Posted on 05/07/2002 9:37:46 PM PDT by HAL9000
Brussels, 7th May 2002
VAT: Commission welcomes Council adoption of rules for application of VAT to electronically delivered services
The European Commission has welcomed the Council's adoption of a Directive and a Regulation to modify the rules for applying value added tax (VAT) to certain services supplied by electronic means as well as subscription-based and pay-per-view radio and television broadcasting. The new rules, based on Commission proposals of 7 June 2000 (see IP/00/583 and MEMO/00/31), will create a level playing field for the taxation of digital e-commerce in accordance with the principles on the taxation of e-commerce agreed at a 1998 OECD Ministerial Conference. The rules will ensure that when these services are supplied for consumption within the European Union, they will be subject to EU VAT, and that when they are supplied for consumption outside the EU, they will be exempt from VAT. The changes modernise the existing VAT rules to accommodate the emerging electronic business environment and to provide a clear and certain regulatory environment for all suppliers, located within or outside the EU. The rules also contain a number of facilitation and simplification measures aimed at easing the compliance burden for business. Member States must implement the new measures by 1 July 2003.
European Commissioner for Taxation Frits Bolkestein commented "I welcome the decision of the Council to adopt these rules on applying VAT to digital products. They will remove the serious competitive handicap which EU firms currently face in comparison with non-EU suppliers of digital services both when exporting to world markets and when selling to European consumers."
The new rules
The new rules will apply to the supply over electronic networks (i.e. digital delivery) of software and computer services generally, plus information and cultural, artistic, sporting, scientific, educational, entertainment or similar services as well as to broadcasting services.
When implemented, the rules will ensure that EU suppliers will no longer be obliged to levy VAT on sales of these products on markets outside the EU. Current VAT rules, drawn up before e-commerce existed, subject electronically delivered services originating within the EU to VAT irrespective of the place of consumption, whilst those from outside the EU are not subject to VAT even when delivered to consumers within the EU. The elimination of these competitive distortions, by subjecting non-EU suppliers to the same VAT rules as EU suppliers, is something which EU businesses have been actively seeking.
Under these new rules, no additional obligations will be imposed on non-EU suppliers selling to business customers in the Union (i.e. business to business (B2B) sales which constitute at least 90% of the market), since the VAT will be paid by the importing company under self-assessment arrangements, as at present.
The changes will however require suppliers of digital products from outside the EU for the first time to charge VAT on sales to private consumers (so-called B2C), just like EU suppliers. Non-EU suppliers will be able to register, using special simplified arrangements, with a VAT authority in any one Member State of their choice, and to levy VAT at the rate applicable in the Member State where the customer is resident. The country of registration will re-allocate the VAT revenue to the country of the customer. This simplified system for non-EU suppliers and for revenue re-allocation will be applied for three years following implementation of the proposal and may then be extended or replaced.
The VAT obligations for non-EU suppliers making B2C sales into the EU will be broadly similar to those for EU suppliers and will meet in full non-discrimination obligations under the World Trade Organisation (WTO). Non-EU e-commerce suppliers will be subject to simpler and lighter administrative requirements than those applied to EU traders and other non-EU businesses carrying on activities in the EU.
OECD principles
The Council agreement means that the EU has become the first significant tax jurisdiction in the world to develop and implement a simplified framework for consumption taxes on e-commerce in accordance with the principles agreed within the framework of the Organisation for Economic Co-operation and Development (OECD). The Directive therefore complements the international process at the OECD. The OECD principles on the taxation of e-commerce were agreed at a 1998 conference in Ottawa. These principles establish that the rules for consumption taxes (such as VAT) should result in taxation in the jurisdiction where consumption takes place. The OECD also agreed that a simplified online registration scheme, as now adopted by the Council, is the only viable option today for applying taxes to e-commerce sales by non-resident traders.
A moratorium on taxation of electronic commerce in the EU, as some critics have suggested, would be unworkable and would discriminate unjustifiably against traders selling tangible goods. Furthermore, EU suppliers are already required to levy VAT on the provision of digital products. The new rules extend equivalent taxation to non-EU providers of electronic services to EU customers.
