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Council Directive 2002/38/EC, in force from 1st July 2003, changes the EU rules for charging Value Added Tax (VAT) on the supply over electronic networks (i.e. digital delivery) of software and computer services generally, plus information and cultural, artistic, sporting, scientific, educational, entertainment or similar services. From now on, these services will be taxed in the country where the customer resides rather than where the supplier is located.

For the purpose of the Directive, the services concerned are defined as "electronic services" or "electronically supplied services". The changes in their tax treatment will eliminate a long-standing competitive distortion by ensuring that both non-EU suppliers and EU suppliers are subject to the same VAT rules when they are providing electronic services to EU customers.

From 1st July 2003, EU suppliers will no longer be obliged to charge European VAT when selling on markets outside the EU.

When a non-EU supplier sells to business customers in the Union (at least 90% of this market), there will in practice be no change and the VAT implications will be handled by the acquiring company in the EU under self-assessment arrangements.

For the non-EU supplier whose EU customers are non-business individuals or organisations, there will now be an obligation to charge and account for VAT on these sales just as EU suppliers have to do.

No. The proposed taxation framework contains a number of elements designed to make the operation of the tax as simple as possible and, in particular, to ensure that it is not disruptive or onerous for suppliers of digital services.

The vast majority of e-commerce supplies (more than 90%) are business to business and in these cases VAT will be accounted for by the customer, under the reverse charge (self-assessment) mechanism, with no obligations for the supplier. The Commission has already initiated the measures needed to modernise and enhance the VAT information exchange system (VIES) network to allow for on-line real time confirmation of VAT status. In this manner, tax administrations will provide traders with the means to distinguish the status of their customers (i.e. whether the customer is a VAT-registered business or not) and so help to determine whether or not a transaction should be charged with tax.

As regards business to private consumers (so-called B2C) sales, the single place of registration introduced under the new Directive will provide the non-EU traders with the option of discharging all VAT obligations through a single administration.

Thus, far from adding complexity to the VAT system, the introduction of measures to apply VAT to e-commerce can be a driver for the rationalisation and simplification of tax administration generally.


Although there are differences in treatment between different categories of businesses, this does not amount to discriminatory treatment and the Directive is fully consistent with WTO obligations on non-discrimination. Such differences in tax treatment are a normal feature of any tax system. There is nothing new about requiring non-resident businesses to register and account for VAT in respect of taxable activities that they carry on within the EU - there are already many thousand such registrations. Therefore, the changes made in the Directive are for the most part an extension of the rules already in place for non-established businesses that have taxable activities in the EU.

The most significant new feature introduced by the Directive is the simplified scheme which can be availed of by non-EU operators making B2C supplies into the EU. This simplified scheme has been designed to recognise the unique circumstances of non-established traders providing digital services and to provide a fair and efficient means for these traders to meet their fiscal obligations. This does not involve discriminatory treatment, but rather acting in response to business demands, provides a taxation framework that facilitates the emerging e-commerce environment. The registration aspect of this simplified scheme will be easier to operate and more business-friendly than the existing rules for non-resident businesses. Indeed the day-to-day operation of the simplified scheme is a good deal more straightforward than that currently faced by most EU businesses. This scheme of course carries the benefit of a single point of contact for the entire Community, with a set of simplified, harmonised tax obligations.

As far as the impact of differences in VAT rates are concerned, the overall impact on non-EU businesses who avail of the simplified scheme is likely to be neutral vis-à-vis their competitors who set up in Europe. The non-EU business will collect tax from their European customer at rates of between 15% and 25% depending on where they are located whilst European companies will charge taxes according to the rate where they are established, again between 15% and 25%.

Furthermore, requiring non-established traders who opt for the simplified scheme to charge VAT at the rate of the Member State of consumption is not administratively difficult and is compatible with most common tax computation software.

Where the Internet or another electronic network is used simply as a means of communication, this does not necessarily create an electronically supplied service. Any one of the national tax administrations will be happy to provide more guidance on what services are affected.

Only when it makes business to consumer (B2C) sales to customers in the EU.

The Directive gives a number of options to a non-EU business which finds it has to collect and account for VAT. The choices for achieving compliance include establishing within the EU or registering as a non-established supplier in each Member State of the EU where taxable activities are conducted.

The Directive however also introduces a new special simplified scheme whereby non-EU suppliers who are affected by its provisions may choose to register with a single VAT authority in a Member State of their choice.

