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EU Commissioner Answers Net VAT Critics As Ministers Meet

Ulrika Lomas, Tax-news.com, Brussels

17 October 2000

EU Finance Ministers were due to meet on Monday with the new VAT Directive covering Internet sales on their agenda for the first time, and Taxation and Internal Market Commissioner Frits Bolkestein issued a plea for the plan not to be misunderstood.

The proposals call for digital imports into the EU (presently classed as services and therefore not taxable if delivered to unregistered traders or consumers) to be taxed by requiring significant importers to register in one EU member state and to route all their EU imports through that state, paying tax as they do so.

Few people think that the proposals stand much chance of obtaining the unanimous consent required for them to become law, because those countries with high VAT rates will be put at a considerable disadvantage by the new tax unless the money collected is shared out among the eventual destination countries - a bureaucratic nightmare, riddled with opportunities for avoidance and fraud.

Writing in the Financial Times, Bolkestein addresses some of the criticisms that have been directed at his ideas:

'Surprisingly, however, these proposals have provoked a range of criticism, not all of which has been equally well informed. For example, some businesses in the US argue that if Europe implemented the proposals, it would be pre-empting global agreements on the taxation of the internet to be made within the framework of the Organisation for Economic Co-operation and Development. That is untrue. The proposals are neither more nor less than what was agreed by OECD Ministers in Ottawa in 1998.'

The Commissioner is well aware of the evasion issue: 'Other critics argue that it will be impossible to control effectively the payment of VAT on digital services. True, the VAT system in general - and not particularly in an e-commerce context - is plagued by tax evasion. But most companies are honest and wish to comply with the law. The explosive development of e-commerce does raise issues of law enforcement that may be difficult to tackle, but these go beyond the issue of just taxation.'

Frits Bolkestein ends by addressing a (vain?) appeal to the Ecofin ministers: 'When European ministers meet today to discuss our e-commerce taxation proposals for the first time, I hope that the determination to modernise our economies will prevail over short-term revenue considerations.'

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