Some critics have drawn attention to what they perceive as an inconsistency with the fact that certain Member States apply reduced or zero rates of VAT to printed material such as books, newspapers and periodicals. However, the argument that there is direct equivalence with digital information services (to which the standard rate of VAT will apply under the new rules) is difficult to sustain. By their nature, they are fundamentally different products and they should not necessarily be taxed identically.
The Council already reached political agreement on the Commission proposal on 12 February 2002 (see MEMO/02/22). However, formal adoption by the Council had to await the opinion of the European Parliament on the Regulation that establishes the procedures for co-operation between Member States' VAT authorities and for revenue-sharing.
A Parliament opinion on the Regulation was necessary because the Council had changed its legal basis from Article 95 of the Treaty (co-decision by the Council and Parliament) to Article 93, under which the Council decides on the proposal unanimously following an opinion from the Parliament. The Commission believes that Article 95 is the correct legal basis for legislative proposals which relate to administrative co-operation.
The new Directive and Regulation will take effect from 1 July 2003 by which time all Member States will be required to have brought into force the necessary national implementing legislation.
The full texts of the Directive and the Regulation are available on the Europa internet site:
http://europa.eu.int/comm/taxation_customs/whatsnew.htm
VAT: Commission welcomes Council adoption of rules for application of VAT to electronically delivered services
The European Commission has welcomed the Council’s adoption of a Directive and a Regulation to modify the rules for applying value added tax (VAT) to certain services supplied by electronic means as well as subscription-based and pay-per-view radio and television broadcasting. The new rules, based on Commission proposals of 7 June 2000 (see IP/00/583 and MEMO/00/31), will create a level playing field for the taxation of digital e-commerce in accordance with the principles on the taxation of e-commerce agreed at a 1998 OECD Ministerial Conference. The rules will ensure that when these services are supplied for consumption within the European Union, they will be subject to EU VAT, and that when they are supplied for consumption outside the EU, they will be exempt from VAT. The changes modernise the existing VAT rules to accommodate the emerging electronic business environment and to provide a clear and certain regulatory environment for all suppliers, located within or outside the EU. The rules also contain a number of facilitation and simplification measures aimed at easing the compliance burden for business. Member States must implement the new measures by 1 July 2003.
MEMO/00/31
Brussels, 7 June 2000
Proposed amendments to the VAT treatment of electronically delivered services frequently asked questions
(see also IP/00/583)
Is this a new tax on e-commerce?
No. The Commission is not proposing any new tax but rather updating existing EU rules concerning the application of value added tax (VAT) to services delivered digitally over the Internet. Current EU VAT rules were never designed to meet the needs of e-commerce. Goods ordered over the Internet but delivered in physical form are not effected by these proposals as these are covered by existing provisions on distance sales which continue to apply.
Why is it necessary to make such a proposal?
The existing measures mean that, for the most part, e-commerce transactions are taxed under a rule which says that the place of supply for services is the place where the supplier is located, unless otherwise provided. E-commerce was not envisaged when the current law was drawn up and the result is that electronic deliveries from an EU operator are taxed where the operator is established, whether the customer is in the EU or elsewhere.
The converse holds true for a non-EU supplier who can sell to an EU customer without any obligation to charge VAT.
This situation puts EU business at a disadvantage, which is why the Commission has presented these proposals.
What would be the result of the changes proposed?
As a result of the changes proposed concerning the place of taxation:
- for the specified electronically delivered services supplied by a non-EU operator to an EU customer, the place of taxation would be within the EU and accordingly they would be subject to VAT.
- when these services were provided by an EU operator to a non-EU customer, the place of taxation would be where the customer is located and they would not be subject to EU VAT.
- when an EU operator provided these services to a business in another Member State, the place of supply would be the place where the business customer was established.
Where the same operator provided these services to a private individual in the EU, or to a taxable person in the same Member State, the place of supply would not change and so would continue to be where the supplier was located.
What kind of services are involved?
The proposed provisions would concern information, cultural, artistic, sporting, scientific, educational, entertainment or similar services and to software, computer games and computer services generally when these are supplied over electronic networks or are broadcast.
What services would not be affected by the proposal?
There would be no effect on the supply of free downloads, free Internet access or free access to information. VAT generally does not arise when no charge is made.
