recommendations mention two main situations: 

 

1.       A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host country by reason of the COVID-19 crisis and attains domestic law residence there.

 

In this case, it is unlikely that the person would acquire residence status in the country where the person is temporarily because of extraordinary circumstances. Although a person may be considered resident in that country as a result of exceeding a certain number of days, if a tax treaty is applicable, it is likely that the tie breaker test would mostly award treaty residence to the home country because it is unlikely that the person would have a “permanent home” available to them in the host country. Even if they did, the other tie-breaker tests (centre of vital interests, place of habitual abode, and nationality) would award residence to the home state. Therefore, such temporary dislocation would not have any tax implications.

 

2.      A person is working in a country (the “current home country”) and has acquired residence status there, but they temporarily return to their “previous home country” because of the COVID-19 situation. 


In this scenario, in cases where the personal and economic relations in the two countries are close but the tie breaker rule was in favour of  the current  home  state, the  fact  that  the  person  moved  to  the previous  home  country during the COVID-19 crisis may risk tipping the balance towards the previous home country. This would usually be decided using the test of “habitual abode”. 

 

“Habitual abode” refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual’s life and are therefore more than transient. Because the COVID-19 crisis is a period of major changes and an exceptional circumstance, in the short-term, tax administrations and competent authorities will have to consider a more normal period of time when assessing a person’s resident status. It is therefore very unlikely that the person would become a resident of that country under the tax treaty due to such temporary dislocation. 

 

The application of this guidance is of a temporary nature due to the current exceptional circumstances being faced by taxpayers on a global level. For clarifications on the application of tax treaties, please contact Nicky Gouder or Luana Farrugia. 

 

 

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

As countries scrambled to contain the outbreak of COVID-19 in early March, Governments had to face their possibly worse nightmare by shutting down the economy and asking everyone to just stay at home. The resulting economic implications are still very much fluid as the uncertainty on when this pandemic will be over, or when and how we will return to some form of normality, still reigns.

Preliminary estimates released by Eurostat for the first quarter of 2020 show that GDP is down by 3.8% in the euro area and by 3.5% in the EU when compared to the previous quarter. These are the sharpest declines observed over the reference period, which also covers the 2008 global financial crisis.

Compared with the same quarter of the previous year, GDP in the first quarter of 2020 decreased by 3.3% in the euro area and by 2.7% in the EU.

 

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

We are living in times of risk and instability. Over the last decade, new technologies and globalisation have overturned the business environment and have surely caused a certain sense of unease to many CEOs.

That sense of unease has intensified beyond measure following the outbreak of COVID-19. The world has changed, and every single person is having to get used to new norms. 

All this uncertainty poses an enormous challenge for strategy making by businesses. Instead of being good at doing a particular thing or at offering a particular service, companies must be really good at learning how to do new things or offer new services. Organisations that foster rapid adaptation are the ones that sustain a competitive advantage.

SMEs that consider ways of adapting and becoming more resilient in addressing market challenges can benefit from a grant scheme which specifically addresses diversification and innovation. Innovation can be crucial for the survival of the enterprise to ensure its market relevance and improve its performance. Through diversification, fundamental changes and increased investment, the grant supports SMEs to bring to the market significantly improved and advanced products/services to those already offered, whilst offering timely support to nurture the right environment towards the potential future business growth of the enterprise.

The SME Diversification and Innovation Grant Scheme offers the possibility of a grant of up to €200,000 to help businesses diversify or innovate their products or services, where the grant would be equal to 50% of the SME’s eligible expenditure.

Eligible actions will include investment in tangible and intangible assets resulting in product or service development, significantly improved products or services, fundamental changes in production processes, or the acquisition or integration of innovative solutions within the business model. 

EU funds would cover in part costs such as the leasing of privately owned operational premises, construction and upgrading costs, the purchasing of new equipment and plant and machinery, the procurement of patents and licenses as well as wage costs to employ  a Change Manager to drive the necessary change within the enterprise through the diversification or fundamental change initiative.

