COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 17.06.1998 
COM(1998) 374 final 
COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL, THE EUROPEAN PARLIAMENT 
AND THE ECONOMIC AND SOCIAL COMMITTEE 
ELECTRONIC COMMERCE AND 
INDIRECT TAXATION 

I. Background 
In its Communication "A European Initiative in Electronic Commerce** COM(97)157 the 
Commission stressed the need to ensure a clear and neutral tax environment and the 
importance of implementing tax rules which avoid market distortion: "in order to allow 
electronic commerce to develop, it is vital for tax systems to provide legal certainty (so 
that tax obligations are clear, transparent and predictable) and tax neutrality (so that there 
is no extra burden on these new activities as compared to more traditional commerce)".It 
also stated that VAT, as opposed to any new form of tax, is appropriate to electronic 
commerce, just as it is to more traditional ways of conducting business. 
Similarly, in the Joint EU-US Statement on Electronic Commerce (5 December 1997), it 
was also accepted that "taxes on electronic commerce should be clear, consistent, neutral 
and non discriminatory". In the Bonn Declaration signed by 29 countries on 6 July 1997. 
Ministers supported "the principle of non-discriminatory taxes on use oi% Global 
Information Networks" and stated that ""tax issues of electronic commerce call for 
international co-operation and, where appropriate, co-ordination in order to avoid 
distortion of competition *. 
Additionally, in the multilateral area, the WTO has taken the decision to launch a 
comprehensive work programme on electronic commerce. The recommendations for 
action reached through this work programme will be submitted to the 1999 WTO 
Ministerial Conference. The Commission will play an active part in this work which will 
include consideration of the way in which indirect taxation should be applied to 
electronic transactions. 
In this perspective the Commission's overall objective is to ensure that this new way of 
doing business can flourish in a tax environment with a minimum of burden. Where any 
legislative changes are necessary, these should neither advantage nor disadvantage 
electronic commerce compared with other forms of commerce. It is also fully appreciated 
that any future tax mechanism in this field will have to be designed in co-operation with 
all business interests and trading partners. This will involve taking full account of 
commercial practices within the new environment. 
VAT is applicable to all supplies of goods and services for consumption within the EU 
regardless of the means of communication or commercial mode used to effect the 
transactions. The EU VAT system should therefore provide the legal certainty, simplicity 
and neutrality required for the full development of electronic commerce. 
Legal certainty enables commerce to be conducted in an environment where the rules are 
clear and consistent reducing the risks of unforeseen tax liabilities and disputes. 
Simplicity is necessary to keep the burdens of compliance to a minimum. In that respect 
the Commission continues to be fully committed to the introduction o\' the future 
common VAT system based on taxation at origin and providing for a single country o[' 
registration where an operator would both account for and deduct tax in respect of all his 
EU VAT transactions'. 
COM(%)328 Final 
Neutrality means that: 
• the consequences of taxation should be the same for transactions in goods and 
services, regardless of the mode of commerce used or whether delivery is effected 
on-line or off-line. 
• the consequences of taxation should be the same for services and goods whether 
they are purchased from within or from outside the EU 
Certainty, simplicity and neutrality are all essential to ensure a level competitive playing 
field for all traders in the developing global market place, and to avoid market 
distortions. 
II. Electronic commerce: opportunities and challenges 
The rapid growth of the Internet and its development as a tool to facilitate commercial 
transactions is opening up considerable new opportunities for business and consumers in 
Europe. The Framework Communication "A European Initiative in Electronic 
Commerce" noted that "by its very nature, electronic commerce is transnational and 
encourages cross border ordering and delivery of goods and services in the Single 
Market, that it directly stimulated European growth and competitiveness, and that it 
represents ;*a potentially vital factor for cohesion and integration in Europe". 
At the same time, however, electronic commerce is presenting new challenges not least in 
the field of indirect taxation. The new global markets that are emerging will no longer be 
constrained geographically. It will become potentially more difficult to know the location 
and identity of the parties to transactions. This will present tax authorities with 
challenges needing careful study in partnership with the business community. It will be 
essential that taxation be applied in a way that ensures that electronic commerce can 
flourish and realise its full potential to benefit the EU economy and promote higher levels 
of employment. 
