Jean Monnet Center at NYU School of Law


IV. Solutions

Subsequent to identifying the specific fields of dysfunction of the Sixth Directive in the digital world and estimating its possible impact on the common market, this part aims at exploring potential ways of resolving these anomalies.

1. Principles of the Prospective Amendments to the Sixth Directive

Any tax system should be based on a set of higher principles to function properly.271 Some of these principles, such as neutrality, legal certainty, convenience and efficiency are acknowledged since the 17th century,272 while others have developed recently with the emergence of modern tax regimes.273 The most important implication of electronic commerce on the guidelines of a prospective VAT system is the necessity for international consensus. Since digital trade is truly global, national actions are not viable anymore without the consent of the involved trading partners.274

The European Community recognized this fact when adopting the Green Paper, which articulated the need for the adjustment of the present VAT regulation for the first time.275 Since then the Community has been working to find a feasible solution to the problems in close cooperation with the OECD.276 Being the pioneer of the widespread use of value added tax worldwide277 and an expert in applying such tax to cross-border transactions the Community's role in finding an internationally acceptable answer to the questions at hand is outstanding.

The Commission, representing the European Community in the OECD,278 prepared a Communication in 1997 with the intention to propose a background for future international dialogue.279 The document draws up the guidelines for the necessary amendment of the VAT regulations. The proposed guidelines reflect the dual aim of enhancing the growth of electronic trade as best as possible while preserving the functionality of the existing regulatory framework.280 This duality follows from the fact that even though Europe wishes to take advantage of the great economic opportunity brought about by e-commerce, it also has an interest in protecting the revenues and competitiveness of its Member States.281

The proposed guidelines rest on four basic postulates set forth at the outset of the Communication.282 First of all, the Commission reinforces the requirement of the broad applicability of VAT. It expresses the assumption that all supplies of goods and services taxable at the moment will remain so according to the amended regulations as well. Further, the old tax principles of legal certainty, simplicity and neutrality are reaffirmed.

According to the first guideline there should be no new taxes applicable to electronic commerce.283 This requirement follows from the principles of neutrality and simplicity. Neutrality in this context means that the method of commerce used to effect transactions should not influence the consequences of taxation.284 The principle of simplicity aims at keeping the compliance burden of the tax system to a minimum.285 For the sake of these postulates the Commission rejected attempts to design new types of taxes, such as the `bit tax' or the `transaction tax' with regard to e-commerce.286 Hence, efforts should be concentrated on adapting existing taxes to the digital environment.

Electronic transmissions should be treated as services in line with the second guideline set forth by the Commission.287 The rationale behind classifying digitized goods as services, as examined in the previous chapters follows from the principle of broad applicability of VAT.288 Due to the lack of tangibility in case of electronic transmissions this classification is the only way to catch these transactions for VAT purposes. By clearing up the uncertainty surrounding the interpretation of digital deliveries at the moment, this guideline also serves the purposes of legal certainty, which is essential for reducing the risks of unforeseen tax liabilities.289

The third guideline aims at implementing the idea of VAT as a tax on consumption to a full extent.290 It sets forth the application of the European VAT merely on goods and services supplied for consumption within the Community. This guideline reacts to the disadvantageous situation of European businesses following from the present regulations. Implementation thereof will put an end to the discrimination against European suppliers under the existing system and will ensure fair competition in the common and the global marketplaces.291

The efficiency of any tax system largely depends on the voluntary compliance of the taxpayers.292 One of the core objectives of the VAT system therefore should be the minimization of the compliance burden. To put the principle of simplicity into practice the fourth and sixth guidelines express the need for a practical and flexible tax mechanism fully in line with commercial practices.293 Administrative rules should take account of the diversified, decentralized and evolving nature of the electronic market.294 For the sake of such requirements the Commission proposes to facilitate electronic invoicing and the discharge of fiscal obligations by means of electronic VAT declarations and accounting.

When voluntary compliance fails, tax systems should be ready to enforce fiscal obligations.295 This requirement is set forth by the fifth guideline. As it will be seen below, enforceability is the Achilles heel of the prospective VAT system. Enforcement causes problems owing to the difficulties in identifying suppliers and customers in general within the digital world.296 However, the problem is more acute with respect to foreign suppliers. On what grounds and by which means can the European system oblige third country enterprises to comply with Community rules?297 The proposal of the Commission detailed in the next chapter tries to find the answers to these questions.

The above guidelines served as a ground for discussion at the OECD Ottawa Conference in 1998.298 The meeting was one in a series of early international policy moves to determine the framework for global taxation of online trade. As a result of the conference a document entitled "Electronic Commerce: Taxation Framework Conditions" came into existence.299 On the field of consumption taxes the Framework Conditions are entirely based on the Commission's proposal. With the international acceptance of the guidelines the Community has got `green light' to pursue its work for the betterment of the VAT system in line with its original ideas. The OECD, through its Committee on Fiscal Affairs, has also been working ambitiously to further the effective implementation of the Framework Conditions.300

2. Proposal for a Council Directive Amending the Sixth Directive

After identifying the anomalies of the European VAT system and the principles set forth to guide amendatory legislation, this chapter aims at examining the ideas of the Community institutions on translating the guiding principles into legal measures capable of clear implementation. In the center of the scrutiny will stand the Proposal of the Commission put forward last June for a Council Directive amending the Sixth VAT Directive.301 Account will also be taken of the respective opinions of the Parliament and the Economic and Social Committee, which discussed the Proposal in line with the consultation procedure.302

A. The Proposal in General

The Proposal addresses a very narrow field of electronic commerce.303 Within the sphere earlier defined as direct electronic commerce, it focuses on the issue of cross-border supply of digitized products, with special regard to those destined to final consumers in the Community. It defines the term `supply by electronic means' to delineate the types of supplies covered by the scope of the amendment.304 The Proposal treats digital deliveries as services implicitly, without any express reference to the underlying OECD principle.305

The Proposal contains two separate sets of provisions. The redefinition of the place-of-supply rules for electronic deliveries and the amendment of connected administrative provisions necessary for the implementation of the redefined rules form the heart of the Proposal. The other key point of the document is the set of provisions facilitating the discharge of VAT obligations by electronic means.

B. Place-of-Supply Rules

The Proposal sets forth two distinct places of supply for digital deliveries in accordance with the varying tax status and location of the recipient.306 The proposed place-of-supply rules represent an amendment to Article 9 of the Sixth Directive. Without interfering with the basic structure of this Article as described in part III, the Proposal introduces an additional lex specialis. The scope of the new subsection (f) in section (2) of Article 9 would cover services specifically listed therein. The list contains traditional and novel types of services:

"(f) mentioned in point (c) first indent [i.e. first indent of subsection (c) section (2) of Article 9 of the Sixth Directive] as well as of software, of data processing, of computer services including web-hosting, web-design and similar services and of information..."

(a) Place-of-Supply Rule I.

The first rule determines the place of supplies destined to European businesses or recipients located outside of the Community.307 This rule reiterates the already familiar structure of subsection (e) section (2) of Article 9 by deeming the location of the customer as the place of supply. It extends the scope of the reverse charge to European business customers receiving digital supplies from abroad or from a business located in a different Member State. Consequently, in these instances the duty to account for and pay the tax lies with the business customers.308 As to digital transmissions to customers residing outside of the Community, the scope of the Sixth Directive would not cover these transactions.

