The British Treasury Is Right (For Once) In Opposing The EU's VAT Proposals

by Jeremy Hetherington-Gore, Tax-News.com, London

25 May 2001

The impasse being reached by the EU's proposal for taxing e-commerce supplies by non-EU companies to EU consumers is throwing up some highly contradictory attitudes on the part of legislators and commentators.

Financial Times journalist Michael Peel, who often writes quite sensibly on tax matters, claimed in yesterday's newspaper that Britain is sabotaging the EU's initiative as a result of lobbying by the US. 'The British recalcitrance,' writes Mr Peel, 'risks destabilising an initiative that is crucial to all EU member states. The arrival of the internet demands politically sensitive reforms to traditional methods of calculating VAT. The reform proposals are the first step towards a more straightforward and logical system'.

Meanwhile, an MEP's letter in the same edition of the FT calls the Commission's proposal 'misguided'. 'I am pleased to read', says Diana Wallis, author of the Parliament's Opinion on the subject, 'that the government now agrees with me that there is no point in promoting legislation that cannot be enforced. This proposal is a complete waste of time and sends all the wrong messages about encouraging the new economy.'

The history so far: VAT-registered EU suppliers of digital goods to consumers inside the EU have to charge VAT at the rate of the country from which the supply is made; non-EU suppliers don't have to charge it (if the buyer is VAT-registered, they cough up under the reverse-charge mechanism at the rate applying to their own Member State). The EU proposed that non-EU suppliers be made to register in one (any one) Member State, and charge VAT at the rate in force in that Member State. The current state of the proposal is that they can register anywhere, but will charge VAT at the rate in force in the country of the buyer; then the country of registration will divide up the revenue collected among the Member States, presumably keeping a collection fee.

Apart from the well-rehearsed arguments for and against an Internet tax moratorium (which might lead the EU to zero-rate all digital content sales, if it weren't the EU) the arguments against the proposed tax are quite straightforward, and have got nothing to do with the US. The tax is largely uncollectable, and the proposals are a bureaucratic nightmare. No doubt a large non-EU company with EU subsidiaries would feel obliged scrupulously to add up its sales of digital content into the EU (big difficulties of definition, though - what is 'a company'?) and register accordingly, but why would your average Costa Rican or South African or even US music retailer bother to measure its sales into the EU? How will it know the buyers are in the EU? How will the EU know that sales are being made into the EU? It's ludicrous.

The only result of this legislation will be to penalise large companies as against small ones, and to erect a veritable forest of regulations and investigatory powers which will severely impede the already glacial pace of e-commerce development in Europe. The British Government, which seldom gets anything right when it comes to tax, is just for once doing the right thing; and if it happens to serve US interests in doing so then Europeans should remember that when they try to slap $5bn worth of sanctions on the Americans in the autumn after Foreign Sales Corporations are knocked on the head, they will need all the goodwill they can get from the Bush administration.

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