Select Committee on European Union Minutes of Evidence

Examination of Witness (Questions 1200 - 1219)



  1200. That is very helpful. We understand that a certain amount of "brigading" is now taking place between Industry and Internal Market Directorates-General. Should this not lead logically to the subsuming of the Industry and Internal Market Council into a new Competitiveness Council?

  A. Yes. Your first question is a very interesting one. I think the question of whether there should be a single Council for the two, frankly is open to debate. I do not think that we have any firm position on that. As far as we see the differences, where I can respond directly is regarding the differences between the two Directorate-Generals, which I think are pretty well drawn. We work closely together but the Internal Market Directorate-General is really the one that deals primarily with Regulation, Internal Market Regulation. If you take the area of electronic commerce as an example of that, we are responsible in effect for the regulatory framework, in other words for the Directorate. Our colleagues in the Industry DG, our Enterprise DG as it is now known, work with us but are far more involved in looking at pilot projects, putting more into new schemes, awareness programmes, this sort of thing. That is not always as clear cut as that. Also they have responsibility for certain sectors. So in the area of e-commerce, for example, one sector which will be subject to quite strong changes, I would suspect, is pharmaceuticals where again there is a pharmaceutical unit in the Enterprise DG. As I understand it there has been a working group set up with the Member States to review the Regulation of pharmaceuticals, advertising and services, largely again because of the implications of e-commerce. The big issue there, as you probably know, is that in the United States it is possible to advertise and sell prescribed pharmaceuticals whereas we have a total ban in the Community on that. That is an issue, a very delicate one, which has wide ramifications for social security systems and health systems in general which they will be looking at. Speaking on a personal basis, it would not make any difference to me if there was such a move towards a Competitiveness Council but I think in terms of the kinds of issues we deal with they are complementary but different, let us put it that way. I do not know if that answers your question. I am happy to take follow on questions.

  1201. I think it goes some way towards it. The interesting bit is where there are clear overlaps obviously we take the steps to adjust.

  A. Sure.

  1202. It is when you get into the position you have just described where there is a debate to be had and it is really trying to look a bit further ahead to see whether they are going to come closer and, if so, is it not better to prepare in advance.

  A. Sure. From our point of view, given there is a complementary nature between our two services, I do not think it will pose a problem in the report to my Council. Where we see a stronger problem of co-ordination is when we have issues which are dealt with, for example, by the Consumer Affairs Council, where we feel sometimes there is a strong overlap between what we are doing and where we do not necessarily always—and I know this is going on the record—have the same views in the different services which will respond to that Council. That would be a stronger problem than in this proposal.

  1203. We congratulate the Commission on the speedy progress of the E-Commerce Directive. We are pleased to see that the internal market imperatives have emerged without too many hostages to fortune. But, one exclusion is the supervision of financial services where, currently, for prudential reasons, the principle of "country of destination" obtains. On the face of it, this seems incompatible with the E-Commerce Directive's "home country" rule. What is being done to bring financial services more strongly into the mainstream of the internal market? Is this in the European Commission's work programme for this year?

  A. I thank you on the second question for your congratulations. As you know, that Directive was adopted by the Parliament in early May. I actually think that the official adoption was the day before yesterday.

  1204. Tomorrow.

  A. Is it tomorrow?

  1205. We have seen the MEPs today from all parties, the United Kingdom ones. It was quite interesting to see how they were working together and they deserve congratulations as well.

