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Proposed amendments to the VAT treatment of electronically delivered services frequently asked questions

European Commission - MEMO/00/31   07/06/2000

Other available languages: FR

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

  • 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 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.


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