Select Committee on European Scrutiny Nineteenth Report




Draft Directive amending Directive 77/388/EEC as regards the Value Added Tax arrangements applicable to certain electronically supplied services and radio and television broadcasting services;

Draft Regulation amending Regulation (EEC) No. 218/92 on administrative co­operation in the field of indirect taxation (VAT) and introducing additional measures regarding electronic commerce.

Legal base:Draft Directive: Article 93 EC; consultation; unanimity

Draft Regulation: Article 95 EC, co-decision; QMV

Forwarded to the Council:4 February 2002
Deposited in Parliament:6 February 2002
Department:HM Customs and Excise
Basis of consideration:EM of 6 February 2002 and Minister's letter of 7 February 2002
Previous Committee Report:None; but see paragraph 15.2 below
To be discussed in Council:12 February 2002
Committee's assessment:Politically important
Committee's decision:Cleared, but further information requested


  15.1  Some services, such as radio and television broadcasting, web-site designs, software and digitised (music and film) products are supplied electronically across borders. Under Council Directive 77/388/EEC, these services are liable to VAT in the country where the supplier is established. Thus where a supplier outside the Community sells a service to a customer in the Community, no liability for VAT arises. However, when a service is supplied from within the Community liability for VAT arises, regardless of whether or not the customer is located in the Community. Consequently, these existing VAT rules create a comparative disadvantage for suppliers in the Community.

  15.2  On 19 July 2000, the previous Committee considered, but decided to leave uncleared, a Commission Communication: VAT — Taxation of e­commerce.[51] That document sought to amend Council Directive 77/388/EEC, especially Article 9 that concerns the place of supply rules, so that liability for VAT for services provided and sold electronically should arise in the Member State of the consumer. Under the Commission's proposal, non-EU businesses would be required to register in a Member State for VAT on sales to EU customers. Similarly, no VAT liability would arise in respect of services provided by a supplier in the Community to a customer located elsewhere.

  15.3  As noted above, the previous Committee decided to leave the Commission's original proposal uncleared pending further information. The Committee specifically requested information from the Minister concerning any measures that might be necessary to prevent non-EU businesses distorting competition by simply registering in Member States with the lowest VAT rate. The previous Committee was also interested in the outcome of any consultations the Government may have had.

The document

  15.4  The document contains the Presidency proposals to amend the original Commission proposals, following agreement at ECOFIN on 13 December 2001 on the principles to be adopted. The document proposes two legislative changes. The first amends Directive 77/388/EC (the Sixth VAT Directive) in relation to the place of supply (and so of taxation) of certain electronic services and introduces a special scheme for non-EU businesses. The second proposal amends Regulation 218/92 on administrative co-operation to put in place certain arrangements for the exchange of information between Member States to support the operation of the proposed special scheme.

  15.5  The most significant change from the Commission's original proposal concerns the approach being adopted to collect tax that is levied on transactions from businesses to final consumer where the supplier is located outside the EU. Under the current proposal, a time-limited interim system is established that is to be replaced by a fully electronic system by 2006.

  15.6  In her letter of 7 February 2002, the Paymaster General (Dawn Primarolo) described some background to the latest proposal, which only made progress at the end of the Belgian Presidency. She says:

"Concerned at the potentially serious drawbacks of a model put forward under the Swedish Presidency (in the first half of 2001) the UK developed and presented an alternative approach. Late last year we successfully persuaded ECOFIN of the merits of this approach which now features in the proposal which has so rapidly emerged. Essentially, we argued that a number of key objectives (such as neutrality, simplicity and consistency of treatment) could best be achieved through adoption of a fully electronic mechanism for charging, declaring, collecting and allocating tax revenues in relation to e­commerce supplies, with such a system achieving taxation in the place of [the] consumer irrespective of the location of the supplier (i.e whether or not the latter was based outside or within the EU)."

