Opinion of the Economic and Social Committee on the 'Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee "Electronic commerce and indirect taxation"` (98/C 407/49)

On 23 June 1998 the Commission decided to consult the Economic and Social Committee, under Article 198 of the Treaty establishing the European Community, on the 'Communication from the Commission: Electronic commerce and indirect taxation`.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, set up a study group and appointed Mr Vasco Cal as rapporteur.

At its 357th plenary session of 9 and 10 September 1998 (meeting of 9 September), the Economic and Social Committee appointed Mr Vasco Cal as rapporteur-general and adopted the following opinion by 77 votes with six abstentions.

1. Summary of the Commission document

1.1. Electronic commerce in all its forms is expected to expand rapidly. Internet offers new opportunities to European businesses and consumers. In its Communication 'A European Initiative in Electronic Commerce` (), the Commission points out that 'by its very nature, electronic commerce is transnational`, stimulates European growth and competitiveness and is a 'potentially vital factor for cohesion and integration in Europe`. At the same time, electronic commerce is presenting new challenges, particularly in the field of indirect taxation. Since trade is no longer geographically constrained, it will be increasingly difficult for tax authorities to ascertain the location and identity of the parties to transactions.

1.2. VAT is the most appropriate form of tax for electronic commerce. It is applicable, regardless of the means of communication or commercial mode used, to all supplies of goods and services for consumption within the EU, as well as to imports of goods and the purchase by businesses of most services from sources outside the EU. In contrast, since the direct purchase of services by EU private individuals is rare, it is for the most part not currently subject to VAT. The latter type of transaction potentially poses the most thorny problem for the future, given the development of Internet. Efforts must therefore commence immediately to devise solutions which reflect the essentially decentralized and international nature of the emerging electronic markets. Consequently, if e-commerce is to develop fully, the Community VAT system must ensure legal certainty (clear and consistent rules reducing the risks of unforeseen tax liabilities and disputes), simplicity (introducing a common VAT system based on taxation at origin) and neutrality (the consequences of taxation should be the same for goods and services whether purchased from within or outside the EU).

1.3. The Commission is making an active contribution, especially in the field of taxation, to the international debate under way on this question within the OECD and WTO. Taxation is to be one of the key questions discussed at the OECD Ministerial Conference on A Borderless World: Realising the Potential of Electronic Commerce, to be held in Ottawa on 6-8 October.

1.4. The purpose of the communication is to prepare the contribution of the EU and the Member States on indirect taxation issues for the Ottawa Conference by defining guidelines for taxation to underpin any further debate with interested parties: governments, trade and industry, consumers. The current Community VAT system is one of the main obstacles to the development of electronic commerce within the single market. For this reason, the Commission is continuing to work towards 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. The Commission proposes six guidelines:

Guideline 1

No new taxes

Existing taxes, VAT in particular, should be adapted.

Guideline 2

All types of electronic transmissions and all intangible products (music, videos, software, etc.) delivered by such means are deemed, for the purposes of EU VAT, to be services. All transactions taking place within the EU, using the medium of electronic commerce and resulting in consumption within the EU, are subject to EU VAT. This is also in keeping with the position taken by the EU and the Member States at the WTO.

Guideline 3

Ensuring neutrality

Services ordered by EU private consumers from suppliers outside the EU for delivery on-line present the greatest challenge in terms of VAT collection. If the predicted increase in such services supplied to final consumers, who at present pay no VAT, reaches an economically significant level, it may become necessary to devise mechanisms, in conjunction with the business community, for taxing such supplies. The absence of such taxation would lead to unfair competition for EU operators who already have to pay tax on their supplies of services for private consumption within the EU. Similarly, insofar as many on-line services are currently subject to tax under EU rules on 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 are not taxed. This clearly results in a competitive disadvantage for EU businesses. Community legislation should ensure that all on-line services supplied by non-EU sources for private consumption within the EU are subject to VAT, and that such services exported from the EU to third countries are VAT exempt. In contrast to the present situation, this would mean that services supplied by conventional means, such as telephone or fax, by non-EU sources to private EU consumers would also be subject to VAT.

Guideline 4

Making compliance easy

The credibility of any system of taxation rests on its practicality and the feasibility of its implementation. Tax systems should be fully compatible with commercial practices that are likely to change with the advent of e-commerce.

Guideline 5

Ensuring control and enforcement

Guideline 6

Facilitating tax administration

It will be essential to ensure that invoicing and accounting by electronic means is made available.

1.5. The foregoing guidelines are fully in tune with the aims and objectives of the EU VAT system. They also allow for the possibility of a neutral interface with the tax regimes of non-EU countries. It is for them to decide if they wish to apply indirect taxes of their own to these incoming supplies. This is of particular importance in the discussions to be held in Ottawa concerning the establishment of a global tax framework. The Commission therefore invites the Council to endorse the aforementioned broad guidelines for EU indirect taxation of electronic 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 tax scheme. However, broad guidelines are needed for the on-going debate and, in consultation with the business sector, for 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.

2. General comments

2.1. The Economic and Social Committee notes the communication with interest. The purpose of the communication is to prepare the European Union's position in the international debate on the subject: electronic commerce is an eminently global phenomenon which is developing as part of the wider growth of Internet and its use as a means of trade.

2.2. The Committee fully supports the underlying positions of the Commission and Council, according to which electronic commerce should be organized in such a way as to ensure:

- legal certainty, meaning a framework of clear and consistent rules,

- simplicity, to reduce avoidable costs for economic operators, and

- neutrality, i.e. setting up a tax system which is independent of the type of commerce practised and is the same for goods acquired within or outside the EU.

2.3. The Committee welcomes the view of the Commission and Council that existing taxes should apply to electronic commerce, which should generate no specific new taxes.

