UK Scuppers The EU's E-Commerce Tax Directive

by Jason Gorringe, Tax-news.com, London

16 May 2001

The United Kingdom has opposed the EU's proposal to impose VAT on e-commerce transactions within the EU with such precise timing that it looks like the directive will be completely scrapped, forcing the EU to go back to the drawing board.

The proposal suggested that non-EU businesses selling digital goods to consumers within the EU should be subject to VAT, just as their EU competitors are. Non-EU businesses would only need to register for VAT in one EU country for all their products and the revenue generated from the registrations would then be redistributed throughout the EU member states under a clearing house system.

As a tax directive, it needed the approval of each and every one of the 15 member states before it could implement the plan and the UK's decision to vote against it was a major blow. Just as the proposal was on the verge of unanimous approval after almost a year of political debate, the UK called for a moratorium on taxing commerce between online suppliers and their EU consumers. It is doubtful that all the other member states will agree with the UK, particularly at such short notice, and thus the accord looks scuppered.

Tony McClenaghan, Indirect Tax Partner at Deloitte & Touche, commented: 'This last minute change is a bitter blow to the European Commission which has been searching for a way in which to tax electronic transactions for the last five years now. It is unlikely the UK opposed the proposal on the grounds it was difficult to implement, but rather it may have feared further confrontation with the US at the World Trade Organisation round in Qatar in November leading to a new trade war.'

He added: 'Non EU suppliers of music, games, books and software that can be downloaded from the Internet will welcome the move, which means they will not have to charge VAT. However, the news is a blow to EU suppliers of digitised products, already suffering from the economic downturn. As we still look a number of years away from getting agreement on how to apply tax to this type of electronic transaction, many of these companies will be encouraged to relocate offshore in order to save tax.'

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