  15.7  In her Explanatory Memorandum of 6 February 2002, the Paymaster General says:

"The key changes for supplies to business customers are:

"—  The place of supply rules for specified electronically supplied services would be changed in such a way that taxation arises in the country of the customer. Thus if an EU operator supplies to a customer established outside the EU, no value added tax would be charged. Conversely, a supply from a vendor established outside the EU to a customer within the EU would be liable for VAT in the EU. This would mean that the current competitive distortion against EU operators would be removed and that both EU and non­EU operators would be subject to the same tax provisions.

"—  Business customers receiving such services in the EU, who are, registered for value added tax, would account for any VAT due on services provided by a supplier located outside the EU. This is referred to as 'reverse charge' and already applies to other types of services which EU businesses purchase from non­EU suppliers.

"For supplies to EU private consumers a special scheme would overcome the need for non­EU businesses to register in each Member State where their supplies are consumed:

"—  Non­EU suppliers would only have to register and account for VAT in one Member State (of their choosing) but would charge VAT at the rate applicable in the Member State where the consumer resides.

"—  The Member State of registration would subsequently allocate the VAT payment to all other Member States concerned on the basis of data provided by the business about its supplies in each Member State.

"The key difference between the current proposals and the original Commission proposals lies in the approach to the taxation of business to consumer supplies in that the interim system is expressly time­limited, and is to be replaced with a simpler fully electronic system by 2006. The interim registration scheme for non­EU businesses supplying private consumers has been much simplified in order to reduce the compliance burden."

The Government's view

  15.8  In her Explanatory Memorandum of 6 February 2002, the Paymaster General says:

"The UK welcomes the Presidency proposal. In the interim, this proposal would establish a workable system which would be relatively simple for businesses to comply with and for Member States to administer.

"In the medium term, the proposal recognises explicitly the need for a fully electronic mechanism for charging, declaring, collecting and allocating tax revenues in relation to e­commerce supplies, which would achieve taxation in the place of consumer irrespective of the location of the supplier (i.e. whether or not the latter was based outside or within the


"The emergence of this proposal represents a significant success for the UK Government in persuading other Member States of the need for a much simplified interim system and for a time-tabled move to a fully electronic approach. This delivers the key principles of neutrality, simplicity and consistency of treatment."


  15.9  Under both the Commission's original proposal and the Presidency proposal, non-EU businesses will be required to register in a Member State for sales to EU customers. However, a major difference between the two proposals is that under the Presidency proposal the arrangement for the taxation of business supplies to final consumers represents only an interim system, which is to be replaced in 2006 when the permanent and fully electronic system comes on-line.

  15.10  While the previous Committee recognised that making non-EU vendors register in one Member State made good administrative sense, it expressed concern that this could lead to some distortion in competition as non-EU businesses chose to register in the Member States with the lowest VAT rates. We recognise the case for moving to an electronic system for charging and collecting VAT on certain e-commerce services. However, we suspect that, given the frequency with which new computer projects are plagued by delays, there must be a reasonable risk that the replacement system will also be delayed and the interim system, with its distortions, will last beyond 2006. We request to be kept informed of progress in moving to the permanent system.

  15.11  The Minister has written to us setting out the reasons why she felt it necessary to lift the scrutiny reserve. She points out in her letter of 7 February that the Spanish Presidency was pressing for political agreement at ECOFIN on 12 February. She says that "formal adoption is not expected until the March or April ECOFIN (subject to receipt of an outstanding European Parliament Opinion)" and that "it would be extremely difficult to substantively reserve the UK position on this measure which represents a significant success after difficult negotiations." She adds, "I believe that the UK interest is best served by early political agreement on this proposal. I regret that I have therefore reluctantly concluded that the UK Government should lift its scrutiny reserve."

  15.12  While we accept that the lifting of the scrutiny reserve was caused by the "unfortunate timing of negotiations", we note that the previous Committee's request for information on the earlier proposal was not answered. The information is still relevant to the current proposal. We now reaffirm the request for further information made in July 2000 and ask for this to be provided immediately together with an explanation of why it was not provided earlier. Meanwhile we clear the document.

51  (21374) 9366/00; HC 23­xxv (1999­2000), paragraph 2 (19 July 2000). Back

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