The paper compares the US policy of avoiding tax on e-commerce with the EU's determination to tax it as soon as possible, and charts the progress of the EU's directive.

According to the report, the Commissions’ proposals, in the form of a draft Directive amending the Sixth Directive published on 8 May 2000, recognised that to achieve the objective of taxing e-commerce in the real world would require a good deal of persuasion and cooperation as well as legal certainty (largely lacking under the existing rules) and means of practical enforcement. In short, carrots as well as sticks.

The Commission’s scheme had three main carrots on offer:

• A single place of registration enabling the operator to discharge all obligations for EU VAT with a single administration. This would normally be the first Member State where the first taxable supply is made – it would not require a fixed establishment to be present;
  
• An exemption from registration for non-EU businesses whose annual level of sales within the EU is below EUR;
  
• The facility of completing electronically all procedures in relation to registration and making of tax return, together with electronic invoicing.
  

Under the EU legislative system, the Commission alone can propose legislation, but the Council of Ministers representing the 15 Member States must agree unanimously (in the case of tax) to adopt it before it can be implemented in the domestic law of the Member States. The Council can, to an extent, modify the Commission’s draft in order to reach an acceptable proposal. In this particular case, the modifications since May 2000 have been extensive – and involve the removal of the most important carrots, while leaving the sticks.

In particular under a 'compromise' proposal drawn up by the French Presidency, the single place of registration idea has disappeared altogether, leaving a requirement that an on-line service provider should register and account for VAT in all the Member States in which he trades – subject to a much reduced registration threshold of only EUR 5000 per Member State (that is up to only EUR 75,000 in the EU as a whole).

Belgium, supported by the Commission, has proposed an alternative formulation of the earlier proposal – central registration in a single Member State with breakdown of receipts on a macro-economic basis between those Member States where actual consumption of services from that operator takes place.

This harks back to earlier ideas put forward by the Commission for a single place of registration for EU business with a clearing system to direct tax receipts to the Member State of consumption. This was rejected by the Council of Ministers as impractical and open to abuse; there is little reason to believe a lesser version of this rejected idea for non-EU operators would be likely to achieve unanimous approval.

So what is the great concern? It has to be remembered that VAT rates vary from as low as 15% in Luxembourg to 25% in Denmark and Sweden, and the higher rate Member States fear that third country operators will contrive to register in mass where the rates are lowest, and may even opt for the special status of registration in Madeira, where the rate is only 12%. Such registration would give them, in effect, 'Community privileges' i.e. the right to supply final consumers all over the EU at the rate of VAT in the Member State in which they now have their base – leading to feared loss of revenue and 'unfair' competition.

Another and more practical concern, this time in the Commission, is to deal with the question of identification of business customers – how can the on-line service provider determine that the person he is dealing with really is a business customer and not a final consumer masquerading as one to obtain a VAT-free delivery? The Commission’s answer is to recognise the need for an on-line 24 hour verification system to check the existence and validity of VAT registration number, the assurance being that if the supplier makes the necessary check before completing an on-line transaction, his liability will be at an end, and tax will be collected by self-assessment from the business customer.

The Ecofin Council will be returning to the VAT issue next Monday at its regular meeting, but it is unlikely to make much progress given the complexities of this dossier, plus the unresolved issue of majority voting, without which the directive stands little chance of success in whatever form it is presented.

To see the full version of the 'White Paper' by Peter Jenkins and Tim Wilkie, click here.