(i) `good faith' clause

For the implementation of the extended reverse charge the Proposal provides for an amendment to article 21 of the Sixth Directive defining the persons liable for paying the tax. The Proposal introduces a so-called `good faith' clause309 allowing the supplier release from liability for the fulfillment of VAT obligations upon the verification of his customer's taxable status.310 The `good faith' clause requires the supplier to act with "all possible diligence" in the course of verification. Normally, reference to the VAT registration number of the customer satisfies this standard of conduct,311 but the section seems to be ready to accept verifications by other means, namely by "a consistent set of data from an independent source."

(ii) joint and several liability

Despite compliance with the `good faith' clause suppliers might be held jointly and severally liable for payment of tax if the VAT legislation of a Member State requires so.312 This opportunity of the Member States follows from article 21 of the Sixth Directive originally applicable for services covered by subsection (e) section 2 of Article 9. By extending the use of the reverse charge method to digital deliveries the corresponding extension of joint and several liability is justified by the reason of avoiding accidental non-taxation.

(b) Place-of-Supply Rule II.

The second place-of-supply rule determines the place of transactions to final consumers within the Community.313 It deems the location of the supplier's business or fixed establishment as the place-of-supply. Though this rule belongs to the lex specialis, it results in the practical extension of the general place-of-supply rule of the Sixth Directive to business-to-consumer digital transmissions.314

(i) registration

It has already been demonstrated in the previous part of this essay that the sole determination of the place of supply does not ensure taxation with certainty in cases of supplies provided by businesses established in third countries. To correct the mistakes of the lex generalis it is necessary to introduce supplementary rules firmly establishing the taxing jurisdiction of the Community with respect to foreign businesses.

At present there are two possible ways of collecting tax from foreign enterprises lacking physical presence in the country of taxation.315 One is to require such enterprises to appoint a fiscal representative in the destination country to duly discharge VAT obligations on their behalf. The other is to oblige foreign businesses to register for VAT purposes in the destination country.

The institution of fiscal representative, as mentioned previously, already exists under the Sixth Directive.316 However, this system of representation has proven to be too complicated and costly, therefore the Council abolished it with respect to European businesses as of 1 January 2002.317 Though, with regard to non-established businesses Member States may continue to require the appointment of a tax representative in certain cases,318 the idea of applying this scheme in case of electronic transmissions was abandoned by the draftsmen in the light of the preceding drawbacks.319

Consequently the Commission adopted the second solution. The Proposal obliges taxable persons established outside of the Community to `identify' for tax purposes in the Member State, to where they first supplied digital services within the internal market.320 Upon registration with the relevant tax authority, the foreign suppliers should be considered as having a fixed establishment in the destination country. By introducing this legal fiction the Proposal creates a clear tax point.

(ii) consequences of registration

The obligation to register means a burden to foreign suppliers. The Commission aims at reducing this burden to the minimum for the sake of inducing compliance.321 That is why the Proposal envisages a single place of registration for foreign enterprises within the Community. According to this scheme, foreign suppliers would apply the VAT rate of the Member State of registration to all of their transactions within the Community and would pay the collected tax thereto regardless of the actual place of consumption.

It is easy to recognize that the system of single registration results in a scheme identical to a place-of-supply regime based on the origin principle.322 Consequently it possesses all the flaws of this approach discussed previously. No wonder that all the institutions participating in the debate of the Proposal spotted the rule on single registration as the most disturbing part of the Proposal.323 In the light of Member State autonomy in fixing VAT rates and the consequent variety of VAT rates throughout the Community, allowing single registration for foreign enterprises would magnify the problem already existing with respect to intra-Community business-to-consumer supplies. Namely, taxing at origin gives an unfair advantage in the price competition to businesses registered in Member States with low VAT rates, and, by shifting consumption to those Member States, it results in the misallocation of VAT revenues within the Community.324

The Parliament, in pursuance of foreclosing the possible negative effects of the single registration scheme proposed a system of refund325 implemented through bilateral agreements between the Member States of registration and consumption. Another solution came up at the debate of the Proposal in the ECOFIN Council326 according to which third-country operators would be required to register in each of the Member States where they conduct business. The Belgian delegation in the Council was in favor of a third type of solution under which registration would be centralized in a single Member State and the revenue would be shared out on a macro-economic basis between the Member States in which consumption took place.327 All of these suggestions will be evaluated in the next chapter.

(iii) threshold

Still connected to the idea of registration and the purpose of minimizing administrative burden on suppliers, the Proposal sets forth a threshold under which registration is not compulsory for the foreign businesses.328 The provision on the threshold supplements the rules of the Sixth Directive regulating the special scheme of VAT for small undertakings.329 In accordance with the proposed amendments, foreign businesses below an annual return of EUR 100.000, if supply of electronic services is their only activity within the Community, would be allowed to supply without charging VAT. The amount of turnover is to be calculated in line with the regulations of the small business scheme.

The Parliament suggested the changing of the threshold to EUR 40.000.330 It justifies the proposed change by the fact that the small-business thresholds adopted by the Member States are without exception lower than EUR 100,000.331 By retaining the high threshold for third-country suppliers the unfortunate situation may occur in which a foreign business enjoys exemption while a domestic enterprise with the same turnover already falls outside the scope of the special provisions. This solution would result in discrimination against the most vulnerable type of European business with a turnover just above the domestic threshold.

(iv) `no establishment' clause

The last important detail to be mentioned in connection to the registration is stipulated in the Preamble of the Proposal.332 This provision intends to make it clear and firm that the registration of foreign enterprises should only serve the purposes of the proposed VAT Directive and by no means constitutes an establishment within the meaning of the Rome Treaty.333 Consequently, by merely registering for tax purposes a third-country business will not become the beneficiary of the internal market freedoms.

(c) Rate

A specific provision on the VAT rate applicable to digital deliveries has been inserted into the Proposal. According to this rule the standard rate should be applicable to all electronic supplies.334 According to the Commission the rationale behind this provision is to ensure legal certainty by excluding the possibility of interpretative difficulties that might arise when trying to classify electronic services in connection with the list of supplies attracting a reduced rate.335

(d) Discharge of VAT Obligations by Electronic Means

As a separate set of rules applicable to all suppliers under the scope of the Sixth Directive, the Proposal brings changes in the field of fulfilling administrative obligations.336 According to the proposed rules the Member States should allow

by electronic means.

3. Critique

After the objective review of the rules proposed by the Commission in the subject matter, this chapter approaches the Proposal with an appraising intention. Its aim is to establish whether or not the Proposal offers adequate solution to the problems delineated in part III of this essay. The aspects of evaluation will be as follows:

A. Theoretical Questions

(a) Goods/Services?

As seen earlier, this is one of the most important questions arising in the course of applying the Sixth Directive. Difficulty in answering it within the electronic environment has led to the adoption of relating policy within the framework of OECD at the initiative of the Commission. According to the Taxation Framework Conditions, digital goods are to be treated as services for the purposes of levying value added tax.341

The Proposal, consequently, has been drafted according to this approach. The Commission, though, has not mentioned expressively the desirability of treating electronic supplies as services. According to the Explanatory Memorandum to the Proposal this approach unambiguously follows from the present wording of the Sixth Directive.342 The author of this essay disagrees. If this issue were so clear, neither the Commission nor the OECD countries would have had to bother with defining it on the policy-level.

For the implementation of the internationally accepted policy within the European Community and for the sake of legal certainty and the coherence of the VAT system, the express and legally binding definition of electronic supplies as services should be adopted by Community legislation. Therefore, the Commission should complement its Proposal with a rule explicitly requiring the treatment of digital deliveries as services under the Sixth Directive.

