The proposal would require suppliers of digital products from outside the EU to charge VAT on sales to private consumers. However, for these suppliers, in the case of sales to business customers in the EU (at least 90% of the market), the supplier would continue to sell without having to apply VAT (which would be paid, as now, by the importing company under self-assessment arrangements).
Under the compromise reached, VAT would be levied on non-EU suppliers' sales to non-business customers according to a system whereby these suppliers would have to register with a VAT authority in just one Member State, but the VAT levied would be the rate applicable in the Member State where the customer was resident. The VAT revenue would be re-allocated from the country of registration to the country of the customer.
This system would be applied for three years following implementation of the Directive and could then be extended, on the basis of a proposal from the Commission, by a further Council decision.
Taxation Commissioner Frits Bolkestein said: "This measure will remove the obligation for EU firms to apply VAT when exporting to world markets and thus remove a major competitive handicap.”
The EU's announcement did not address the question of how it would enforce the proposal on non-EU businesses.
The Council instructed its experts to finalise the text for agreement at a meeting taking place in February 2002.