On Tuesday, the European Council of Economics and Finance Ministers gave its political agreement, without discussion, to proposals for a Directive and a Regulation. The rules will apply to products such as computer games and software, delivered on-line as opposed to in a physical form, as well as to subscription-based and pay-per-view radio and television broadcasting. Member States are due to implement the new rules by 1st July 2003.
European Commissioner for taxation Frits Bolkestein commented:
"I am delighted that the Council has at last been able to agree the important Directive on applying VAT to digital products. 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 new rules will ensure that EU suppliers will no longer be obliged to levy VAT when selling these products on markets outside the EU. Current VAT rules, drawn up before e-commerce existed, subject electronically delivered services originating within the EU to VAT irrespective of the place of consumption, whilst those from outside the EU are not subject to VAT even when delivered to consumers within the EU. The new rules will also eliminate an existing competitive distortion by subjecting non-EU suppliers to the same VAT rules as EU suppliers when they are providing electronic services to EU customers, something which EU businesses have been actively seeking.
Under these new rules, no obligations will be imposed on non-EU suppliers selling to business customers in the EU (so-called B2B sales which constitute at least 90% of the market), since the VAT will be paid by the importing company under self-assessment arrangements.
However, the rules will require for the first time that suppliers of digital products from outside the EU will have to charge VAT on sales to private consumers (B2C), just as EU suppliers have to do. Non-EU suppliers will be required to register using special simplified arrangements with a VAT authority in any one Member State of their choice, and to levy VAT at the rate applicable in the Member State where the customer is resident. The country of registration will re-allocate the VAT revenue to the country of the customer. This system concerning how the non-EU suppliers should fulfil their obligations and concerning revenue re-allocation will be applied for three years following implementation of the proposal and may then be extended or revised.
Non-EU suppliers' B2C sales into the EU will not be treated identically to EU suppliers for VAT purposes but the Commission says that the rules will be fair and will meet fully non-discrimination obligations under the World Trade Organisation (WTO). Non-EU suppliers will be subject to simpler and lighter administrative requirements than those applied to EU traders and other non-EU businesses carrying on activities in the EU.
The Council can formally adopt the Directive once the text agreed has been translated into all eleven of the EU's working languages and once the Parliament has given its opinion about the Regulation that establishes the procedures for co-operation between Member States' VAT authorities and for revenue-sharing.