Ecofin Council Fails To Agree E-Commerce VAT Rules

by Ulrika Lomas, Tax-News.com, Brussels

27 June 2001

While the US Congress moves closer to extending the moratorium on taxation of e-commerce which expires this October, the EU moves closer (but not much closer) to agreement on a method of taxing digital downloads. These are already taxed when the supplies come from or are made to an EU VAT-registered trader, but the Union has been agonising over how to extend taxation to downloads paid for by individuals or non-registered traders, particularly when the supplier is outside the EU.

The Ecofin Council meeting in June reconsidered this issue, looking at a new set of proposals from its working party which replaced those rejected as unworkable at its meeting last November. The main elements of the proposals are as follows:

• electronically supplied services provided from third countries to non-taxable persons established in the Community should be taxed at the place of the recipient of the services applying the standard rate of VAT, whereas such services supplied from the Community to customers established in third countries should not be taxed in the Community;
  
  
• a simplified scheme based on electronic procedures should be established to facilitate compliance with fiscal obligations by operators who are not established within the Community and who provide electronically supplied services to non-taxable customers in the Community;
  
  
• this scheme permits any third country operator supplying such services by electronic means to non-taxable persons within the Community to fulfil, under certain conditions, his VAT obligations at a single contact point;
  
  
• the non-established operator wishing to benefit from the simplified scheme should comply with the requirements laid down therein and the provisions laid down in the Member State where the services are consumed.

However the UK, alone among the 15 members states of the EU, could not accept these proposals, arguing that this approach would give rise to inequality of treatment for non-EU suppliers compared to EU suppliers, would impos additional compliance burdens on the former, would be difficult for non-EU operators to comply with and near impossible for Member States to enforce, would entail a complex distribution system, would be expensive to implement and difficult to monitor, and would not explicitly be an interim measure.

The UK then proposed a moratorium on all taxation of e-commerce supplies to consumers within the Community, and in the longer term to work with the OECD on the development of an electronic portal system, meeting international agreed specifications which could be enforced by international mutual assistance agreements.

No other country supported the UK's proposals, saying that an international solution was so far off as to be a totally unrealistic prospect. The June Ecofin meeting therefore failed to reach consensus on the issue, merely taking note of the working party's report and leaving the search for a solution to later discussions.

Despite the current opposition of the United Kingdom, it's now more likely than not that a compromise will be reached in the foreseeable future. That won't make whatever scheme that is adopted any more workable, and it will be essentially voluntary for non-EU suppliers, since the EU has no means of tracking e-commerce transactions recorded in a set of books outside its borders, unless outside countries impose the legislation themselves.

It's tempting to see some connection between the US's Foreign Sales Corporation legislation, which favours exporters, and the EU's VAT proposals, which do likewise. Assuming that the US extends its e-commerce tax moratorium in October, which is when the FSC row will escalate further, perhaps there is a possible swap? The US could drop or amend its FSC rules, while the EU copies the US moratorium?

Recommended