VAT ON SERVICES SUPPLIED IN E-COMMERCE
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.
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.
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
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.
"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
"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.
9366/00; HC 23xxv (19992000), paragraph 2 (19 July