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Thursday, 25th April 2024 |
| Digital services and VAT confusion |
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| The EU have still not arrived at a solution to the levying of VAT on e-commerce. Normally business would welcome a failure to levy taxes. In this case however the lack of progress handicaps EU digital supplies and favours their non EU competitors. A solution is urgent. |
Agreement on how to tax digital supplies is being sought in the EU because, at present, there is no provision in the 6th Directive requiring the supplier to register and account for VAT on these supplies, where the supplier is established outside the EU.
EU-based suppliers are however required to account for VAT in the country of origin on the same electronic transaction with the same customer. This results in tax-driven distortion of competition because suppliers of digital products (eg software, music, video, information etc) can currently sell and deliver their products over the web without the need for a physical presence in the country of consumption.
Last year, the Commission proposed amendments to the Directive aimed at implementing the principle of ‘Taxation in the Place of Consumption’ for non-EU supplies of digital products, including supplies of broadcasting. Various ways of achieving this have been considered by the Member States since the initial draft amendments.
There are two separate proposals currently under debate:
• The Swedish Proposal
This involves non-EU suppliers applying the rates and rules applicable in each Member State according to the place of consumption, but having only a single point of registration within the EU with the Member States taking responsibility for sharing information and revenues.
• The UK Proposal
This has two components. In the longer term, there would be a technology-based solution, provided by a trusted third-party (TTP), which the UK say would ensure neutrality regardless of where the supplier belongs. The TTP would calculate the amount of VAT due, charge it, collect it and allocate it amongst the various Member States. Non-EU suppliers would not have to register for VAT in the EU but would use the TTP. In the short-term, the UK are suggesting an exemption (with credit for VAT recovery on costs) on digital supplies for both EU and non-EU providers alike.
What this means for business
The OECD wants to ensure that services are not treated differently just because they are supplied via the Internet. They have put forward some aims for the taxation of e-commerce transactions - namely: neutrality, efficiency, certainty, simplicity, effectiveness, fairness and flexibility. Neither of the two proposals are perfect in this regard and therefore the ECOFIN members have found it difficult to reach a consensus on this complex issue.
Swedish Proposal
The Swedish proposal provides a practical approach in that non-EU vendors would register in a single EU Member State but, unlike the original proposal, they would be required to charge VAT at the rate applicable in the EU Member State where the place of consumption occurred.
However, it would require non-EU vendors to verify at the time of each sale the place of consumption. Existing technologies may not be able to perform real-time online verification of the location of the customer. Additionally, non-EU and EU suppliers of the same products would not be treated neutrally. EU suppliers would be required to account for VAT where they are established whereas non-EU suppliers would need to account for VAT where their customer is located.
UK Proposal
Whilst non-EU and EU suppliers of digitised goods would be treated the same, the alternative short-term proposals are not neutral in relation to EU-based suppliers of the equivalent tangible product - who would be left at a VAT disadvantage. For example, the sale of music/software/games delivered on disc would be subject to VAT at the standard rate compared with the exemption they would benefit from if they were sold by downloading them from the Internet.
The alternative long-term proposals would also not be neutral as the supplier of the equivalent tangible products would have to register for VAT where it supplies goods and would incur significant administrative and compliance costs in each Member State. By contrast the online supplier of digitised goods would be able to shift these responsibilities to a TTP.
Summary
The original proposals were put out about a year ago. Since then, there have been the two revised proposals discussed above - neither of which meet the OECD objectives in full. The Ecofin Council of EU Ministers stated on June 5 that there is a ‘compromise proposal’ - which may be one of those mentioned above, or indeed a totally new idea. Even this does not currently have the full support of all EU Member States.
In the meantime, EU suppliers of digitally delivered goods are at a competitive disadvantage against non-EU suppliers when selling to the EU market. Also, at a time when many businesses are making already difficult decisions regarding product development, pricing models and systems, uncertainty over the final impact of VAT on these issues is not to be welcomed.
There is no easy solution to the VAT issues raised by digital distribution and, perhaps, there is little incentive for one whilst commercial digital distribution is still in its infancy and there is little real revenue loss at stake. The current situation could however change rapidly as advances in the technology (for instance the introduction of third generation mobile telephony) make digital downloading a normal part of our daily lives. |
Niall Campbell is Director in charge of VAT services at KPMG.
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| Article appeared in the June 2001 issue.
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