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PETER JENKINS comments on the collapse of the compromise proposal relating to VAT and e-commerce put forward by the Swedish presidency of the Council because of the effective exercise of a United Kingdom veto at the ECOFIN meeting on 5 June.
PETER JENKINS comments on the collapse of the compromise proposal relating to VAT and e-commerce put forward by the Swedish presidency of the Council because of the effective exercise of a United Kingdom veto at the ECOFIN meeting on 5 June. THE DRAFT DIRECTIVE on the application of VAT to e-commerce was submitted by the Commission to the Council of Ministers on 8 June 2000. The broad intention is to ensure that all services which are consumed in the European Union are subject to VAT, specifically by bringing within the VAT net services delivered electronically by suppliers based in third countries to both private and corporate customers within the European Union, whether or not the supplier has an European Union establishment or other taxable nexus. At the same time, the intention is to remove European Union VAT from similar 'exported' services from European Union suppliers to recipients in third countries. A broad range of electronically delivered services is intended to be included (much wider for example than the present scope of Article 9(2)(e) of the Sixth Directive), including most forms of entertainment services, software, games and music, data-processing and information, computer services such as web design and hosting and cross-border television broadcasting services for payment. The broad intention is to tax business to business supplies through the reverse charge principle in the hands of the taxable customer, and to tax business to consumer supplies broadly in the country of consumption (i.e. residence of the customer) except in the case of intra-European Union supplies which will continue to be taxed in the supplier's country under the origin principle (tax at the rate of VAT of the supplier).
The third way
The proposals in the draft Directive have not had an easy ride in the Council of Ministers: a major sticking point for the Member States has been the proposal of the Commission to allow business to consumer suppliers the right of registration in a single Member State, without necessarily having a fixed establishment there, with VAT then being due throughout the European Union at the rate applicable in that Member State. At the November 2000 ECOFIN, the French presidency put forward a revised proposal which in effect meant registration in every Member State in which a business to consumer supplier did business, and this proved unacceptable to a number of Member States. As a result, Belgium put up a compromise proposal, which involved the principle of registration in one Member State but with the on-line supplier providing information to the fiscal authorities of that Member State about its supplies to final consumers in other Member States, so that the appropriate rate of VAT could be collected and paid over on those supplies. This proposal was taken up by the Swedish presidency and worked on by the Commission, with the hope of presenting a viable third way solution for business to consumer supplies for adoption at the meeting of ECOFIN on 5 June.
Special scheme
The compromise proposal involves a special scheme for the taxation of business to consumer supplies by third country electronic service providers under a new draft Article 26C of the Sixth Directive. This retains the single place of registration as the contact point for third country operators, but with the place of taxation remaining where the customer is established in the country of consumption. The non-established taxable person has an obligation to state when his activities commence, and if he chooses to use the special scheme, he then registers electronically in the Member State of his choice, which then becomes the taxable person's Member State of identification or contact point. However, VAT will be paid over to the other Member States by that authority on the basis of accounting information provided by the on-line service provider about the extent and location of his sales. The VAT return would be filed electronically to the Member State of identification, and its content transferred to the other Member States or made directly available to them. Under the special scheme of registration, there would be no need for a tax representative and no need for a fixed establishment, but there would also be no wider right of recovery of VAT except under the Thirteenth Directive. Given the unwillingness of some Member States to allow Thirteenth Directive reclaims to certain countries such as the United States, this seems particularly onerous. Under the special scheme, all obligations of third country operators will be carried out electronically and payments will be made to a designated bank account in the Member State of identification paid in euro. Reasonably detailed electronic records would have to be kept for six years and would be available on request to the Member State of consumption by electronic means. Overall responsibility for control would remain with the Member State of consumption, but the Member State of identification would have 'an important role in checking on activities of the compliant operator'.
Place of supply changes
Technically, the necessary changes to the place of supply rules in Article 9(2)(e) would be achieved by adding two new indents; for radio and television broadcasting services, and electronically supplied services such as those described in Annex L. Annex L supplies are described as follows: It is worth noting that the list is deliberately described as non-exhaustive, despite its apparent precision, so that it will be possible for other examples to be included by Member States if they are similar to those mentioned and it is felt that the need to include them arises. It is not clear why games of chance and gambling games are included, given that these are subject to a mandatory exemption. Finally a new Article 9(2)(f) is added to govern the place of supply of the Annex L services as follows: 'When the services referred to in the last indent of paragraph 2(e) are supplied by a taxable person established outside the Community to a non-taxable person who is established or has his permanent address or usually resides in a Member State, the place where those services are provided shall be within that Member State.' Although not included in this place of consumption test, there is a separate provision in Article 9(4) which has the effect of applying the long-stop provision in Article 9(3)(b) to telecommunication services and radio and television broadcasting services, so that where they are supplied by a taxable person in a third country to a final consumer in the Community, tax will in effect be due on a place of consumption basis.