(b) Place-of-Supply Rules

(i) structure of article 9

This subsection scrutinizes the structure of the proposed Article 9 and the way it fits into the existing system of place-of-supply rules.

As we saw previously, Article 9 consists of a general rule stipulated by section (1) and special rules laid down in section (2). This structure is built on three varying factors, namely the type of service, the location of the parties and the tax status of the customer.

The Proposal intends to introduce an additional lex specialis as subsection (f) of section (2). This special place-of-supply rule is based on a new factor, namely the mode of delivery. Subsection (f) retains the relevance of the other three factors. It would only apply to the types of services specifically listed thereby, and it contains two separate place-of-supply rules corresponding to the location of the parties and the tax status of the customer.

The following analysis intends to show that the proposed place-of-supply rule suffers from several structural flaws.

The first striking inconsistency concerns the list of the types of service electronic supply of which falls under the scope of the proposed rule.343 As to already known types of service, the proposed subsection (f) covers the supply of all the services listed under subsection (c) section (2) of the Sixth Directive that are susceptible to electronic delivery, but contains only two of them listed under subsection (e).344 These two types of service are not the only ones that are capable of being supplied by electronic means.345 Electronic delivery of the rest of the services to final consumers, though, would fall under the general rule, resulting in the same negative consequences the Proposal intends to fight.

The list seems to be unsatisfactory in respect of the novel types of service as well.346 Due to dynamic evolution of the Internet and electronic commerce there are already some services which would fall outside the scope of subsection (f).347 The taxation of these services, therefore, would also happen according to the general place-of-supply rule.

Thus, amending the Sixth Directive according to the proposed list would obviously mean a half-solution of the problematic issues. The negative consequences following from the application of the present rules to digital deliveries would continue to apply, violating all the interests delineated at the beginning of this section.

The next issue of concern is the over-complication of the place-of-supply rules that would follow from the adoption of the proposed amendments to Article 9 of the Sixth Directive.348 The proposed lex specialis reiterates two already existing places of supply. Namely, the place of business-to-business and outbound supplies of digital goods and services would be identical to the one stipulated by subsection (e) section (2) of Article 9, while the place of the same services delivered to consumers would be the exact copy of the general place of supply rule. Is such over-complication of the already complex rules justified?

The author of this essay is of the opinion that taxation of electronic goods and services could be resolved under the present place-of-supply rules. To prove the correctness of this standpoint it should be examined whether the legal consequences intended by the Proposal to apply solely to electronic supplies could be incorporated into the Sixth Directive without introducing additional place-of-supply rules.

The differences between the legal consequences following from the proposed subsection (f) and what is applicable under section (1) and subsection (e) section (2) of Article 9 are as follows:

(I) the obligation of foreign businesses to register in case of digital transactions to final consumers;

(II) the `good faith' clause applicable to business-to-business electronic deliveries;

(III) the exclusion of the application of reduced rates to digital deliveries;

(IV) the `effective use and enjoyment' derogation under section (3) of Article 9 is not applicable to digital deliveries.

In light of these differences the following part of this section will examine the possibility of the `merger' of the existing and proposed rules, by including business-to-business electronic supplies under subsection (e) section (2) of Article 9 and treating business-to-consumer electronic transactions under the general rule.

ad (I) In case of treating business-to-consumer digital deliveries under the general rule the obligation of foreign suppliers to register would have to be extended to all cases falling under section (1) Article 9 of the Sixth Directive.349 This solution would bring about virtually no changes in the present obligations under this section. Based on the previous analysis of the nature of traditional and electronic supplies, it can be concluded that supplies arriving from abroad to consumers will overwhelmingly be electronic supplies, where registration is intended by the Proposal. Other deliveries falling under this section would be of off-line intangible services. For the case of these services arriving from abroad to final consumers the majority of the national VAT systems already stipulate the obligation of foreign suppliers to appoint a fiscal representative,350 therefore to obligate these businesses to register would not make a great difference. For the provision of supplies to consumers other than electronic or intangible services the third-country suppliers have to set up a business establishment in one of the Member States due to the difficulty of supplying such services from a remote location. In these cases taxation would naturally follow from the treatment of these foreign businesses like European businesses.

ad (II) In case of treating electronic business-to-business supplies under subsection (e) section (2) of Article 9, the `good faith' clause envisaged by the Proposal would have to be extended to all supplies listed under this subsection. In fact, this clause would have to be extended to all subsection (e) supplies even if electronic supplies stay under the proposed subsection (f). Namely, such extension would be the only way to avoid discrimination between electronic versus off-line supply of the same services.351 This is especially true with respect to services under subsection (e) that are closely connected to e-commerce, such as provision of Internet access.352 Extension of the `good faith' preference to other types of intangible services would not be inconsistent with the spirit of the Sixth Directive either.

ad (III) The unacceptability of excluding the application of reduced rates to digital deliveries will be examined in the next subsection. Suffice to say here that this provision of the Proposal does not justify the introduction of separate place-of-supply rules for electronic supplies.

ad (IV) The last comment concerns the application of the `effective use and enjoyment' derogation. In case of extending the list of subsection (e) section (2) of Article 9 to digital deliveries the derogation of section (3) would become applicable thereto. The rationale behind the derogation lies in the evasive nature of intangible services. Electronic deliveries are of the same nature for the purposes of this derogation. Nevertheless, we already saw in the preceding part of this essay that defining the place of effective use or enjoyment is almost impossible in case of electronic supplies. Therefore, applying the derogation to these services would discredit the operation of this rule. To foreclose this negative consequence, an amendment would have to be introduced to the derogation, which would ensure the exclusion of digital deliveries from its scope.

Upon close scrutiny of the differences above, neither of them seems capable of adequately justifying the introduction of an additional subsection to section (2) Article 9. The unnecessary over-complication of the place-of-supply rules would harm the interests of the VAT system and the operation of the internal market.353 The SLIM Program has recognized the negative impact of over-complex legislation on the operation of the internal market.354 The Proposal clearly conflicts the objectives of this program.

In light of the above negative consequences the Commission should rethink the proposed article at hand.

(ii) scope of proposal

In part III of this essay the full range of problems arising from the application of the Sixth Directive to electronic deliveries was explored. This subsection aims at examining the extent to which the Proposal intends to give a solution to these problems.

The admitted aim of the Proposal is to fight the competitive disadvantage of European businesses vis-à-vis third-country suppliers following from the lack of taxing the latter.355 For this reason the Commission proposes an amendment to the present place-of-supply rules to resolve taxation of foreign enterprises. The Proposal is almost totally short of reactions to the problems of the European VAT system in handling intra-Community electronic commerce. What is more, the proposed system of single registration, by implementing taxation at origin, would even magnify the problems of intra-Community misallocation of tax burden and tax revenue already existing with regard to business-to-consumer transactions.356

The question is whether amendatory legislation with such a narrow focus could be justified.357 The argument for the Proposal is the necessity to eliminate unevenness of the global level playing field with respect to European suppliers of digital goods for the sake of enhancing the growth of European electronic commerce and preserving the competitiveness of European economy. Arguments against the Proposal include its lack of responsiveness to all existing problems and its potential to increase the already existing intra-Community misallocation of VAT revenues. Counter-arguments also include the unacceptability of the prospective series of fragmented legislative actions tackling separately with each aspect of the VAT system's dysfunction from the viewpoint of the SLIM project and the credibility of the VAT legislation.358

In the light of the fact that the volume of business-to-consumer electronic transactions is quite modest at present,359 the arguments for the acceptability of this narrowly focused Proposal seem quite weak. Without disregarding the importance of the Proposal's objective, the conclusion should be drawn that fighting the problems at hand is more desirable by legislation with a broader scope.