  A. What was interesting in that was the recognition by the Parliament of the urgent need for this Directive. I am sure you will understand better than most that there is a very strong will, notably from politicians, to think "ah, yes, but I can amend this and improve it" and Parliament refrained from doing that in order to get the text through as quickly as possible, largely because I think it saw the need for that regulatory certainty to encourage investment in e-commerce in Europe. The rapporteur who was key in getting that through was, in fact, the chair lady, Mrs De Palacio, and she did a really sterling job. There were a lot of United Kingdom people, Malcolm Harbour and Lord Inglewood, who were all involved in that and it was a great effort, very good for us as well. Now, as you know, there is an 18 month transposition period, which is quite short actually, again reflecting the urgency. Certainly from the Council point of view I think that was recognised as well. In terms of financial services, it is true that there are derogations to the Internal Market principle of country of origin control for certain aspects of financial services, albeit not all. For example, banking services would be subject to the country of origin rule. The derogations do not actually lead to an automatic application of country of destination. I do not want to get into a long legal argument but in brief terms, as an economist, I will try to explain. The basis of the Directive is the principle of free movement of services as enshrined in the Treaty. That is the primary law on which it was based. Even without the Directive that principle applies. In the context, let us say, that there were a restriction applied for a particular type of financial service, say an insurance service, being sold across the border, the Member State that restricted that would still have to prove compatibility of that restriction with the Treaty. Because there is a derogation to Article 3, which is the country of origin principle restated, if you like, in the Directive, it does not automatically follow that means it is country of destination control. It is unfortunately in a grey area. I am not saying it is an ideal situation. The reason why there were specific derogations for certain financial services was, in fact, we already had certain Directives which at the time that they were adopted, in my opinion quite rightly, had emphasised or had tried to facilitate the establishment of, let us say, branches in other countries because that was the way prior to the development of the Internet and the communications revolution, if you like, that one had to offer the service. It was a face to face service, as with many other services. The Directive sought to facilitate the establishment of a branch network, a single passbook idea. In doing that they then had clauses that stated "and the branches will apply the local marketing laws", for example, or "the laws regarding financial prospectuses", etc. That is the problem now. Until those Directives are altered we cannot impose country of origin because obviously it would be contradicting the existing Community law. The work in terms of reviewing those Directives is all in the Financial Services Action Programme which we are currently working on. It is not as if we have forgotten about them, on the contrary, we are actually looking first at the specific Directives that concern UCITS and also insurance Directives and we are looking at the whole issue. It could be a revision of those Directives, not only so that we can allow for country of origin but also to see whether in fact some of the existing provisions need to be changed now because of the possibility of supplying on-line. That is the reason. In terms of the timing, the official deadline for completing the Financial Services Action Programme is 2005. Regarding certain aspects of it there is a shorter deadline of 2003. That work is actively being undertaken by our services at the current time. I do not know if that explains where we are. Again, I am quite happy to take further questions on that second question.

  1206. What are your expectations of the French Presidency? How will the French deal with the legislative framework for e-commerce, and issues such as the Copyright Directive, dual-use controls, jurisdiction and e-money? How much progress do you think will be made on the five new Directives governing the telecommunications regime?

  A. What are my expectations of the French Presidency?

Lord Faulkner of Worcester

  1207. It is going to be a huge success, is it not?

  A. I am half French, I have got a schizophrenic character anyway. Let me try to answer that in terms of your follow-on questions. If I can start with the issue of jurisdiction which may be one that is more clear cut. It is clear from the negotiations that we had regarding e-commerce that the French felt very, very strongly that as regards contractual obligations where there is a derogation for the country of origin control principle in the Directive they are very strongly in favour of country of destination. I think that whole issue is going to be resolved in the discussions regarding the Brussels Regulation where there is currently a parliamentary opinion being prepared by Mrs Wallace. You know this as well as us because the issue is hot in many Member States, including your own where the DTI have launched an enquiry, a hearing. If I may say so, looking at it from the Internal Market perspective, as the Regulation stands at the moment it poses a problem because it leads to a situation where any information society service, any website, as far as contractual obligations are concerned, could be subject to be sued in any Member State. There is a big argument on this, or rather simplified argument, where people say "yes, but if you push country of origin all the way through", which is our tendency "that works against consumer protection". We do not agree with that. We think, as our Directive has suggested, that the flip side of country of origin control is improved cross-border redress mechanisms. We have given a very strong signal to encourage the development of Alternative Dispute Resolution systems particularly. I am sure many of you will be aware that seeking redress for a consumer complaint for the typical value of the consumer claim, going through the courts is rather ridiculous in terms of the costs involved. Not only that, the country of destination approach does not help you because although the consumer will have access, or supposedly will find it easier to have access, to his international court, he then will have to get that judgment executed in the court of the country of origin anyway. Unfortunately, frankly that whole argument has become a kind of dogmatic argument, country of destination against origin. If you like, we have left the objective facts of what could facilitate on the one hand the Internal Market, which after all needs to rely on consumer trust if it is to work. Our whole objective is to encourage cross-border trade. If consumers cannot trust a site simply because it is in another Member State that kills our objective. We feel that cross border redress and improved judicial co-operation is far more a challenge that we must meet rather than suggesting the country of destination control is some kind of panacea for the consumer which it is not. That is very much our view, I would not say that it is necessarily shared by all the services of the Commission. I would make that point. Regarding the Dual-use Controls, as far as I am aware the Regulation should be agreed. It has certainly been agreed in COREPER and it should be going to Council quite soon. It is going through the 113 Council. The French, as I understand it, also with the United Kingdom, wanted—I stand to be corrected—a little more in terms of controls on encryption systems on that. From our point of view, again purely talking here on a technical basis—and this is a service line, this is not a Commission line—we do find it odd that this is being done through the 113 Committee. We are completely in agreement that there should be export controls. What is more worrying is that through this we are imposing also intra Community export controls, which we feel from the Internal Market perspective should have been dealt with through a harmonisation initiative. The reason I say that is not in any way contesting the issue but it does seem a bit odd that for what is effectively an export control—i.e, to third countries—Regulation which is being taken by the Council, which requires, as I understand it, unanimous votes and unanimity, that we are in fact regulating also intra Community exports. Usually if we had dealt with this intra Community dimension in a harmonisation initiative from the Internal Market perspective it would have gone through the European Parliament so from a democratic perspective we are a little worried, let us put it that way. From a legal perspective we are also concerned because the Commission might get caught out by allowing that to happen if somebody was to take it before the court. That is a discussion being held within the services at the current time. As far as I know anyway it is going through and probably, as I understand it, could be adopted next week. It is not really an issue for the French Presidency any more. The Copyright Directive, I have just mentioned that my Director could not be here because of that. He is actually in COREPER right now and as I understand it there should be agreement on a common position. Apparently the problems are resolved. That is the common position. Then there will be the Second Reading in the European Parliament. If you ask what the French view on copyright protection is, it seems to me to be the more the better. I disagree with it but anyway that is another story altogether. In terms of E-Money, the Directive defining E-Money has been agreed, that is not the important one. Obviously the key one is regarding authorities responsible for supervision of issuance. It is in Second Reading, this Directive. Apparently there have been very few amendments made to it. I understand it could be adopted also before the French Presidency, that is what I have been briefed. That is as much as I can tell you on that one. How much progress do we think on the five new telecommunications Directives? Well, as we understand it, our information is that the French Presidency wants to pursue two of the five, namely the Framework Directiveand the Inter-Connection Directive. They will be focusing on those two which are probably the most important. I suspect they will give quite a lot of emphasis to that. I think that is as much as I can say on those. I do not know if there are any other questions you want to ask me which I will try to answer?