The United Kingdom counter-proposal
In a surprise move very much at the eleventh hour, the United Kingdom has brought forward a counter-proposal, effectively accepting the proposals in the draft Directive to make all exports of digitised services by European Union suppliers free from VAT and all similar business to business sales subject to VAT under the reverse charge rule, but suggesting in effect a temporary moratorium for business to consumer supplies from third country on-line suppliers into the Community. The main United Kingdom objections to the Swedish proposals are first that it taxes non-European Union suppliers on a different basis from European Union suppliers, imposing additional compliance burdens on them, and that the system currently proposed for distributing the revenue raised from taxing these supplies in the different Member States is unwieldy, bureaucratic and inefficient relative to the real revenue at stake. At the core of the United Kingdom proposal is the suggestion that the attempt to tax business to consumer supplies at all should wait until the whole job can be done by electronic means using a portal system, whereby a trusted intermediary will calculate, declare and allocate the consumption taxes that are due on e-commerce supplies both within the European Union and internationally. This trusted third party would collate sales data concerning digitised products sold to final consumers, and operate a tax collection mechanism in effect to calculate the consumption tax due in each country or area where these products were actually consumed. Until such an electronic portal system can be developed, the United Kingdom view is that the attempt to tax business to consumer supplies from third country suppliers should be placed on hold, so that the European Union moves in concert with other Organisation for Economic Co-operation and Development countries towards a workable long-term international solution to the problem. The United Kingdom is therefore pressing for a formal moratorium for all business to consumer sales to final consumers in the European Union – hitherto regarded as unacceptable heresy both by the Commission and the great majority of VAT authorities in the European Union. It is clear from the wording of the proposal that it is intended to apply to European Union as well as non-European Union on-line service suppliers, since otherwise there would be clear discrimination against European Union suppliers. Member States like Sweden and Denmark with 25 per cent VAT rates find it difficult enough to accept the origin rule applying to intra-European Union supplies – they are scarcely going to accept effective zero rating for electronic deliveries by any supplier. Arguably this would be contrary to European Community law because it would discriminate in favour of suppliers who choose to deliver their supplies electronically rather than conventionally, and so threaten the principle of neutrality which governs consumption taxes such as VAT. The United Kingdom proposal was defeated 14 to 1 in the Financial Questions Group meeting in April, and has roused a good deal of hostility both from the Commission and other Member States. It is seen essentially as a wrecking proposal, which makes further progress on the Swedish compromise virtually impossible in the short term, and certainly rules out adoption of the draft Directive at the 5 June ECOFIN. The question will be how the United Kingdom reacts if it is completely isolated in ECOFIN, and there is strong pressure from the rest to move towards adoption of the draft Directive or something very like it. The other Member States have made clear that they will not accept a proposal which fails to deal with business to consumer supplies, but only puts in place the proposals for exported digital services and business to business supplies. The matter is likely to be handed over to the Belgian presidency, and brought forward again at the ECOFIN in November 2001, where, if the United Kingdom continues to block the proposals, there is likely to be a political price to be paid.
Temporary respite?
The United Kingdom stance can be seen, to some extent, as directed at an American audience, and may owe quite a lot to pressure put on the Blair Government by the Bush administration and by United States businesses. Certainly United States on-line service providers will welcome the respite that the United Kingdom proposal for a moratorium appears to give them – though it is probably no more than a temporary respite. There is every likelihood that the present position is a set-back rather than a defeat for the European Union's proposals on the taxation of e-commerce, although realistically the likely implementation date is now well into 2003. In the meantime, European Union on-line service providers will be frustrated that zero rating for their exported services remains only partial (because of the limited definitions in Article 9(2)(e)); and the high rate Member States may take some comfort from the United Kingdom's suggestion that the new system, when it does come in, should also cover intra-Community electronic supplies. This would mean scrapping the origin rule which presently allows businesses established in the European Union to supply final consumers in high VAT rate Member States, such as Sweden and Denmark (25 per cent) from Madeira (12 per cent), Luxembourg (15 per cent) or Spain (16 per cent). On-line service providers (and for that matter telcos) in the European Union would be well advised to start lobbying hard against this (since the high rate States are pretty keen on it). Those in the United States and other third countries should bear in mind that they too can join the club and get 'Community privileges' by electing for normal registration in a Member State of choice by setting up their stall there (a fixed establishment). Although this may carry a direct tax cost, it may be a better bet than the special scheme for a single place of registration in the current proposal – if it ever comes to pass. Peter Jenkins is United Kingdom head of indirect tax at Ernst & Young.