Under this special scheme, all the procedures they need to fulfil - registration, payment and reporting - will be handled through the tax administration which they have selected, which will also give them guidance on how to meet their obligations.

The non-EU e-commerce business using this special simplified registration scheme will be offered a set of procedures which are easier to operate and more business-friendly than the existing rules for non-resident businesses generally. The single registration model provides a streamlined set of obligations that can be easily completed online without the need for a fiscal representative or for any physical presence.

Yes. The standard rate of VAT also applies to the vast majority of content supplied via traditional media - music, software, video, etc. - so there will be no issue of discrimination compared with electronic media which under the Directive is taxable at the standard rate in all Member States.

Current VAT legislation permits reduced rates of tax (or in some cases a zero rate) on printed material. Books, newspapers and periodicals are amongst the most common items to which Member States apply reduced rates.

But it is by no means clear that digital information services are the direct equivalent of traditional printed products - even where the content is similar, the additional functionality (e.g. search facilities, hyperlinks, archives) increasingly associated with electronic content produces a fundamentally different product.

The Commission is, in fact, due shortly to present a proposal for a global revision of the reduced rates of VAT. The objective will be to simplify and ensure a more uniform application of VAT and thus improve the functioning of the Single Market. The proposal will aim to eliminate potential distortions of competition by giving all Member States equivalent opportunities to apply reduced rates in certain areas and by rationalising the various derogations in terms of rates that exist at present.

In fact the changes that the new Directive will introduce will bring the EU VAT system into line with agreed OECD principles on taxation of e-commerce and rectify a fundamental competitive inequity that today operates to the detriment of European based e-business.

The OECD principles on the taxation of e-commerce were agreed at a 1998 conference in Ottawa. These principles establish that the rules for consumption taxes (such as VAT) should result in taxation in the jurisdiction where consumption takes place. The OECD also agreed that a simplified online registration scheme, as now adopted by the Council, is the only viable option today for applying taxes to e-commerce sales by non-resident traders to private consumers (so-called B2C). This is exactly what is now being implemented in the EU - initially for a three-year period which can then be renewed or refined as developments dictate.

A moratorium would only have been of benefit to those who wished to ensure that an equitable tax system is not developed. This would have put Europe out of step with the emerging international consensus on fair and predictable rules for taxing e-commerce and would have created a climate of uncertainty that would further hamper the development of e-commerce within the Community.

Although one Member State did briefly consider a tax moratorium, no sustaining arguments could be found and the suggestion was eventually withdrawn. All Member States have now rejected a moratorium on a number of grounds:

  • it does not respect the OECD taxation framework conditions and would undermine the OECD process

  • experience had shown that a moratorium on taxation that would be very difficult to reverse would lead to uncertainty and delay in providing a clear legal framework for the development of e-commerce

  • the EU Directive is the first step in achieving an international solution and the obligation of reviewing it in 2006 reflects a realistic assessment of the pace of the ongoing work in the OECD

  • it is at best wishful thinking to imagine that a moratorium would accelerate the commitment of business to developing more technical tax collection mechanisms, and

  • a moratorium would introduce active discrimination - for instance, music on traditional media such as CDs would carry a tax penalty compared with music on the Internet.

There is no realistic way of applying such a threshold to electronic transactions. Traders providing electronic services have never, in fact, seriously pursued this issue.

In fact, the VAT exemption for small packages is giving rise to an increasing amount of market distortion with the increase in distance sales that has been facilitated by the Internet, and it is currently under review. The exemption is limited to goods the total value of which does not exceed €22. Member States also have the option of excluding from the exemption goods that are imported by mail.

Moreover, the exemption applies to the tax chargeable at import on physical goods and it is the purchaser who benefits from the threshold. The exemption, which runs counter to the fundamental principle of VAT as a broad-based tax on consumption, is provided for practical reasons to avoid the need to collect small amounts of tax from private consumers. This does not apply to digital services where the tax will be collected by suppliers.

The level of revenue currently is not an issue. Because this is still a developing area, it is difficult to determine the level of taxable activity and therefore revenue involved. But the Commission has always made it clear that revenue-raising is not the objective of the Directive. What is important is to correct the competitive imbalance and to establish an equitable taxation structure that addresses e-commerce in a fair and realistic manner.

To suggest waiting until the tax revenues become more significant does not make sense given that the key objective of the Directive is the provision of a level playing field for EU business.

This view is at odds with conclusions currently being reached by OECD countries in a process that includes substantial business involvement. It can only be seen as representing the position of a business sector that is fundamentally "anti-tax" and simply does not want to see VAT imposed on e-commerce in any shape or form.