(iii) clearinghouse

Two comments seem necessary in connection with the idea of a clearing system put forward by the Parliament. The first comment concerns the justification of the clearing system and the second deals with the questions of its practical implementation.

The Parliament proposes the introduction of a clearinghouse to tackle the problems arising from the scheme of single registration put forward by the Commission. Namely, it intends to foreclose the intra-Community misallocation of VAT burden and revenues potentially following from supplies to European consumers from third-country suppliers.360 The writer of this essay thinks that introduction of a clearing house solely with regard to supplies by foreign enterprises to consumers is unjustified.

It has been recognized in part III of this paper that misallocation of VAT burden and revenues already exists within the Community owing to taxing business-to-consumer transactions at origin. It follows that the idea of a clearing system is not at all to be rejected. Nevertheless, its introduction would be justifiable only if its scope covered intra-Community transactions as well.

This conclusion is especially true when viewing the ultimate goal of the European VAT system.361 Since the definitive system of VAT will be implemented through a clearing system covering all supplies under the Sixth Directive, designing a clearinghouse solely to handle the transactions of third-country suppliers would be an unnecessary expenditure of time and resources. Consequently, the system of clearing should be redesigned to include all business-to-consumer transactions conducted within the Community.

The second comment with regard to the clearinghouse concerns the practical implementation of the idea. The essay has intended to highlight the conflicts between the fiscal sovereignty of Member States and the interests of the internal market on several occasions. It has become evident that the Member States are not willing to accept curtailment of their fiscal power necessary for the introduction of the clearing system without weighty reasons.362 The Proposal at hand, full with inconsistencies and unanswered questions - partly highlighted in the following sections - is hardly the appropriate means of convincing Member States to restrain their fiscal autonomy. Therefore, proposals of the Parliament and the Belgian delegation to introduce a clearing system should not expect positive reactions in the Council. 363

(iv) registration in all member states

Besides the scheme of single registration with a clearing system the ECOFIN Council heard another solution to the problem of revenue-misallocation potentially following from the Commission's Proposal. The French Presidency suggested that foreign suppliers should be required to register in all Member States.

The positive side of this solution is that it would make the introduction of a clearing system avoidable. However, under this scheme compliance would become significantly heavier for foreign businesses as opposed to European businesses, which may conduct transactions throughout the Community by registering in a single Member State. Such practice would probably be in conflict with the Community' obligations under the WTO Agreement on Subsidies and Countervailing Duties and therefore is internationally unacceptable.364

(v) threshold

The Commission when proposing the scheme of single registration determined a threshold below which foreign businesses are not required to register. Two points are worth mentioning in connection with the registration threshold.

The first remark concerns the amount of turnover below which the third-country business qualifies for exemption. When determining this amount, the draftsman should keep the rationale behind the concept of threshold in mind. Registration thresholds in the world of VAT serve a dual objective. They remove the burden of compliance in cases where such burden would reduce or eliminate the incentive to carry on business activity.365 In international context they have a role in securing equal competition between domestic and foreign businesses.366

The Commission, on the one hand, when setting the registration threshold at EUR 100,000 focused on inducing compliance of foreign enterprises by reducing the compliance burden to minimum.367 The Parliament, on the other hand, drew the attention to the importance of securing competitive equality within the internal market and proposed to determine the registration threshold at EUR 40,000.368

It follows that the Commission should rethink the Proposal by balancing on the edge of the above twofold objective. It should converge the proposed threshold to domestic thresholds by weighing the increase in the burden of foreign businesses and its potential effect on compliance against the consequences of a possible distortion of competition following from the gap between the two rates.369

The second comment in connection with the threshold concerns the imprecise wording of the proposed rule. The Proposal is clear on the point that foreign businesses with an annual turnover above the threshold should register. The rule is silent on the question whether registration is an option for businesses below the threshold. Though the main idea of registration thresholds is to relieve small businesses from administrative obligations, in certain instances registration might be the more convenient solution. This is the case of businesses expecting to exceed the threshold only after a certain period. Leaving the option of registration open for small businesses therefore is desirable.370

(c) Right to Tax Deduction

The Proposal describes registration as an obligation to be fulfilled by foreign businesses when their annual turnover exceeds the stipulated threshold. The document does not contain any provisions regarding the `other side' of such obligation, namely the rights deriving therefrom vested with foreign businesses.

The right to deduct input credits from the VAT due on supplies is the focal point of the rights of taxable entities under the Sixth Directive.371 The Proposal does not provide for the right of deduction with respect to third-country businesses. It is true that foreign enterprises are only required to register for VAT purposes with regard to their supplies to final consumers. However, it would be a crude oversimplification of business reality to disregard the possibility that these businesses, once registered, will conduct business-to-business transactions within the Community. As soon as these businesses enter the European supply-chain they need to have the right to deduct the VAT incurred on business investments for purposes of avoiding tax accumulation and securing equal competition within the internal market.372

The Commission presumably intends to grant such right to foreign businesses without explicitly mentioning it.373 Therefore, when refining the Proposal, to right of foreign businesses to deduct input credits should expressly be stipulated for the sake of legal certainty.

(d) Exclusion of Reduced Rates

The Proposal for the reasons stated in the previous chapter excludes the application of reduced VAT rates to digital deliveries. This provision would clearly result in the discriminatory treatment of certain goods and services based on the mode of their delivery.374 Namely, digital goods and services should be considered as identical to their physical counterparts for the purposes of applying reduced rates.375 This statement holds true despite the fact that for the purposes of implementing the principle of broad taxation, digital deliveries are treated under different categories of supply than the offline deliveries of the same goods and services.376

Such discriminatory treatment would constitute an obstacle to the development of e-commerce in general by imposing more favorable tax consequences on offline deliveries.377 Within the specific context of the internal market impeding electronic commerce would lead to the frustration of the objective of improving the competitiveness of the European economy on the global market.378 Within the international context, the discrimination would definitely conflict the principle of neutrality incorporated into the OECD Taxation Framework Conditions.379 This is especially true viewing the fact that the discrimination would be more strongly present with regard to certain third-country suppliers, who conduct solely digital transmissions to the Community.380

All in all, the Commission should rethink the provision at hand. In theory, equal treatment of physical and digital deliveries could be achieved by allowing application of reduced rates to the respective electronic transmissions or by disallowing the application thereof to traditional forms of supply.381 In practice, general elimination of reduced rates is unthinkable in the light of the emphasis Member States put on the preservation of their fiscal autonomy. Consequently, the Commission should extend the application of reduced rates to digital deliveries.

B. Implementation

This section aims at highlighting the practical difficulties arising in the course of implementing the double scheme of place-of-supply rules applicable to electronic deliveries according to the Proposal. It should be noted that these problems will rise regardless of whether the `double-scheme' is implemented separately under subsection (f), as proposed by the Commission or as an integrate part of the existing rules, as suggested by the author of this essay.

The following chart illustrates the steps in the process of complying with the respective rules of the Sixth Directive:



For suppliers established in third countries to find out whether the transaction falls under the scope of the European VAT system and for European enterprises to know whether to charge VAT on the supply the first question to be answered is where the customer is located.