Neither is any change proposed in respect of services when the Internet is simply a means of communication between the parties for instance, sending legal advice by e-mail does not essentially change the nature of a lawyer's services. The existing provisions will continue to apply although the increasing globalisation of services generally mean that a more general review of the rules for taxation of services may be necessary.
How would the new VAT rules function in practice?
VAT is a self-assessment tax with a very high degree of voluntary compliance and this will continue to be the case. Achieving this objective would be aided by a number of flanking facilitation measures to make the operation of the VAT rules as simple as possible and, in particular, to ensure that they were not unduly disruptive or onerous for e-commerce operators.
The effect of these measures would be that:
- VAT on supplies to business customers would be accounted for by the customer. Registration for tax purposes would only therefore be necessary if supplies were made to private consumers
- registration would not be necessary for traders established outside the EU whose annual level of sales to private consumers within the EU was below €100,000 (euros)
- it would be possible to register for VAT in a single Member State (which will in practice normally be the Member State to where a first taxable supply is made). This would enable the operator to discharge all obligations for EU VAT with a single administration. This latter measure would effectively put EU and non-EU operators on an equal basis when supplying to EU consumers.
- it would also be possible to use electronic means to complete all procedures in relation to registration and the filing of VAT returns.
- tax administrations would provide operators with the means to distinguish easily the status of their customers (i.e. whether the customer was a VAT registered business or not) and this would normally provide the means whereby a supplier, acting in good faith, could determine whether or not a transaction should be charged with tax.
How would these proposed VAT rules be enforced in the case of non-EU companies?
These proposals would require VAT registration only in the case of larger operators (over €100,000 (euros) of sales to private consumers per annum in the EU). Smaller operators and those with only occasional sales into the Community would be excluded from the scope of the tax.
In the case of larger operators, it is in their own interests to be seen to be in compliance with their legal obligations (including VAT obligations) arising from Internet trading because they themselves want to ensure that others respect their obligations in respect of the operators' rights, for example as regards copyright or other intellectual property rights. Legitimate operators certainly do not want to give credence to the idea that Internet is a zone where laws do not apply - the incentive to voluntary compliance should not therefore be underestimated.
Why is the Commission making its proposals now without waiting for the outcome of current OECD negotiations on taxing e-commerce?
Participants at the Ottawa ministerial conference in 1998, held under the auspices of the Organisation for Economic Cooperation and Development (OECD) reached agreement on the broad taxation principles which should apply to e-commerce (described as "Taxation Framework Conditions"). It was agreed that the rules for consumption taxes (such as VAT) should result in taxation in the jurisdiction where consumption takes place and, for these purposes, the supply of digitised products should not be treated as a supply of goods. The new proposal would ensure that the EU VAT system was in conformity with these principles.
The Framework Conditions agreed in Ottawa recognised that full application of the underlying principles would require further work. The post-Ottawa agenda commits OECD members to work, through the OECD and in consultation with business, to identify the substantive measures needed to implement these framework conditions. For consumption taxes, these include reaching agreement on, inter alia, the measures needed to define place on consumption, internationally compatible definitions of services and intangible property as well as developing effective tax administration and collection mechanisms.
This phase of the OECD's work is scheduled to extend to early 2001. The Commission is committed to, and is an active participant, in this process. In no sense can the current proposal be seen as prejudging or pre-empting the outcome of the OECD's deliberations. The Commission's proposal does not solve the aforementioned problems but rather emphasises the need for continuing to work on their resolution, notably within the OECD.
Where the Commission is working on specific tax administration measures for e-commerce (e.g. taxpayer identification and electronic invoicing standards), the intention is that such measures, whilst in the first instance intended for the internal VAT system, would serve as a model for international use. Other OECD members are aware of this work and accept that it as a constructive contribution to the process.
Actually you'll see scads of Euro-dudes cruising ebay looking for whatever they need.
Would someone dumb this down for me and explain how this could affect Americans and how them Europeans plan on collecting?
Say what Euroweenie....? if you didn't have a VAT then problem solved,
Big number of Europeans would like the VAT to go away...after all..it is used to finance that additional layer of beaurocracy called the EEC
AND PORNOGRAPHY....please tell me this isn't so....
Upfront, I will concede that no business will do that - it would not make sense. But theoretically, if IBM, Microsoft, etc. were to stop doing business in the EU, how much would the EU be hurt?
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.