Examination of Witnesses (Questions 380
WEDNESDAY 8 MARCH 2000
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.
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
(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 complyand, ultimately, I
guess those are the people who would be generating the most revenues
in e-commercethen 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.
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 email@example.com,
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
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
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.
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
(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
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.
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.