As discussed earlier suppliers of digital services encounter serious difficulties when trying to determine the location of their customers.383 The Proposal, apart from drafting a system that requires the localization of the customer does not provide any guidance as to the technical means necessary for the fulfillment of such duty. The Technology TAG of the OECD has been taking major efforts to find feasible technology for the verification of customer location. Unfortunately, it is evident upon the latest Report of this body that presently there exists no technical means, which could offer the verification of location with certainty.384

The Proposal therefore is obviously built upon the faith vested in the genuineness of self-declaration. In case of business recipients self-declaration is likely to go smoothly since the right to deduct the tax paid motivates their compliance. They will only be able to deduct the VAT on their purchases if the invoice registers their valid business address.385 Self-disclosure by private individuals raises more questions. In their case anonymity of the Internet offers an opportunity to specify a false location for the purposes of paying less or no tax on the supply.386 As stated previously, information available to the supplier at present is not reliable.387 Moreover, as a response to increasing consumer sensitivity about personal privacy and data protection businesses are reluctant to seek the collection of more information from consumers than they need for commercial purposes.388

All things considered, it seems that the Proposal fails to offer a certain way of establishing the whereabouts of the consumer.


Simultaneously with finding out the location of the customer, the supplier should also inquire into the tax status thereof. Upon the customer's assertion of its taxable status, the supplier is obliged to check the validity of the disclosed registration number. Under the `good faith' preference the supplier should make every reasonable effort to verify the taxable status of the recipient in order to become released from tax liability.389

Part II of this paper has already expanded upon the deficiencies of the VIES system, the primary means of verifying registration numbers. Concurrently with introducing the Proposal at hand, the Commission put forward a draft Regulation initiating the reform of the VIES.390 Unless the VIES system is capable of providing third-country suppliers with assistance in the verification process, the `good faith' clause remains paper-law.391


When the recipient of the service claims non-taxable status the articles of the Proposal providing for business-to-consumer transactions become applicable. The obligation to register forms the core of these provisions. To calculate the amount of annual turnover and to appropriately comply with the obligation to register knowledge of exact customer-location is indispensable. As seen earlier, there are no means at present for establishing the location of the customer with certainty.


So far it has been presumed that foreign enterprises will act in compliance with the obligation to register, provided that necessary technological means are available. However, the legislator, to remain on the grounds of reality, should count with the possibility of non-compliance. Therefore, the VAT system should be able to address non-cooperation of third-country suppliers by appropriate means of enforcement.392

The Proposal does not expand upon the issue of enforcement. From the Explanatory Memorandum to the Proposal it is clear that the Commission drafted the amendments with the firm belief that the overwhelming majority of enterprises will comply with their VAT obligations.393 The driving motivation for such compliance would be the intention of businesses to maintain their goodwill in the "world's largest market-place." This pattern of conduct, however, may only be legitimately expected from large, well-known businesses.394 What will happen to smaller enterprises, which do not have such motivation?

The importance of answering the previous question is even greater in view of the necessary reduction of the registration threshold.395 As to the means of enforcement the Explanatory Memorandum vaguely mentions the sanctions of "additional penalty and interest charges" and "civil and criminal sanctions against the managers."396 The Commission's `trump' among the envisaged sanctions seems to be the idea of depriving third country suppliers of the protection of their intellectual property rights in case of their non-compliance with VAT rules. This approach is seriously flawed. First of all, it ignores the fact that intellectual property rights do not only protect the businesses selling copies within the internal market, but also the original authors, who has nothing to do with the VAT obligations of these companies.397 Secondly, the Commission seems to be disregarding the fact that intellectual property rights are protected under international treaties, interference with which is not in the authority of taxing bodies.398

Unfortunately, even if the Commission offered acceptable sanctions, practical implementation thereof would still be impossible. Namely, taxing authorities, in order to enforce VAT regulations need to identify the infringing enterprises. When trying to fulfill this duty, tax authorities encounter the very same difficulties described above with respect to consumer-identification.399 Again, the Proposal is short on indications with regard to the technical means necessary for the practical implementation of the proposed rules. Until finding the necessary technology for implementing sanctions on non-compliance the obligation to register would function as a `de facto' lex imperfecta.400

Based on the foregoing the conclusion should be drawn that the Proposal put forward by the Commission is unsuitable for acceptance by the Community. Reasons for this conclusion lie in the theoretical and practical flaws of the envisaged amendments.

On the theoretical level, the imprecise wording, the incoherent structure and the one-sidedness of the Proposal in many questions make it incapable to comfort the interests delineated at the beginning of the chapter. It does not comply with the basic postulates of the VAT system, such as simplicity, neutrality and certainty. Since these principles have been reinforced within the OECD framework, infringement thereof makes the Proposal internationally unacceptable as well. Due to its lacking the response to the whole range of problematic issues and its potential to magnify the consequences of the present dysfunction of the VAT system the draft Directive is unsuitable for the purposes of enhancing the internal market objective. The deficiencies of the theory, by threatening with unexpected tax consequences, have the potential to hamper the growth of e-commerce.

On the practical level the most striking flaw of the Proposal is the lack of technological means necessary for its implementation. The Commission intends to resolve a legitimate policy question independently from understanding the technology required thereby. Nevertheless, policy and practice are symbiotic and need to be developed concurrently, given the ultimate goals of compliance and enforceability.401

The lack of means for compliance and enforcement, apart from discrediting the VAT system and frustrating the goal of creating a level playing field within the Community, has a serious impact on the international acceptability of the Proposal. First, the dysfunction of the VIES prevents foreign businesses to be released from liability by taking advantage of the `good faith' clause. Second, the impossibility of enforcing VAT rules results in discrimination against compliant businesses, the group of which will include a lot of international companies. This scenario is obviously inconsistent with the Taxation Framework Conditions and would lead to serious conflicts with the trading partners of the European Community.

The foregoing is concordant to the conclusion reached at the meeting of the ECOFIN Council on November 27, 2000. After discussing the Proposal of the Commission together with the opinions of the European Parliament and the Economic and Social Committee, the ECOFIN requested the Commission to rework its Proposal until June 30, 2000.402

4. Alternatives

After establishing the unacceptability of the Proposal put forward by the Commission for the taxation of electronic transactions, this chapter aims at highlighting the possible alternatives of the Community for resolving the problems at hand. Analysis will extend to short-term and long-term solutions.

The ultimate goal of the Community and the OECD is clearly the taxation of electronic transactions.403 That is, any contrary solution would contradict the fundamental principle of neutrality by positively discriminating in favor of digital deliveries as compared to conventional trade. It should be recognized, though, that coming up with a viable solution for taxing e-commerce and accepting it might take a longer process. Therefore, the Commission should think of alternative approaches for the short term.

One of the alternatives may be the preservation of status quo during the following 1-2 years, until the volume of e-commerce increases significantly.404 Although, the operation of the European VAT system with regard to electronic commerce is not satisfactory, the negative consequences of not taxing foreign supplies are not acute at present due to the small number of digital transactions, as seen in part III of this essay.

Nevertheless, failing the introduction of the ultimate scheme of taxing e-commerce during the following years, the Community needs to work out an acceptable temporary scheme to handle the expectedly increasing negative consequences of the dysfunction of the VAT system, especially the widening competitive gap between European and third-country suppliers.

Refraining from the application of VAT to European electronic supplies could serve as a temporary solution.405 In light of the fact that the flaws of the Sixth Directive are the most emphatic with respect to business-to-consumer transactions, relieving these types of supplies from VAT could create equal competition between European and foreign enterprises. Specifically, the author of this paper suggests that supplies of European businesses to European consumers and foreign customers406 enjoy tax relief.