2.4. At the same time, the Commission is pressing ahead with its work on replacing the EU's current VAT system with '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` on upstream transactions. Consequently, the Committee wonders whether this approach by the Commission, which has been known for some time, and is probably justified from the point of view of tax equity between Member States and between businesses, is compatible with the Council conclusions of 6 July 1998, which clearly state that 'services, which are supplied via electronic commerce, should, without prejudice to the rules that will be applied within the EU, in principle be taxed at the place of consumption`.

2.4.1. The Committee notes that the Committee is considering significant changes regarding indirect taxation, arguing in Guideline 3 that 'services, whether supplied via e-commerce or otherwise, which are supplied for consumption within the EU, [should be] taxed within the EU, whatever their origin`. This clearly heralds a new tax, particularly in the light of the last sentence of the Guideline, which specifies 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`. However, the true scale of the phenomenon is unknown, and a problem of competition cannot at present be said to exist.

2.4.2. In any case, the problem of the rate of taxation and its impact on competition, involved in applying the principle of VAT in the country of origin, arises more acutely at international level than at Community level.

2.5. The European Parliament's Report of 4 May 1998 () quite rightly commented that 'there is no universally accepted definition of e-commerce so far` and that 'it includes indirect e-commerce (electronic ordering of tangible goods), as well as direct e-commerce (online delivery of intangibles)`. The Committee does not believe that electronic commercial transactions involving tangible goods raise the same problems as traditional commerce. VAT is due on all such transactions whether conducted electronically or otherwise. Sending small, 'uncontrollable` packages from a non-EU country to a private individual within the Union raises the same problem from the technical, tax point of view, whether the order is placed electronically or otherwise. Insofar as the volume of such transactions is likely to increase sharply as a result of e-commerce and the use of electronic money, the situation could become more acute.

3. Specific comments and conclusions

3.1. A trade purchaser of tangible or intangible goods is supposed to pay VAT, which he can then recover at the following commercial stage. The sole problem therefore remains in the case of private purchasers of goods directly transferred by electronic means.

3.2. The first question is whether the goods or service transferred electronically to a private individual are subject to VAT. Many of these products could also be purchased via other means, such as diskettes, CD-ROMs or books: it follows that they may be compared with products supplied by conventional trade which must pay VAT (i.e. charge the client for the VAT, subsequently paid to the tax authorities). Failure to tax products delivered via e-commerce therefore distorts competition between sellers.

3.3. The next question is where the VAT on intangible products can be paid. A number of options may be envisaged:

a) at the point of sale, which raises the problem of imports from non-EU countries;

b) at the seller's Internet provider stage: this would involve some complications for the provider, although advances in software may provide ready solutions;

c) at the carrier stage, provided that the electronically transferred goods become tangible and are physically delivered;

d) at the bank or financial body stage (credit and debit cards);

e) at the consumer stage, by solemn declaration on regular declarations of income;

f) at the level of an independent Community or international organization which would centralize the VAT collected by sellers, and then attribute payments to the countries where the consumers in question live.

3.4. The Committee believes each of these solutions to contain drawbacks, as none of them is tamper- or fraud-proof. The existence of 'tax immorality` is not however a reason to jettison all hopes of indirect taxation of electronically transferred goods.

3.5. In order to avoid the problem of unfair e-commerce competition with conventional commerce, the Community could in both cases provisionally waive VAT on all products or services which may be delivered electronically (), whether of Community origin or imported.

3.6. After a given period of time (three years, say) the situation could be reviewed in the light of technological developments, product definition, the degree of SME preparedness in this area, trends in electronic and conventional trade in the products in question, and the outcome of negotiations with our world trading partners, who are facing a similar problem.

3.7. In this connection, however, it needs to be emphasized that the issue chiefly affects those countries where VAT, or consumption tax, is highest. Whereas in the Community VAT rises to a high point of 25 % in Denmark and Sweden, it is unknown in the United States, where consumption is subject to a modest tax which varies from state to state but rarely exceeds 3 %, as is also the case in Singapore, for example. Some countries levy no taxes on services. In the course of international negotiations, the Community will have to highlight the importance of VAT in balancing its Member States' budgets.

3.7.1. European and US authorities are contemplating tax measures in connection with e-commerce, in close cooperation with the business community. The Committee considers that this process must embrace the commercial sector, undertakings, and all the other socio-occupational interest groups, particularly consumers and workers.

3.7.2. These groups are naturally concerned about the possible negative impact on the level of economic activity, investment and employment (e.g. relocation, disincentives for investment and competition) of tax measures which fail to reflect the overall context.

3.7.3. The Committee draws attention to the danger of ad-hoc, partial solutions to the tax aspects of e-commerce. Electronic commerce is a part of the profound changes taking place in society and in the way companies operate, and raises new problems for the tax system as a whole. Moreover, the tax burden on labour is currently growing, making tax systems increasingly unfair.

3.8. The Committee is disappointed that the Commission's communication does not respond to the call made by the European Parliament in point 22 of its Resolution of 14 May 1998. The Parliament poses the problem of taxation fairly and squarely by asking 'whether electronic commerce trading should be taxed according to the traditional system or whether new realities on the Internet create worldwide challenges that require a complete reformulation of all tax principles (e.g. definition of territorial concepts, rules of origin, sourcing of income)`.

Brussels, 9 September 1998.

The President of the Economic and Social Committee

Tom JENKINS

() COM(97) 157 final, 16.4.1997. Cf. also the ESC opinion on the communication, in OJ C 19, 21.1.1998, p. 72.

() Rapporteur: Erika Mann, PE 223.962/def. (A4-0173/98), p. 15.

() There is no precise description or definition of products which may be delivered electronically. The only clear case to date is that of software.