The Council is adopting the European Commission's proposals for a Directive and a Regulation which will apply to products such as software delivered on-line as opposed to in a physical form, as well as subscription-based and pay-per-view radio and television broadcasting.
Under the new rules, EU suppliers will no longer be obliged to levy VAT when selling these products on markets outside the EU, thereby removing a competitive handicap. Current EU rules, drawn up before e-commerce existed, oblige EU suppliers to levy VAT when supplying digital products even in countries outside the EU.
The proposals are designed to eliminate an existing competitive distortion by subjecting non-EU 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.
The VAT rules for non-EU suppliers selling to business customers in the Union (at least 90% of the market), will remain unchanged, with the VAT paid by the importing company under self-assessment arrangements.
However, the new 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, just as EU suppliers have to do.
Non-EU suppliers will be required to register 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 was resident. In other words, the VAT rate applicable to non-EU suppliers' sales to consumers (so-called B2C) will be the same as the rate applicable to their sales to businesses (so-called B2B). The country of registration would re-allocate the VAT revenue to the country of the customer.
The Council of Finance Ministers agreed on 13 December 2001 that this system concerning how the non-EU suppliers should fulfil their obligations and concerning revenue re-allocation should be applied for three years following implementation of the proposal and could then be extended or revised.
The Council can formally adopt the Directive once the text agreed has been translated into all eleven of the EU's working languages. However, before it can adopt the Regulation that establishes the procedures for co-operation between Member States' VAT authorities, it must re-consult the European Parliament.
Among the criticisms that have been made of the proposal are concerns that the EU should not take action before a global consensus on how to tax electronic commerce has been agreed. The Commission and Member States argue that introducing a moratorium on tax of electronic commerce would be unworkable and would discriminate unjustifiably against traders selling tangible goods. European business is already subject to tax on the provision of electronic services and this proposal is only about extending taxation to non-EU providers of electronic services to EU customers.
The Council contends that it is simply implementing what was agreed at an OECD conference in 1998 on the taxation of e-commerce. The principles from that conference are known as the "Taxation Framework Conditions.” These establish that the rules for consumption taxes (such as VAT) should result in taxation in the jurisdiction where consumption takes place and, for these purposes, the supply of digitised products should not be treated as a supply of goods.
The changes have been attacked by Kenneth Dam, the US Deputy Treasury Secretary. In a statement last week, Dam criticised the EU for implementing its proposal instead of waiting for the OECD to complete its work on a global approach to the taxation of e-commerce. Last month, the Information Technology Association of America criticised the plans, saying they will harm US on-line sales to EU consumers.