Following from the policy stating that electronic transactions fall under the scope of value added tax,407 relieving the above supplies from tax may only be achieved by the application of the respective rules of the Sixth Directive. Title X of the Directive contains the rules providing for the exemption of certain supplies from the VAT. The articles of this Title draw up two separate schemes of exemption, as mentioned earlier.408 One type of tax relief is generally considered as `true' exemption by the world of VAT, while the other form of exemption is referred to as zero-rating.

In the following the pros and cons of the two types of exemption will be considered from the viewpoints of e-commerce, the VAT system, the internal market and the international principles of taxation.

A. Exemption

The scope of exemption under the Sixth Directive covers certain services supply of which is in the interest of the public and some other supplies, where due to the complexity of calculating the added value setting aside taxation is more convenient.409 Exempting electronic deliveries could be justified under both categories by reasons of lacking appropriate means of taxation and desirability of enhancing the growth of e-commerce.

There are some drawbacks of exemption following from the inability of enterprises to recoup tax. Firstly, as a result of denying tax deduction, the VAT would appear in the books of the business as an absolute cost, which is in contrast with the idea of levying VAT only on final consumption.410 Secondly, though exemption relieves the business from the administrative obligations under the VAT, the necessity to properly attribute its input tax credits available on taxable sales among the exempt and taxable activities means an increase in the administrative burden.411 Increased burden could induce non-compliance or decrease in the number of electronic transactions.

Exemption has a drawback from the viewpoint of outbound deliveries of European businesses as well. As stated previously, the European VAT system traditionally handles foreign supplies under the scheme of zero-rating.412 Therefore, introducing exemption with respect to outbound electronic deliveries would again lead to increased administrative burden on European suppliers with the consequences delineated above.

From the viewpoint of the internal market exemption could create equal competition between European and foreign suppliers in theory. In practice, however, the positive effects of this approach are partly offset by the increased administrative burden following therefrom with respect to European enterprises.

B. Zero-Rating

The scope of zero-rating under the Sixth Directive covers deliveries concerned with public interest and supplies for export. Zero-rating of electronic deliveries within the Community therefore could be justified by reason of enhancing the growth of e-commerce to increase the welfare of the public. Electronic supplies to foreign consumers could be zero-rated under the general practice applicable to exports.

Zero-rating has some drawbacks following from the right to deduct input tax. Firstly, as there is no outgoing tax liability on the transaction neutralizing input credits, zero-rating might lead to positive payment obligation and increased administrative burden on the side of tax authorities.413 Secondly, the advantage following from zero-rating may encourage enterprises to test the limits thereof, which practice leads to an increase in the number of litigation.414

Nevertheless, the above undesirable consequences of the right to tax deduction are offset by its overall positive effects. Treating the suppliers of zero-rated items equally to other taxable businesses as to the right of tax deduction is closer to the spirit of the ideal VAT system, than exemption.415 By not resulting in increased compliance and financial burden on the side of businesses, zero-rating is more favorable also from the viewpoint of the common market.

After drawing the conclusion that zero-rating of electronic supplies is the more desirable alternative, some further comments seem necessary.

First, when introducing special treatment of electronic deliveries the general premise of the VAT should be kept in mind according to which the only way to ensure efficiency and simplicity of the VAT system is the application of the tax as broadly as possible.416 Any exemption or special treatment obviously results in increased administrative burden both on the side of the enterprises and of tax administrations.417 Therefore, whichever of the solutions is chosen, it should strictly be treated as a temporary answer to the problems.

The second comment concerns the justification underlying the discriminatory treatment of electronic vis-a-vis traditional trade. At present, differential tax treatment of the two types of trade may be justified by the lack of feasible technology implementing taxation and the desirability of enhancing the spread of digital trade. With the growth of e-commerce, such justification will not hold anymore.418 Failing to find appropriate technical means for taxation during the following years, the Community, for the sake of neutrality, would have to consider exempting from VAT the part of physical trade that suffers a competitive disadvantage from electronic transactions until feasible technology becomes available for the taxation of the latter.419

The third comment concerns the amount of revenue loss following from the zero-rating of electronic transactions. Despite the fact that equal competition is more endangered by the dysfunction of the VAT system than the budget of the Community, the impact of special treatment of electronic supplies on Community revenues should be considered. With the growing number of electronic transactions and the rising degree of its substituting traditional commercial activity, an increasing loss in revenue should be expected.420 Serious revenue loss will probably not occur during the following 1-2 years.421 The issue at hand, however, would become acute in case of relieving traditional transactions from tax in accordance with the suggestion of the preceding paragraph. In the medium term, therefore, the cut in the VAT revenues will probably necessitate the compensation of the Community budget from other sources.422 Increase of VAT or other tax rates and similar actions to balance the budget will have to be considered very cautiously and thoroughly in the light of the overall tax policy of the Community and of the Member States.423 Suffice to mention here that it is a quite complex and sensitive issue.

All in all it seems that non-taxation of electronic commerce should be considered as a short-term, transitory measure. To avoid the negative consequence and difficult questions delineated above, the Community should attempt to achieve results in the field of technological development as soon as possible.

271 See Hinnekens, International Taxation, supra note 15, at 440-444; Haufler, Commodity Tax, supra note 9, at 7-11.

272 These are, e.g., fairness, legal certainty, convenience and efficiency. See Adam Smith, An Inquiry into the Causes and Nature of the Wealth of Nations, cited in Hinnekens, International Taxation, supra note 15, at 440-444.

273 These principles mainly require effectiveness, international acceptability and economic neutrality and vitality from the tax systems. See Hinnekens, International Taxation, supra note 15, at 440-444.

274 See supra note 15.

275 See supra note 4, at 19-20.

276 See Working Paper - 1998, supra note 5; E-Commerce and Indirect Taxation, Communication by the Commission to the Council of Ministers, the European Parliament and to the Economic and Social Committee [COM (98) 374] [hereinafter: "Guidelines"]; Working Paper - 1999, supra note 171, 2; Explanatory Memorandum, supra note 126, at 3-5.

277 France already introduced a primitive version of VAT after the World War II. The Community was the first to introduce a VAT system with the characteristics recognized today as featuring the VAT. See Schenk & Oldman, Value Added Tax, supra note 41, at 26.

278 See Supplementary Protocol No. 1 to the Convention on the Organization on Economic Co-Operation and Development, Dec 14, 1960,

279 See Guidelines, supra note 276.

280 See id., at 2-4.

281 See Working Paper - 1998, supra note 5; Guidelines, supra note 276, at 3; Working Paper - 1999, supra note 171, at 2; Explanatory Memorandum, supra note 126, at 3-5.

282 Guidelines, see supra note 276, at 2-3.

283 See id, at 4.

284 See Guidelines, supra note 276, at 5-7; OECD, Report on the Turku Conference, supra note 6, at 4-5; Working Paper - 1998, supra note 5, at 9-10.

285 See OECD, Report on the Turku Conference, supra note 6, at 13; Working Paper - 1998, supra note 5, at 7.

286 See Green Paper, supra note 4, at 19; Hinnekens, Challenges, supra note 105, at 69.

287 See supra note 276, at 5.

288 See supra subsection (a) section A of chapter 3 part III of this essay.

289 See OECD, Report on the Turku Conference, supra note 6, at 4-6; Guidelines, supra note 276, at 2; Working Paper - 1998, supra note 5, at 7.

290 See supra note 276, at 5-7.

291 See id.

292 Tait, Value Added Tax, supra note 42, at 270; Schenk & Oldman, Value Added Tax, supra note 41, at 25.

293 See Guidelines, supra note 276, at 7-8.

294 See id.

295 See id, at 7; Tait, Value Added Tax, supra note 42, at 315-318; Schenk & Oldman, Value Added Tax, supra note 41, at 25.