  1208. It is not your area but we have the tax one still outstanding.

  A. I thought you might raise that. On tax, there is within the Commission now a proposal which in fact is dealing more—and which will come out—with the issue of tax vis a vis third countries, e-commerce and third countries. The idea would be a revision of the Sixth VAT Directive in a similar way that we did for the telecommunications services. It is the Treasury, the Ministers of Finance who have the problem with leakage. The problem regarding e-commerce remains though. Obviously it is a very thorny issue to grasp but it is one that I think does need to be grasped on a personal basis. I say that because effectively the Sixth VAT Directive is the ideal framework to impose country of origin, as you know. The problem is that the exceptions in its annexes list many services, including information services which will cover the bulk of e-commerce services which means currently they will be subject to different reporting and different VAT regimes across the Member States. The Commission proposal I have seen regarding the specific problem of third country imports, which would have to be taxed now, refers to the fact that this more general issue will have to be looked at, and I think the sooner the better. Obviously it is a highly sensitive area. I do not know if that covers it? I cannot really say much more than that on tax. It is a problem. It is particularly a problem for SMEs because e-commerce is a wonderful opportunity for SMEs to trade for the first time across borders and having to meet the tax requirements of registering in each country for tax purposes, different registration recording periods, etc., language problems is really an enormous amount of red tape that they could do without. There are other key issues as well. There is a discrimination even now between on-line goods and, let us say, off-line goods.

  1209. Bricks and mortar.

  A. Absolutely. That is crazy. The zero rating, for example, on the press does not apply to online which is very difficult to understand, quite frankly. Something has to be done on that. It is a question of political will actually and obviously the Member States feel very strongly about that. I think it will come but the current proposal coming out of the Commission is dealing more with the problem of the fact that goods coming, for example, from the US are not taxed, or escape VAT, and the solution that certainly I have seen is the idea that a US company or third country traders would have to register for tax purposes in the EU in order to sell on-line. How that will work in practice I have no idea. I am not a fiscal expert so I could not answer any questions on that.

  1210. How long can they put off dealing with the internal taxation issues?

  A. Do you want a frank answer to that?

  1211. It just goes on and on.

  A. What I hear from business, I think they cannot put it off for very long. Largely also from this small business angle, many large enterprises are in any way established in many of the Member States so they are already used to it but it is highly dissuasive to start ups.

  1212. While in the United States we were struck by the pivotal role said to be played by access at an early stage to venture capital. Lisbon called for a Commission review with Member States to improve the coherence of available instruments. What lessons have you learnt from this review? What innovations in raising capital (e.g. public-private partnerships) are you working on? How will they affect the availability of venture capital?