The Internet is rapidly evolving from primarily a communication tool to becoming a 
global trading platform. The business community is already aware of its potential use as a 
marketing and sales medium. At the moment, commercial use is mainly in the field of 
advertising and ordering of products. Other innovative uses are developing, in the area 
both of '"indirect" electronic commerce (electronic ordering of tangible goods), and 
"direct"* electronic commerce (electronic ordering and delivery of products and services 
on-line over the networks). Although the market remains small, in absolute terms, 
networks are expanding rapidly and becoming more sophisticated. With increasing 
transmission speeds and the development of secure means of payment, it is predicted that 
over the next few years the market will grow rapidly. 
The supply within the El I of all goods and services is subject to tax under existing VAT 
provisions. This is also the case lor importations of goods by businesses and individuals 
and for the purchase by businesses of most services from sources outside the EU. Until 
now the direct purchase of services by EU private individuals, being rare, is, for the most 
part, not currently subject to VAT. The latter type of transaction, which potentially poses 
the most thorny problems for tax administrations, is predicted to increase considerably as 
on-line delivery becomes quicker and more reliable. Even so. it is forecast that these are 
unlikely to become significant in economic terms by the year 2001. While there is no 
immediate need for changes in the current tax provisions, it is nevertheless necessary to 
monitor the way in which these markets are evolving and to develop solutions in 
conjunction with the industry. Such solutions should simplify existing tax provisions, and 
be compatible with the essentially decentralised and international nature of the emerging 
electronic global markets. 
IIL The international dimension 
The United States Treasury policy statements on e-commerce, made early in 1997, 
provided a stimulus for the current high profile debate on this new phenomenon. Since 
then the debate has widened to include many of our other trading partners in multilateral 
fora, such as the OECD and WTO. The Commission is actively contributing to all these 
activities, in particular in the crucial area of taxation. This includes, in particular, 
continuing wide-ranging consultations with representatives of businesses on tax issues 
both on its own initiative and together with the OECD. Taxation will, thus be one of the 
four key issues discussed at the OECD Ministerial Conference "A Borderless World: 
Realising the Potential of Electronic Commerce'*, which will take place in Ottawa on 6-8 
October 1998. 
IV The objective of the communication 
The purpose of this communication is to prepare the contribution by the EU and its 
Member States on indirect taxation issues for the Ottawa Conference. In this respect, this 
communication aims at defining guidelines for taxation on which to base any further 
debate of these issues with all interested parties - governments, industry, consumers -
both in the Internal Market context, and internationally, in an effort to find global 
solutions. As a contribution to the forthcoming debate, it also allows the Council to 
consider the work that has been done so far by the Commission and the Member States in 
the tax field. It proposes a number of general guidelines which should steer further study 
of ways of adapting the EU VAT system in order to provide the clear and simple rules 
required to meet the needs and support the development of the emerging e-commerce in 
Europe. 
This communication does not address directly the issue of the future changes to VAT in 
the Internal Market. The Commission is fully aware of the problems resulting from the 
current Community VAT system which are perceived by operators, and in particular by 
SMEs, as one of the main obstacle to the development of electronic commerce in the 
Internal Market. For that reason, the Commission continues to be committed to the 
introduction of a common VAT system based on taxation at origin and providing for a 
single country of registration where an operator would both account for and deduct tax in 
respect of all his EU VAT transactions1. 
V. Guidelines. 
Guideline I: No new taxes 
COM(96)328 Final 
The first guideline has been formulated to reflect the basic concept that existing taxes 
should apply to electronic commerce: 
/. In the field of indirect taxation all efforts should to be concentrated on 
adapting existing taxes and more specifically VAT to the developments of e-
commerce. No new or additional taxes are therefore to be considered. 
Guideline 2: Electronic transmissions as services 
VAT is designed as a general consumption tax that, in principle, applies to all supplies of 
goods and services. In all cases transactions taking place within the EU, using the 
medium of electronic commerce and resulting in consumption within the EU, are subject 
to EU VAT under existing provisions. Flowever. that is not always the case where 
supplies from non-EU countries are concerned. In the case of goods supplied from a 
non-EU country to an EU recipient, normal import procedures ensure that VAT is applied 
regardless of the means used to conduct the transaction. Similarly, certain descriptions of 
services received by EU businesses from non-EU countries are subject to VAT. 
Flowever, it should be noted that with few exceptions, services received by EU private 
persons are not. under existing provisions, subject to VAT, (the volumes of such supplies 
is at present very small). 
