Select Committee on European Union Minutes of Evidence

Examination of Witnesses (Questions 380 - 399)



Lord Skelmersdale

  380. What is the difference? This, I find is the crux of the whole enquiry that we have spent weeks on and are about to spend another six or seven on. Is the whole subject being over-hyped, in your view?
  (Mr Wong) Just to comment on that from a tax perspective, I think there are two distortions which arise from e-commerce. The first one is because the same product can now be delivered in a different format. If we take a mail order company and it sells books, and let us say it is from a United Kingdom based vendor to a United Kingdom based customer, then because of the way that United Kingdom VAT rules work, the book will be liable to VAT at the zero rate and no VAT will be payable. If the customer were to download the book via the website of the seller, because the book has now become an intangible asset, the way the VAT rules currently work, it is treated as something other than a book and VAT would be payable on that transaction at the standard rate.

  381. Except if it is an import?
  (Mr Wong) If it is between a United Kingdom based vendor and a United Kingdom based customer. That is one of the distortions that has been created by the way people can do business now, and it may cause even greater distortions in the future. The other area of distortion is with imports. Where goods are imported, like videos, cassettes or CDs, then, at least in theory, United Kingdom tax can be paid at the point of importation, but if you can download the same product via a website, the product will come into the country and there will be no check points. It would not cross a physical border at any point. That is the other area of distortion which is created by the way in which the same transaction is carried out, albeit on-line. I agree with David that rules are there, but the way the rules currently work creates a distortion in many cases in favour of a seller who is based outside the EC.

  382. And a seller who uses the Internet, which is the real point?
  (Mr Wong) Not, perhaps, in the case of the book seller, because the person who sells a book in a downloadable form will have to charge his customer VAT, whereas if he sells the book in a shop, he would not.

  Baroness O'Cathain: VAT is not payable on books.

Lord Skelmersdale

  383. Let us take a video which is chargeable for VAT purposes. If it was downloaded it would, because nobody can check up on it, escape tax, is that what you are saying? If, however, it was put in the post from America to here, then, if the post office and Customs and Excise were alert, which happens about .00005 per cent of the time, it might attract tax, would you agree with that?
  (Mr Wong) Yes. As the law stands at the moment, a United Kingdom based private customer buying downloadable software from a United States vendor, that transaction is outside the scope of VAT. It is just not taxable.

  384. Even if it was, it would not be and could not be, could it?
  (Mr Wong) That is one of the issues that the European Commission is looking at. I think the suggestion has been made that they will change the rules so that you will require the United States based, or non EC based, seller to become registered for VAT in any of the countries in the EC with a single registration.

  Baroness O'Cathain: Could they not say no?

  Lord Skelmersdale: They cannot stop them selling in the EC because of the World Wide Web.


  385. The problem is in the compliance, is it not?
  (Mr Wong) Absolutely, there would be problems with compliance. I think the hope, perhaps, is that if the big United States based companies were to comply—and, ultimately, I guess those are the people who would be generating the most revenues in e-commerce—then although you cannot get everybody, you would get the people who matter, plus you would get a greater percentage of the revenues that you were hoping to get. The authorities were faced with similar problems in relation to telecommunication services but there most, if not all, of the players are substantial and they are prepared to comply with regulations like tax. I agree that it is a little bit more difficult in relation to e-commerce.

