Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee - Electronic commerce and indirect taxation
Date: 1998-06-17
Institutions: European Commission
Subjects: VAT, commercial transaction, indirect tax, information network, tax system

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 
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". 

Initiative 

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 

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