  A. I saw you had a very interesting question about venture capital. This is probably even more dissuasive to developing on-line trade within the Community. There is not an official position in the Commission as far as I am aware. I would say it is extremely urgent. You have been speaking to MEPs as well and you will know the position in the United Kingdom. One feels that could be a major stumbling block to real growth in the e-economy in Europe and that would be a shame frankly. To build on that in the area I do know, I think the E-Commerce Directive sets the standard because we realise also that we are not working in a closed European environment, that our companies are facing global competition more than ever in this context. The framework that we have adopted and that the Member States have agreed to in the E-Commerce Directive is something that the American administration is quite interested in as well for once which, from our point of view, is largely because many of the laws regarding contract, regarding advertising, etc., are state driven in the States as well, so they have the same problem that we were facing in terms of regulation. They had the same problem with state tax as well.

  1213. There are big problems in some areas.

  A. Absolutely. I think it is an issue that you hear spoken of not only at the European, national levels but at the international level in terms of the gaps. People realise that something needs to be agreed rather rapidly. Of course, it does force the question, and this is why it is delicate, of harmonisation. That is the big problem, particularly when you have zero rating on certain products as you know. We have evidence, albeit anecdotal evidence, that from the SME angle it is restricting the development of on-line services and that is a shame. The other thing to say is what we think when we see disclaimers on websites saying "we only trade in the United Kingdom" or whatever, that there are various reasons for that, it can be logistics problems or distribution problems. However, another problem is some of the regulatory legal uncertainty which we hope the Directive will help us on. The third one is certainly tax differences. The costs of being able to offer or sell across the different frontiers in terms of tax registration or the formalities you have to go through far outstrip the benefits originally when you are starting trading.

Lord Faulkner of Worcester

  1214. Tax is a huge barrier to cross-border e-commerce, is it not?

  A. Personally I am convinced of this. In many of these areas I think that there could be very rapidly some sort of agreement to take it forward, particularly with on-line because any business that you talk to about this will raise this point. The biggest players, some of them quite like the idea because it means they can—off the record—


  1215. Keep it to themselves.

  A. Absolutely, it is that. It is a strong entry barrier for the new innovatory firms that we keep talking about, the start-ups in particular.

Viscount Brookeborough

  1216. Can you give us any idea of what the cost is?

  A. I cannot give it to you. To give you an anecdotal answer, and I am sorry I have to rely on this but it is an example which was given to me, a small United Kingdom antiques firm had started putting their catalogue on the Internet and had built up a kind of network, thanks to that, with other antiques dealers in other countries. They had different pieces that were more or less wanted in different countries and they were trading between each other and they started selling. This was a small business, a three man enterprise. When they found what the tax formalities, the hurdles were: to register in each country; the different reporting periods; the different tax rates themselves; and also having to report in different languages as well, they stopped trading. They still had their site showing what they were selling in the United Kingdom but they were never able to develop the commercial side of it, the sales side. It is very anecdotal. I do not think there have been any studies looking at the real costs in administrative terms of time to go through these formalities.

  1217. So if someone was able to do the research there would be evidence that a business with a turnover of less than X would probably find it impossible to engage in cross-border trade?

  A. Absolutely. With the E-Commerce Directive, when we were looking at the regulatory costs we put out a questionnaire to federations and to individual businesses, we had a magazine we could use for that, simply to get a feel of what were the legal costs of checking the regulations in different Member States when you are establishing a website. I am not talking about the physical administrative side but the actual legal costs. It was very interesting because first of all those companies who had done it were the big players, companies such as Yahoo, Amazon or whatever. They were talking about 15, 20 full-time lawyers working for two years to work it out. Then you had small firms who said either they risked it and said "we cannot afford to check so we go on the basis that we state very clearly we are within the United Kingdom and hope that we will not be sued in one or other Member State" or many replied "we just put a disclaimer and at this stage we are not trading across borders because we cannot afford the legal search cost to see what the regulatory regime is". Those arguments helped, certainly in both the Council and the Parliament, to get the Directive adopted. I think it is exactly the same problem with tax but probably revealed even more because you not only have to register for tax purposes but need a physical presence, a tax person responsible for your tax returns in each Member State. In terms of the actual costs of doing that for a small firm, particularly if we are talking about micro-enterprises, that is quite significant.

  1218. In terms of the expansion of e-commerce, or e-retailing, there is obviously a great deal of misunderstanding or lack of knowledge of the regulations and, therefore, there is a lack of confidence.

  A. Yes.

  1219. If the information was made available in a way that people could understand it and they could get hold of it, because of course SMEs do not necessarily have the ability to spend a lot of time getting hold of it, as you have just said, but even more so for confidence of individual consumers, if that was made available it would accelerate e-commerce dramatically.

  A. It would convince them.

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