Lord Cavendish of Furness

  386. I am afraid I have missed a trick. Although I enjoyed this paper very much, I do not know really who you are or where you come from, so perhaps in your answer you might tell me. I am pursuing the line that Lord Skelmersdale did in that I am also of the view that information and e-commerce are not producing any new problems, the whole problem is vastly more complicated and vastly interactable, which brings me back to an old situation which is that as far as the EC is concerned in dealing with commerce from Europe, is there actually a chance of organisation and harmonisation in the way we run our files legally? The point I make is, am I right in thinking that an EC Directive requiring legislation arrives in this country and has a totally different course to travel thereafter, particularly in France and Germany where it most matters? Can one seriously feel that these complications, and we are talking about now, can actually be resolved unless you go back to a fundamental thing and say, "Is the EC workable unless we have the same system of law?" I think the first port of call is an EC Directive requiring legislation to the Treasury Solicitor. I speak to my neighbours in Italy and they have a rather different situation. If they do not hear about the thing they say, "Principle is an operation which will unfold over a decade or so."
  (Mr Griffiths) First of all, just to say who I am. I am David Griffiths and I am a solicitor in private practice with the law firm, Clifford Chance, as are my colleagues. My experience in this area comes from helping clients who are trying to set up businesses offering services, not just in the United Kingdom, but in many other countries and using the Internet. What we tend to do for these clients is carry out legal reviews to identify what the obstacles are and then help them launch whatever particular type of e-commerce business they have in mind. We find that the work involved in carrying out those reviews is extensive and there are significant variations in what they have to do from country to country. This sometimes means that they have to develop quite different approaches in the way they provide their services in different countries. I do not have any particular objective in terms of legislation. It just seems to me that if the cost of this exercise can be reduced in some way, then apart from possibly losing some work myself, it would be to the benefit of the Community generally. Looking at the specific question, given the process of legislation we have, can we achieve the level of harmonisation required to deliver real benefits? I think the answer to that is that we can, but the process which leads to Directives seems, at the moment, to involve making so many compromises between industry lobbies on the one hand, and consumer lobbies on the other hand, that we end up with legislation with exceptions and carve outs. This means that Member States can maintain very diverse regulations, or will be able to maintain diverse regulations, even after the Directives have been produced. I do not think that problem is as a result of the structure of the institutions, but more the compromises that are made in the legislative process.

Viscount Brookborough

  387. Regulations and their effect between countries on taxes are undoubtedly necessary in legal terms, however, what part do you think self-regulation could play to reduce the amount of regulations which may have to come through national governments or international governments between the EU? We have not asked this, but many of the service providers are not actually in associations and, therefore, they do not speak with one voice. Are they so busy being competitive that they are simply neglecting to see that they could harmonise a lot of their work together and so reduce the necessity for national and international legislation?
  (Mr Griffiths) My Lord Chairman, I think there are two problems here. One is the problem of building trust in e-commerce, which both the papers, for example, e-Europe and, identify as something that needs to be tackled. It seems to me that self-regulation could play a significant role, and thereby establish best practice standards for participants to adhere to. However, I do not think self-regulation is the whole answer, because there will remain organisations that choose not to participate in self-regulation, and it seems to me that minimum standards are required. The other issue which self-regulation does not, in itself, address is the widely varying standards of existing government regulations, legal regulations. Unless something is done to deal with the widely varying standards, self-regulation will only help on the trust side, it will not help to actually reduce significantly the costs to businesses of entering the e-commerce marketplace.

  388. Would it be your opinion, or do you agree, that the providers and those involved in e-commerce are simply doing too little, they are not actually working at trying to get self-regulation to work for them for themselves and for their benefit? Do you think they are doing enough or not? So far, all you have talked about is really national and international.
  (Mr Griffiths) It is difficult. So many of the companies in this field are brand new. They tend to have fairly lean teams establishing them. I am not sure that a lot of them, at least in the first one or two years, have the resources to participate in many things outside of the implementation of their business plan.

  389. As a basic requirement would you not agree that maybe they should all have to at least belong to some form of association somewhere? At the moment, with all the new sites, going on the Internet, especially if you are as inexperienced as I am, you would not have a clue what they belonged to. Should there not be a basic level of membership of anything?
  (Mr Griffiths) I find it difficult to agree with that, because it seems to me that by compelling people to belong to self regulatory bodies you are compelling them to do something without any very clear parameters as to what it is that they would need to do. If the proposition was that they had to belong to a set number of bodies, then it would seem to me that you are creating a regulatory structure that is probably heavier than would be needed, or heavier than would be desirable if you are going to allow business to develop rapidly.

Baroness O'Cathain

  390. Can I follow up on that and then take the opportunity to ask my other question? While you were talking to Lord Brookborough I suddenly thought that companies are actually regulated anyway through the Companies Act, for example, in this country, and various Companies Acts in other countries. Surely Companies Acts could be amended to bring in regulations on dealing with e-commerce? It need not be beyond the bounds of man's ability to do just that. Have you any idea about that? In other words, do not rely on self-regulation because you are going to get all sorts of cowboys out there, but do it on the basis that companies cannot trade without having rules and regulations on e-commerce, or am I being totally naive?
  (Ms Marsland) In my experience of enforcing intellectual property rights for well known brand owners, some of the problems I have are with people who are not companies in the first place running websites and supplying counterfeit material. So, focusing on the corporate structure as the means of regulation leaves an enormous loop-hole for people like that.