296 See supra subsection (b) section B of chapter 3 part III of this essay.

297 This question constitutes one dimension of the conflict between the US and European approaches to taxing electronic commerce. Namely, the Supreme Court of the United States decided in the Quill-case that businesses are not responsible for collecting a use tax unless they have a physical presence (nexus) in the customer's home state. See, Quill Corp. v. North Dakota (91-0194) 504 U.S. 298 (1992). Despite the fact that this decision relates merely to national constitutional questions of taxation, the opponents of the European proposal, detailed below, which concerns US sellers to a large extent, often use the principle of this case as a counter-argument against Europeans. See Jenkins, Application, supra note 193, at 2-3; Hardesty, Introduction, supra note 6, at 3.

298 See Taxation Framework Conditions, supra note 143, at 7; Working Paper - 1998, supra note 5, at 8-9; Guidelines, see supra note 276, at 4. Revision of the events and results of the OECD Ottawa Conference may be found at

299 See supra note 143.

300 The main work within the OECD is going on in Working Party No. 9 set up by the Committee on Fiscal Affairs. The Working Party created five Technical Advisory Groups researching different aspects of electronic commerce taxation. See>.

301 Proposal for a Council Directive amending Directive 77/388/EEC as regards the value added tax arrangements applicable to certain services supplied by electronic means [COM (2000) 349 final] [hereinafter: "the Proposal"] OJ C337 28/11/00 065E.

302 See supra chapter 1 of part II of this essay.

303 See Preamble of the Proposal, supra note 301; Explanatory Memorandum, supra note 126, at 11-12.

304 See subsection (1) of Article 1 of the Proposal, supra note 301.

305 See id.

306 See section (1) of Article 1 of the Proposal, supra note 301.

307 See first indent of section (1) Article 1 of the Proposal, supra note 301.

308 See supra subsection (b) section A of chapter 3 part III of this paper.

309 See Eriksen & Hulsebos, Electronic Commerce and VAT, supra note 106, at 140.

310 See subsection (a) section (4) of Article 1 of the Proposal, supra note 301.

311 See the present system of verification under the VIES system, supra note 77.

312 See subsection (b) section (4) of Article 1 of the Proposal, supra note 301.

313 See second indent of section (1) Article 1 of the Proposal, supra note 301.

314 See supra subsection (b) section A of chapter 3 part III of this paper.

315 The Working Party No. 9 of the Committee of Fiscal Affairs was considering three other options for tax collection with respect to non-established businesses, but eventually found them unfeasible. See Consumption TAG Report, supra note 76, at 14-17.

316 See supra note 172.

317 See Press Release on the 2297th Council Meeting, ECOFIN, October 17, 2000, [hereinafter: "ECOFIN Report"] reporting that the Council accepted the Directive amending the Sixth Directive as regards the determination of the person liable for the payment of the value added tax.

318 Member States may continue to apply this requirement if the foreign business is established in a country with which there exists no legal instruments providing for mutual assistance similar to that provided for within the Community. See id.

319 The idea came up in Working Paper - 1998, see supra note 5, at 13.

320 See subsection (b) section (5) of Article 1 of the Proposal, supra note 301.

321 See Explanatory Memorandum, supra note 126, at 13-15; Jenkins, Application, supra note 193, a 4-5.

322 See supra chapter 2 of part II of this paper.

323 See the opinion of the Parliament and separately the opinion of its Committee on Legal Affairs and the Internal Market, supra note 241; ECOFIN Report, supra note 317.

324 See subsection (b) section A of chapter 3 part III of this essay; Opinion, supra note 241, at 18-19 and 31-32.

325 Amendment 4 in the Opinion, supra note 241, at 9.

326 See supra note 323; Jenkins, Application, supra note 193, at 5-6.

327 See id.

328 See section (3) of Article 1 of the Proposal, supra note 301.

329 See supra note 102.

330 See Amendment 4 of the Opinion, supra note 241, at 11.

331 See id, at 20.

332 See Recital (5) of the Preamble of the Proposal, supra note 301.

333 See Articles 43 and 48 of the Treaty of Rome, supra note 3.

334 Except reception of broadcasting services as defined in Annex H of the Sixth Directive. See section (2) of Article 1 of the Proposal, supra note 301.

335 See Explanatory Memorandum, supra note 126, at 14.

336 See subsection (a), (c) and (d) of section (5) of Article 1 of the Proposal, supra note 301.

337 See chapter 2 of part II of this essay.

338 Simpler Legislation for the Internal Market Initiative, Commission, May 1996. The aim of the SLIM is to simplify national and Community legislation in the light of the fact that over-regulation is the major obstacle of completing the common market. See

339 See supra note 89.

340 See supra note 143.

341 See chapter 1 of part IV of this essay; Taxation Framework Conditions, supra note 143, at 5.

342 See Explanatory Memorandum, supra note 126, at 12.

343 See section B of the previous chapter; Section (1) Article 1 of the Proposal, supra note 301.

344 Supplying of information and data processing, see id.

345 Electronic delivery of, e.g., advertising services, consultancy and banking services, financial and insurance transactions are also possible. See Electronic Commerce - An Introduction, supra note 11, at 4-5.

346 It can generally be stated that the list-approach is flawed with respect to electronic transactions considering the rapid development of technology offering newer and newer opportunities for e-commerce transactions. See Eriksen & Hulsebos, Electronic Commerce and VAT, supra note 106, at 138 and 141; Taxation Comment, supra note 256, at 1.

347 Such as, e.g., colocation services and registration of domain names, see id.

348 See, e.g., Jenkins, Application, supra note 193, at 6.

349 Following from the intention to find a simpler solution for the taxation of digital deliveries the author of this essay considers the option of introducing a separate subsection to section (1) Article 9 for digital deliveries undesirable.

350 See supra note 172.

351 See Eriksen & Hulsebos, Electronic Commerce and VAT, supra note 106, at 142.

352 See id.

353 As seen in chapter 2 of part II and chapter 1 part IV of this essay over-complication of the VAT rules leads to an increased compliance burden, therefore serves as a disincentive to conform with the obligations or to pursue taxable activity.

354 See supra note 338.

355 See Explanatory Memorandum, supra note 126, at 6; E-mail from Geoff Trueman, Taxation and Customs Union Directorate General, TAXUD C3 (March 12, 2001) [on file with author.]

356 See Eriksen & Hulsebos, Electronic Commerce and VAT, supra note 106, at 141.

357 See the Report of the Consumption Tax TAG of the OECD, February, 2000, at 15,

358 See id.

359 See section A chapter 4 of part III of this paper.

360 See Opinion, supra note 241, at 18-20.

361 See supra note 89.

362 See supra note 90.

363 Amendment 4 of the Opinion of the Parliament, see supra note 241, proposes a refund system, which would be implemented through bilateral agreements between the states instead of creating a central authority. The rationale behind this choice is to respect the fiscal sovereignty of Member States as best as possible thereby enhancing the success of the proposal. The most neuralgic point of the Parliament's proposal would be the debate whether to apply macro-economic data or figures collected by the taxable persons to decide the refundable amount. The Parliament should also be reminded of the fact that the Commission has already proposed such bilateral arrangements for the simplification of the cross-border VAT deduction procedure in 1998. See Proposal for a Council Regulation on verification measures, measures relating to the refund system and administrative cooperation measures [COM(1998) 377]This proposal has not been able to get through the Council ever since. In light of these failures it is highly unlikely that unanimity in the Council could be reached in the near future with regard to the clearinghouse. See Jenkins, VAT and Electronic Commerce, supra note 5, at 5; Jenkins, Application, supra note 193, at 5-6; Taxation Comment, supra note 256, at 2.