It is the policy of the EU to consider products ordered and delivered on networks to be 
services. E.U. VAT legislation makes a basic distinction between the supply of goods and 
the supply of services. All types of electronic transmissions and all intangible products 
delivered by such means are deemed, for the purposes of EU VAT, to be servicesThis is 
in keeping with the position taken by the EU and its Member States at WTO. In the tax 
area, this also allows for a clear set of rules to be applied. 
2. A supply that results in a product being placed at the disposal of the recipient in 
digital form via an electronic network is to be treated for I A T purposes, as a 
supply of services/ 
Guideline 3: Ensuring neutrality 
Supplies of these eleetronicalh delivered products may also be delivered by more conventional means in 
a tangible form and. according !o their characteristics, be treated for VAT purposes either as supplies 
of services or of goods. Those currently treated as goods, such as supplies of music or video on disc or 
cassette may be subject to customs duties at importation. Products that, in their tangible form are 
treated for VAT purposes as goods are treated as services when they are delivered by electronic 
means. 
It has already been noted that rapid growth in all types of e-commerce is expected, 
resulting in an increase of supplies from non-EU countries to final consumers in the EU. 
Inevitably, this will include on-line supplies of "intangibles" such as music, video or 
software. 
Turn-over relating to EU final consumption attributable to e-commerce (i.e. delivered to 
private individuals as opposed to companies) is difficult to estimate. This may reach a 
figure of 5bn ECU by the year 2001 for all types of electronic commerce - goods and 
services, ordered and paid for on-line, irrespective of mode of delivery.. Only a 
proportion of this total will be attributable to supplies from non-EU sources and only a 
further fraction of this will consist partly of of "direcf ' electronic commerce, i.e. services 
delivered on-line . 
The latter representing services ordered by EU private consumers from suppliers outside 
the EU for delivery on-line are the activities, that present the greatest challenge in terms 
of collection of VAT. If the predicted increase in such services supplied to final 
consumers, who at present pay no VAT, reaches a level which is economically significant 
it may be necessary, in conjunction with the business community, to design mechanisms 
to tax such supplies. 
The absence of such taxation would lead to unfair competition for EU operators who 
already have to tax their supplies of services for private consumption within the EU. 
Similarly, because many on-line services are currently subject to tax under EU rules at 
the place of origin, VAT is payable by EU suppliers on all the services they supply to 
non-EU countries. Conversely, supplies from non-EU countries to the EU would not be 
taxed - clearly a double competitive disadvantage for EU businesses. Such discrepancies 
in the application of tax clearly offend against the principle of neutrality. 
In order to avoid this type of distortion and to assure the neutrality of the tax system it 
would be desirable that: 
3. The E.U. VAT system should ensure that: 
• Services, whether supplied via e-commerce or otherwise, which are supplied 
for consumption within the E.U. are taxed within the E.U., whatever their 
origin. 
• Such services, supplied by EU operators for consumption outside the E. U. 
are not subject to VAT in the E.U. and VAT on related inputs is eligible for 
deduction. 
The above guideline does not prejudge the rules that will be applied within the 
E.U. 
However, since the practical implementation of this guideline will present problems, the 
Commission intends to pursue its reflections in consultation with member States, within 
a Working Group established by the Commission and with the business sector. 
The last but one sentence reflects the Commission's continuing commitment to the 
introduction of a common VAT system based on taxation at origin and providing for a 
single country of registration where an operator would both account for and deduct tax in 
respect of all his EU VAT transactions. Such a system would not only simplify the 
operation of the tax system for EU businesses but would also provide non-EU businesses 
with the possibility of meeting their EU VAT obligations in a single country. 
Overall, this guideline represents a significant change compared to the present situation. 
It would mean that all services delivered on-line from non-EU sources to private 
individuals in the EU would be subject to VAT and that all such services exported from 
the EU to other countries would be free of VAT. This would ensure tax neutrality 
between EU and non-EU supplies. To preserve tax neutrality between offline and online 
deliveries, it would mean that, unlike now, services delivered by traditional means, such 
as telephone, or fax, from non-EU sources to private individuals in the EU, would also be 
subjected to VAT. 
Guideline 4: Making compliance easy 
The credibility of any system of taxation rests on its practicality, and the feasibility of its 
implementation. There should be certainty about the rules and compliance should be 
made as simple as possible to avoid unnecessary burdens on business. Also there must be 
assurance, both from the point of view of the businesses concerned and the tax 
authorities, that the tax can be controlled and collected efficiently and effectively. The 
global nature of these commercial activities has to be taken into account and international 
consensus and co-operation should be sought to create the right tools to make compliance 
easy. 