For further information on this scheme, including on entity eligibility, please contact:

Luana Farrugia

Daniel Attard

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

What We Think

June 6, 2020

Seed’s Proposal: A reduction in Malta’s Corporate Tax Rate

The new PSD2 directive is a fundamental piece of payment legislation in Europe.  Through the implementation of EBA Regulatory Technical Standards (RTSs) as formalized through Commission Delegated Regulation (EU) 2018/389, it was to go into effect on 14 September 2019.  However, the European Banking Authority (EBA) recommended a period of non-enforcement of SCA measures’ with respect to card-based e-commerce transactions and set the new deadline to 31 December 2020. 

The PSD2 regulation drastically impacts the financial eco-system and infrastructure for banks, payment service providers, fintechs, and businesses using payment data for the benefits of consumers.  The revised Payment Services Directive 2 (PSD2) aims to better align payment regulation with the current state of the market and technology.  It introduces security requirements for the initiation and processing of electronic payments, as well as for the protection of consumers’ financial data. It also recognizes and regulates Third-Party Providers (TPPs) that are allowed to access or aggregate accounts and initiate payment services.  This will clearly shake up the payments markets, particularly in the eCommerce space, by encouraging greater competition, transparency, and innovation in payment services.  In short, PSD2 aims at facilitating consumer access to their banking data and driving innovation by encouraging banks to exchange customer data securely with third parties.

Who’s ready?

As stated by Finextra, 41% of the 442 European banks part of a survey carried out last year failed to meet the March 2019 deadline.  They could not provide a testing environment to third-party service providers.  The six month testing period before the September deadline was seen as critical for them to test the APIs that will connect them to banks and also key to pilot new services. 

However, at the same time most industry participants – Payment Service Providers (PSPs; the regulated bodies required to comply), acquirers, trade groups, merchants – had been clamoring about this.  They knew that the payments industry simply wasn’t ready for full enforcement of SCA.  Th risk of disruption, especially to online payment transactions, was too great.  A trend was perceived about certain reliance from some banks and financial providers to hand over data to customers, arguing about their compliance and risk scenarios.   Their concerns proved to be right.   The European Banking Authority (EBA) announcement (so-called Opinion), issued last October, clearly showed that it has acknowledged that various players in the payment chain were not ready for this change. The EBA’s June 2019 Opinion also acknowledged that consumer awareness is vital for SCA’s success.

The new deadline to implement Strong Customer Authentication (SCA) has been pushed back by fifteen months (till 31 December 2020). 

Impacts on Banks, Payment Service Providers and Third Party Providers (TPPs)

European payment providers and banks are legally required to enforce SCA for card-not-present payments from December 2020 and are subject to heavy fines or even having their licence revoked for not doing so.  Merchants that resist adopting the EMV 3DS (the evolution of 3-D Secure and the preferred SCA solution) requirements are going to suffer a severe loss of transaction volume as their card decline rate for non-3DS authenticated payments rapidly increases. This increase in card declines will culminate at the SCA deadline; at this point a merchant will not be able to process any card transactions without having integrated 3DS.  Issuers will not be adopting a risk-based approach to authorization from that data; in order to comply with the regulation all online card payments that aren’t Strong Customer Authenticated via 3DS will be declined without consideration.

As a result, in the last months we have witnessed huge inroads in the achievement of such goals such as recent news from the card giant VISA who transformed its Verified by Visa into a new program for frictionless payments.  The new program provides rules and polices that merchants and issuing payment providers have to follow to authenticate e-commerce transactions and verify cardholder identity before a transaction can be authorized.  It committed to a number of milestones with the next one happening on 1 July 2020 whereby VISA is introducing an issuer behavioral fee for abandoned EMV 3DS transactions.  MasterCard choose a similar date for all parties in the EEA to achieve market readiness for 3DS.

By this time most payment providers have contacted or are in the process of contacting their customers who are likely to be affected to advise of the changes required.  As most 3D Secure transactions are handled by the payment provider, merchants who use a hosted payment gateway will be unaffected, whilst merchants using other solutions may require to update their extensions. 

Security critical

The core principles of the PSD2 RTS i.e. Strong Customer Authentication (SCA), Secured Communication, Risk Management and Transaction Risk Analysis (TRA), have been maintained, confirming the directive’s security objectives. 


To protect the consumer, PSD2 requires banks and PSPs to implement multi-factor authentication for all proximity and remote transactions performed on any channel.   It means customers may be asked for two different pieces of information from the following categories when making purchases online as follows:

Smooth user experience

To ensure smooth user experience, PSD2 requests banks and PSPs to put in place security measures that are “compatible with the level of risk involved in the payment service” to find the right balance between security and user convenience. 