  391. So they are the cowboys?
  (Ms Marsland) Some of them.

  392. That brings me neatly on to the intellectual property area. In the memorandum I was fascinated by the section on patents, and it is an area that is really a minefield. Obviously it is a problem and is going to be a growing problem. Have you got any solution to that? If you were the great supremo in the European Union who had the power, if they have any, to do something about patents, what solution would you propose in order to combat the problem that you deal with in your paper?
  (Ms Marsland) I think the first problem is that the Americans now have a much more amenable patent environment for people who are working in the e-commerce sector than we do in Europe. That means that European e-commerce businesses are at risk of being sued when they go into the United States markets by United States players, and, practically speaking, people who are European based probably find it harder to optimise their patent position in the United States market than United States domestic companies do, for a variety of reasons, some practical, some legal. Looking at it from a European business perspective there is a case for rapid liberalisation of the European patent system so far as software patents and business patents are concerned. The software patents issue is already a live one. People are talking less about the business method issue, which has become the issue of the last 18 months to two years in the United States. I think if Europe does not catch up legally, then European e-commerce players are likely to be disadvantaged in that technology race. The other issue is simply addressing the practical problem which is emerging in the United States of trying to achieve a tool for analysing what is truly new and patentable in the e-commerce environment, because many of the patents which have been granted in the United States are really for doing, in an e-commerce environment, things that people have been doing commercially off-line for a long time. Trying to tap the body of commercial experience to determine what is new and should be protected under the patent system is a difficult issue which the Americans are just starting to grapple with now.


  393. Could I just pick up on the position on intellectual property rights? You say that a solution is in sight but do not hold out too much hope of it being very effective. How effective has it been? There has been quite a lot of work done in the United States, but how effective has it been there?
  (Ms Marsland) Are you talking about intellectual property generally?

  394. Yes.
  (Ms Marsland) I think in Europe we have some very effective steps by the creation of pan-EU rights. We now have a pan-European trademark which makes brand owners' positions in Europe much stronger. We also have great harmonisation of, particularly, trademark law and the European Patents Convention underpinning the patent law. As far as harmonisation is concerned, we have gone a long way, and I think my earlier comments should be read as not failing to acknowledge that sometimes the best is the enemy of the good and that great steps have been made. Particularly in the copyright area we have very long standing traditions of diversity and sometimes use the same words to mean a totally different thing. The pressure to enable people to supply invisible materials across borders in Europe and to evolve these systems at great speed is causing the legal systems to creak and will continue to do so for some time.

  395. We are having some evidence put to us from WIPO. How effective are they?
  (Ms Marsland) They achieved a major coup in December 1996 by getting two Treaties adopted, which very substantially updated copyright and neighbouring rights laws internationally. Those Treaties are what underpin the current draft copyright Directive to enable Europe to move towards a much higher level of approximation of European copyright law. They have also become a very active player in the world of domain law. They are involved in current debates about having a new domain named ".EU", which, I think, is a great thing in terms of creating a European image.

  396. Do you think that that is a good idea?
  (Ms Marsland) Yes. They have also started to take a very active role in the .com domain names resolution policy and, therefore, developing a very good track record there, very rapidly.

  397. Is this view about the EU domain name shared by your colleagues?
  (Mr Griffiths) I would share that view.
  (Mr Wong) So would I.

  Baroness O'Cathain: No euro sceptics here.

Lord Paul

  398. First of all, I forgot to mention that I thought your paper was very good and the only problem I found was that it opened up more questions and almost made me feel that it is a lawyers' paradise to start recommending regulations.
  (Ms Marsland) We do hope so.

  399. After listening to Mr Wong, why would anybody want to be in this business in the United Kingdom or Europe and not be offshore with all this, or even run the business from here but put yourself offshore like the old steamship companies did? How are you going to avoid that?
  (Mr Griffiths) Before Etienne talks about tax, I think, purely from a presentation or marketing point of view, that many consumers will feel a lot more comfortable about dealing with a business that is located within a Member State of the European Union. I suspect that for marketing reasons there is a good reason why many e-commerce businesses will want to be seen to have a national presence in one Member State and, indeed, some businesses may well decide that they actually want to have a national presence in every Member State in which they do business, irrespective of the regulatory regimes, so that they can give the impression of being a local business.

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