Tax mechanisms should be designed to be fully compatible, with commercial practices 
that are likely to change with the advent of e-commerce. Also they should be proportional 
taking account of the specific needs of internet businesses having regard to the 
fundamentally transnational, diversified and decentralised nature of the market. The 
alignment of the tax systems with established business practices is fundamental to the 
efficiency of tax accounting both for operators and tax authorities and in this respect the 
following formulations cater for the foreseeable need of the emerging e-commerce 
environment: 
4. Compliance for all operators in the field of e-commerce should be made as easy 
and simple as possible. 
Guideline 5: Ensuring Control and enforcement 
As already stated the tax systems will have to ensure that all types of consumption in the 
EU will be taxed in the same way. Rules should be restricted to a minimum and 
disproportionate obligations avoided in order to allow e-commerce to flourish. However, 
at the same time, there must be assurances that the tax can be controlled in an effective 
way. 
5. The tax system and its control tools must ensure that taxation is enforceable on 
supplies of services received within the E.U., via e-commerce, by both businesses 
an d private in dividuals. 
As regards individuals, mechanisms devised will have to conform to existing Community 
legislation as regards protection of personal data. 
Guideline 6: Facilitating tax administration 
If businesses are to have confidence in a tax system it must be capable of being applied 
fairly and with certainty and in a manner which allows the full benefits of e-commerce to 
be realised. It should be recognised that the EU and its Member States' own best interests 
lie in creating conditions that will facilitate non-E.U. operators in accounting for E.U. 
VAT on e-commerce. 
By the same token, it is essential to ensure that, in the field of e-commerce, compliance 
burdens are no more onerous for EU operators than they are for non-El1 operators. It will 
be essential in the new environment to ensure that invoicing and accounting by electronic 
means is made available. 
6. Paperless electronic invoicing will be a characteristic of electronic commerce 
and must be authorised for VAT purposes for transactions within the E.U. The 
legitimate interest of Member States must however be safeguarded by the provision 
of sufficient tools for control and prevention of abuse when fixing the conditions 
for the use of electronic invoicing on a uniform basis within the E.U. Similarly, 
high priority should be given to creating a framework of co-operation between 
E.U. and other countries to ensure that conditions, equivalent to those provided 
within the E.U. are also created for international electronic invoicing. 
7. Subject to uniform EC conditions, fiscal administrations should provide for 
operators, participating in e-commerce to discharge their fiscal obligations by 
means of electronic VA T declarations and accounting. 
Mere again, tax administrations will need to be active players in the electronic world, 
prepared to integrate its concepts and practices into their dealings with operators and 
consumers in the global electronic commerce environment.. 
VII. Conclusion 
The foregoing guidelines are fully in tune with the aims and objective of the EU VAT 
system. However they also allow for the possibility of a neutral interface with the tax 
regimes of other non-EU countries insofar as they only provide for taxation of supplies 
consumed within the territory of the EU. Supplies from the EU to other countries would 
not be subject to FT) tax and, as now. in the case of goods and most services, it would be 
for them to decide whether they wished to apply indirect taxes of their own to those 
incoming supplies. This is of particular importance in the discussions that are due to take 
place at the OECD Ministerial conference with business in Ottawa in October concerning 
the establishment of a global tax framework. 
The Commission therefore invites the Council to consider the aforementioned broad 
guidelines for EU indirect taxation of electronic commerce. These should form the 
basis of the EU's input in the forthcoming Ottawa Conference. They serve as a basis 
for further ongoing discussions within the EU and internationally with all 
concerned with development and participation in E-commerce. At this stage, where 
e-commerce technology is still developing and patterns of trade are as yet unclear it 
is not necessary or possible to change the existing scheme of tax. However, broad 
guidelines are needed to steer the direction of the on-going debate and to guide, in 
consultation with the business sector, future developments in the tax field in this 
new and rapidly growing global marketplace. The Commission is convinced that 
taxation consistent with these guidelines will contribute to the success of e-
commerce and the EU economy by providing EU businesses with a level playing 
field for competition. The Commission's overall objective is to ensure that 
Electronic Commerce can flourish in a tax environment with a minimum of burden. 

ISSN 0254-1475 
COM(98) 374 final 
DOCUMENTS 
EN 15 02 10 16 
Catalogue number : CB-CO-98-399-EN-C 
ISBN 92-78-37316-8 
Office for Official Publications of the European Communities 
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