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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:

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