364 See Opinion, supra note 241, at 18; Jenkins, VAT and Electronic Commerce, supra note 5, at 5. As to the GATT see supra note 16.

365 See Consumption TAG Report, supra note 76, at 15-16; Schenk & Oldman, Value Added Tax, supra note 41, at 89-96.

366 See id.

367 See point (iii) subsection (b) section B of the previous chapter.

368 See id.

369 See, Opinion, supra note 20, at 20; Taxation Comment, supra note 256, at 2; Kogels, Brussels Bites the Bullet, supra note 131, at 136. To offset the possible negative consequences of the reduction of threshold the Commission could consider the introduction of the so-called `simplified interim approach' put forward by the Consumption Tax TAG of the OECD. According to this scheme the overall simplicity of the registration process could serve as an encouragement to comply. The simplified procedure, optional for all foreign businesses, would make use of electronic means and would require only very basic data from the supplier. A key aspect of the interim approach would be the unavailability of input tax deduction. Naturally, normal registration with full tax credit recovery would remain an option for interested businesses. See Consumption TAG Report, supra note 76, at 17-18.

370 See Schenk & Oldman, Value Added Tax, supra note 41, at 89-96.

371 See id, at 187.

372 See chapter 2 of part II of this essay.

373 See Opinion, supra note 241, at 32.

374 These transactions include those electronic supplies that compete with traditional forms of trade, e.g., supply of books or music through the Internet versus conventional distribution of such items. See, Opinion, supra note 241, at 19; Taxation Comment, supra note 256, at 1.

375 It is apparent from Annex H of the Sixth Directive that Member States may apply reduced rates for, inter alia, the purposes of implementing their cultural policies. By easing the tax burden on certain products widespread use of which is considered desirable by the cultural policy, Member Stets ensure wide access of the public to them. Obviously the traditional and electronic form of, e.g., the sonnets of Shakespeare are equally capable of enhancing the objectives of the cultural policy. Therefore, the policy should not be concerned with the form. See id; Annex H of the Sixth Directive, supra note 71; Schenk & Oldman, Value Added Tax, supra note 41, at 225-226.

376 See supra subsection (a) section A of chapter 3 part III of this essay.

377 Kortenaar & Spanjersberg, Taxation and E-Commerce, supra note 5, at 180-187; Taxation Comment, supra note 256, at 2.

378 See supra notes 246 and 250.

379 See supra note 143.

380 i.e. for these businesses to switch to traditional forms of delivery to the common market for the sake of preserving competitiveness against businesses selling traditional reduced-rate products needs the investment of more resources than for the European competitors.

381 See Opinion, supra note 241, at 19-20; Kortenaar & Spanjersberg, Taxation and E-Commerce, supra note 5, at 180-187; Taxation Comment, supra note 256, at 2.

382 The idea of the chart is based on Hardesty, Europe Propose, see supra note 180, at 5 and on the Report of the Consumption Tax TAG of the OECD, see supra note 357, at 20.

383 See subsections (a) and (b) section B of chapter 3 part III of this paper.

384 See Technology TAG Report, supra note 136.

385 See subsection (a) section (3) Article 22 (as replaced by Article 28h) of the Sixth Directive, supra note 71; Invoicing, supra note 210, at 6-11.

386 Kogels, Brussels Bites the Bullet, supra note 131, at 135; Eriksen & Hulsebos, Electronic Commerce and VAT, supra note 106, at 140; Jenkins, Application, supra note 193, at 4.

387 See supra note 201.

388 See id.

389 See point (I) of subsection (a) section B of the previous chapter.

390 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EEC) No. 218/92 on administrative co-operation in the field of indirect taxation [COM (2000) 349 final] June 7, 2000.

391 See supra subsection (b) section B of chapter 3 part III of this essay. The flaws of the practical implementation of the Proposal are the main concern for the USA, who fears that the lack of appropriate means for the identification of the customer might lead to unintended and unfair consequences for US businesses supplying to Europe through the Internet. See Treasury Deputy Secretary Stuart Eizenstat, Remarks to the Coalition of Service Industries and Tax Council in Treasury News, Washington DC, July 26, 2000, at 3 [hereinafter: "Remarks"]

392 See Tait, Value Added Tax, supra note 42, at 315; Explanatory Memorandum, supra note 126, at 9-10.

393 See Explanatory Memorandum, supra note 126, at 9.

394 See Opinion, supra note 241, at 31; Hardesty, EU Continues Efforts, supra note 183 at 4-5.

395 See point (v) subsection (b) of section A of this chapter.

396 See Explanatory Memorandum, supra note 126, at 9-10.

397 See Opinion, supra note 241, at 33; Taxation Comment, supra note 256, at 4; David Hardesty, EU Withdraws Proposal for VAT on Digital Sales in E-Commerce Tax News, Feb. 4, 2001 [hereinafter: "Hardesty, EU Withdraws"]

398 See id.

399 See subsections (b) and (c) section B of chapter 3 part III of this essay.

400 See Remarks, supra note 391, at 3; Opinion, supra note 241, at 33; Taxation Comment, supra note 256, at 4; Hardesty, EU Withdraws, supra note 397, at 4.

401 See Technology TAG Report, supra note 136.

402 See Press Release on the 2312th Council Meeting, ECOFIN, November 26-27, 2000

403 See Green Paper, supra note 4, at 19; OECD Report on the Turku Conference, supra note 6, at 4. The idea of a permanent ban on taxing the Internet has even been rejected by the US Congress, see Tom Squitieri, House Votes to Extend Net Tax Ban in USA Today, June 7, 2000

404 See supra note 117.

405 See Kortenaar & Spenjersberg, Taxation and E-Commerce, supra note 5, at 180-187.

406 It should be kept in mind that this category of digital services for the purposes of this essay only includes those falling under section (1) Article 9 of the Sixth Directive, since services coming under subsection (e) section (2) of Article 9 are already `exempted' under the reverse charge method.

407 See supra note 403.

408 See point (g) chapter 3 of part II of this essay.

409 See sections A and B of Article 13 Title X of the Sixth Directive, supra note 71; Schenk & Oldman, Value Added Tax, supra note 41, at 221.

410 See id, at 231-232.

411 See id, at 240-250.

412 Services that are presumably susceptible to international delivery are provided for by subsection (e) section (2) of Article 9 of the Sixth Directive. Because, as stated earlier in part II of this paper, services are not physically traceable, this rule, instead of introducing `real' zero-rating based on physical border controls applies the reverse charge method. Reverse charge, though, has the very same practical effects than zero-rating, therefore it equally implements the destination principle.

413 Tait, Value Added Tax, supra note 42, at 54.

414 Schenk & Oldman, Value Added Tax, supra note 41, at 225.

415 See id, at 223-225.

416 See supra note 47.

417 See id.

418 See Kortenaar & Spanjersberg, Taxation and E-Commerce, supra note 5, at 180-187.

419 See id.

420 See chapter 4 part III of this essay.

421 See id.

422 Kortenaar & Spanjersberg, Taxation and E-Commerce, supra note 5, at 180-187.

423 See ECFIN's Effective Tax Rates, Economic Papers No. 146, European Commission, October 2000 [ECFIN/593/00-EN]




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