To simplify life for consumers, the RTS list several situations for which PSPs are not required to perform strong customer authentication.   Most of these exemptions are related to low-value payments, repetitive transactions and transactions to trusted beneficiaries. 

PSD2 and Open Banking

The move to open banking means removing barriers between competitors as it requires banks to allow their account details and transactions to be shared with third parties through APIs.  The Directive hinges on a critical connection between retailers, fintechs, and payment providers.  This relationship will be driven by APIs that current service providers need to open to any Third-Party Provider that wants to aggregate account data and/or initiate payment services.  On paper – but to some extent already being witnessed – this will bring about more robust collaboration between traditional financial institutions and new players of the banking and payment space.

An enticing opportunity

PSD2 is a customer-centric regulation that should lead to an improved customer environment, brining benefits not only to end-users but to all banking and payment parties.   Some of the most enticing benefits include those of adding third-party capabilities to core offerings, capitalizing on consumer behavior and storing consumer preference data, and, making the multi-factor authentication process as easy as possible for the customer.

New customer onboarding will be made easier, offering end-users better tools to manage their finance and enticing them to buy new products and services that can be offered by payment providers, and TPPs.  Banks and PSPs will be able to better use financial data to provide competing services at competitive rates.  Already, leading payment service providers have started building strong partnerships and open-banking API Hubs, showing how PSD2 regulation can be the perfect tool for more innovation in payment and banking. 

The enforcement delay and need to revisit SCA implementations is not necessarily a bad thing, as concerns had already been raised about the reduced consumer accessibility and sustainability of SCA approaches relying on SMS one-time passwords (OTP).  With the extra time offered by the extension, PSPs can deploy SCA solutions that work effectively and efficiently for all consumers regardless of where they are or whether they have a mobile signal (or even a mobile device at all).

Coupled with efforts to ensure merchant support for SCA and campaigns to raise consumer awareness of the changes, the SCA enforcement delay will help to ensure the greater convenience of available solutions and greater acceptance by merchants and consumers alike. 

Getting there - Now it’s doable

On all sides – the European Commission, the EBA, banks, the PSPs, the wider industry – the complexity of introducing SCA for all the impacted transaction types and channels defined as in scope was underestimated.  At a high level, the principles and requirements were understood, but to fulfil those principles and meet those requirements two factors needed to come together across that whole range of in-scope transactions:  on the payments side, identifying those in-scope activities, identifying responsibilities, seeking clarification of interpretation from the EBA on ‘grey areas’, and coordinating multiple entities across industry sectors; and on the technical and security side, defining and developing solutions to meet the RTS requirements. 

The timescale allowed for the implementation of the RTS was ambitious – necessarily so, there needed to be pressure on the industry to drive the change – but at the time the RTS were published there were many unknowns, many questions to be answered, many scope implications to be teased out, responsibilities to be defined, technical solutions to be considered and many parties to be coordinated.

In many ways, therefore, the date was unrealistic from the start, even though the EBA was of the view that the payment industry had plenty of time to prepare and be ready to comply, as September 2019 was more than three years after PSD2 came into force and a full 18 months after publication of the RTS.  However, by setting a hard date, driving the players in the market to meet it, now we are at a stage where most of those unknowns have been identified, questions asked, clarified and defined.  Now is the time for implementation of SCA solutions that actually work across the board of all in-scope activities.  We needed the time up till 14 September, 2019 and we needed the extended deadline to get us to this point.

Everything seemed to be going smooth this time …. until the world was hit by the COVID crisis which once again questioned the SCA enforcement delays.  The EBA published their response to the Coranovirus (COVID-19), which includes a Statement on consumer and payment issues in light of COVID-19, published 25 March 2020.   The EBA has stated they will monitor the impact of COVID-19 on the industry’s readiness to implement SCA. 

Only time will tell whether the enforcement will happen by the revised date, but one thing is certain; this fundamental piece of payment legislation is here to stay. 

PSD2 Compliance:  Where do we fit in?

Seed enables financial institutions to meet the challenges raised by PSD2.  A dedicated cluster on payments and electronic money supports financial institutions understand and address PSD2 requirements particularly in the area of compliance, governance and risk.

For more information contact Daniel Attard.

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