The VAT system is based on voluntary compliance and this tradition will continue. The reality is that legitimate business will want to operate within the law and satisfy audit obligations to ensure that their commercial rights are respected. Legitimate operators certainly do not want to give credence to the idea that Internet is a zone where laws do not apply - the role of voluntary compliance should not therefore be underestimated. Tax administrations must create an environment where compliant operators do not face unfair competition. Where businesses choose to operate outside the law, enforcement efforts must ensure that this is detected and rectified.

Regulation of the Internet is an issue that goes well beyond taxation. Considerable progress has already been made in the development of regulatory and legal structures for cross border e-commerce and Internet communications generally. Solutions to these issues must be found not just for taxation, but for related issues such as copyright and intellectual property protection as well as more general questions of public policy.

Nobody is seriously suggesting that, simply because legal enforcement and regulatory issues on the Internet present new challenges, nothing should be done about these issues. Tax laws are ultimately just as enforceable as any other laws or regulations affecting e-commerce.

The requirement to make a taxing decision based on customer location is one that applies to all operators, irrespective of whether they are EU or non-EU suppliers.

The Commission and Member States are of the view that the measures expected of suppliers should be proportionate (these are mainly low value transactions) and realistic in the light of a technology that is still developing. For the most part, deciding tax on the basis of a customer declaration, which is potentially verifiable against a credit card billing address or by geo-location tools, is both acceptable and in line with business practice. In fact, global E-commerce businesses already use similar methods for commercial purposes or to respect legal or regulatory constraints. More detailed guidance on how information from customers should be treated and how it should be verified will be provided by the individual national tax administrations on request.

This potential is almost entirely theoretical. Although Member States always maintain the right to control taxable activities occurring within their own jurisdiction, Member States are in agreement that, in practice, any audit of a 'special scheme' participant will take place via the Member State of registration.

This is far from being the case. As far as the legislative changes provided for in the Directive are concerned, implementation measures or interpretation questions will be considered by one of the committees that the Commission operates to bring Member States together to discuss VAT administration issues - the Standing Committee on Administrative Co-operation (SCAC) and the VAT Committee. The electronic information and revenue distribution scheme provided for in the Directive requires a common approach and a common set of technical standards for all Member States. Given this essential level of standardisation, it is to be expected that the external interface of the system will be constant between Member States. In short, a non-EU business should expect to be confronted with the same compliance requirements and the same interpretation and coverage, no matter which Member State of contact it chooses.

For a business using the special scheme, the rate of tax to be charged on the value of a transaction is the standard rate of VAT applicable in the Member State where the customer is resident. Currently, these are as follows:

Czech Republic21% (as of 01/01/2013)
Spain21% (as of 01/09/2012)
Ireland23% (as of 01/03/2012)
Cyprus18% (as of 14/01/2013)
Latvia21% (as of 01/07/2012)
Hungary27% (as of 01/01/2012)
Netherlands21% (as of 01/10/2012)
Slovak Republic20%
Finland24% (as of 01/01/2013)

The national administrations will also explain how to account for this tax, how to prepare and submit a declaration or return and how payment should be made.

As a result, the VAT rate applicable to non-EU suppliers' sales to consumers will in any Member State be the same as the rate charged by a local supplier. The country of registration will be responsible for re-allocating the VAT revenue to the country of the customer on the basis of the information supplied by the non-resident business.

Neither category of business would need to use the special scheme. If they require further information about VAT on electronically supplied services, they should contact their professional advisors or the tax administration of the Member State where they are established or registered.

A basic principle of the European Community VAT system set out in the Sixth VAT Directive (77/388/EEC) is that each business in the chain charges the tax on the supply that he makes and deducts the tax on the supply that he receives (i.e. the input tax).

As the special scheme is intended for businesses which do not have a physical presence in the EU, the question of input tax credit should not normally arise.

However, if such a business had to pay VAT on goods or services acquired for the purposes of its taxable business activities, the thirteenth Council Directive (86/560/EEC) concerning arrangements for the refund of value added tax to taxable persons not established in Community territory would apply to ensure that the tax could be recovered from the Member State where it was incurred. For more information on this procedure, the business should contact the tax administration concerned.

A business that considers that it could be affected by the new Directive, or a person acting in a professional capacity for clients who may be so affected, should contact one on the EU's national tax administrations by clicking on one of the following links: