Report from the Commission to the Council on Council Directive 2002/38/ECof 7 May 2002 amending and amending temporarily Directive 77/388/EEC as regards the value added tax arrangements applicable to radio and television broadcasting services and certain electronically supplied services
Date: 2006-05-15
Institutions: European Commission
Subjects: VAT, application of EU law, broadcasting, electronic commerce, fiscal policy, head office, provision of services, report, television

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 15.5.2006 
COM(2006) 210 final 

2006/0069 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending directive 2002/38/EC 
as regards the period of application of the value added tax arrangements applicable to 
radio and television broadcasting services and certain electronically supplied services 

REPORT FROM THE COMMISSION TO THE COUNCIL 

on COUNCIL DIRECTIVE 2002/38/ECof 7 May 2002 
amending and amending temporarily Directive 77/388/EEC as regards the value added 
tax arrangements applicable to radio and television broadcasting services and certain 
electronically supplied services 

(presented by the Commission) 

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EXPLANATORY MEMORANDUM 

CONTEXT OF THE PROPOSAL 

•  Grounds for and objectives of the proposal 

Council  Directive  2002/38/EC  of  7  May  2002  amending  and  amending  temporarily 
Directive 77/388/EEC as regards the value added tax arrangements applicable to radio 
and television broadcasting services and certain electronically supplied services, the so 
called e-commerce VAT Directive, contains a number of provisions which are due to 
expire on 30 June 2006 unless extended. 

When enacted, it was intended that the provisions covering the place of supply of these 
services and certain facilitation measures for non-EU businesses should be reviewed by 
the Council before the end of the first three years of operation and, on the basis of a 
proposal  from  the  Commission,  revised  or  extended  as  needed.  The  review  is  on  the 
basis  of  a  report  from  the  Commission  to  the  Council  and  this  report  is  accordingly 
adjoined  to  this  proposal.  The  timely  adoption  by  the  Council  of  proposals  from  the 
Commission  on  the  place  of  supply  of  services  (COM  (2005)  334)  and  on  the 
simplification of VAT obligations (COM (2004) 728) would have obviated the need to 
extend the provisions in question since these more general proposals included measures 
to ensure the long term fulfilment of the aims of Directive 2002/38/EC. The slow rate 
of  legislative  progress  by  Member  States  in  the  Council  however  means  that  these 
changes will not be in place in time before the 2002 measures expire. If the provisions 
are  not  to  expire  this  year  -  an  outcome  which  nobody  would  welcome  -  the 
Commission has no choice but to propose their temporary extension. 

The  main  objective  of  Directive  2002/38/EC  was  precise  -  rectifying  an  obvious 
shortcoming in one of the basic provisions of VAT law. Electronic delivery of services 
had  not  been  foreseen  at  the  time  the  6th  VAT  Directive  was  enacted  and  the 
application of the provisions as they stood prior to the 2002 changes gave a perverse 
result.  Not  only  did  they  fail  to  tax  electronic  services  provided  by  third  country 
operators but European businesses were obliged to tax all such supplies - regardless of 
where the customer was located. This outcome conflicted with the neutrality which is 
central  to  VAT  and  seeks  that  the  tax  does  not  "distort  conditions  of  competition  or 
hinder  the  free  movement  of  goods  and  services"  (First  Council  Directive  on  VAT 
67/227/EEC). 

The  issue  was  where  these  services  should  be  taxed.  VAT  is  a  general  tax  on  the 
consumption of goods and services and any exclusion requires a specific provision. If 
developments in technology or commercial practices produce lacunae in the coverage, 
it has always been standard practice to rectify them 

The Directive 2002/38/EC included simplified registration and reporting obligations to 
assist compliance by non-EU operators, allowing them to deal with a single European 
tax administration of their choice. This provision was a significant departure from the 
existing norm where taxpayers are required to deal directly with each administration in 
whose jurisdiction taxable activities took place. Although limited in coverage to non-
established e-commerce service suppliers, the novel nature of this single point for VAT 
compliance was a contributory factor to the insertion of a review clause which obliged 

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the Commission and Member States to re-visit the issue before the end of three years. 
The report from the Commission to the Council concludes that the 2002 Directive has 
operated  in  a  satisfactory  manner  and  has  achieved  its  objective.  In  the  absence  of  a 
decision on renewal or replacement, its main provisions would expire and the rules for 
e-services would revert to those prevailing prior to the changes effected from 2003. In 
order to avoid such a situation, the Commission is therefore proposing that the existing 
provisions  which  are  set  to  expire  this  year  should  be  extended  by  a  period  of  30 
months until 31 December 2008. This will allow sufficient time for the adoption of the 
two  proposals  mentioned  above  and  for  Member  States  to  ensure  that  the 
infrastructural changes necessary are in place. 

This  proposal  will  also  ensure  that  the  provisions  of  Council  Regulation  (EC)  No 
1798/2003  which  deal  with  the  exchange  of  information  between  Member  States 
needed for registering foreign e-service traders for VAT purposes and for distributing 
the VAT receipts to the appropriate Member State, will remain in force as this is linked 
to Directive 2002/38/EC.  

•  General context 

Council Directive 2002/38/EC was introduced with the primary aim of eliminating an 
undesired  and  unintended  effect  of  the  6th  VAT  Directive  whereby  EU  businesses 
found themselves charging and collecting VAT in circumstances which placed them at 
a competitive disadvantage vis-à-vis 3rd country based operations. 

The Directive has delivered on this objective. Today the balance between EU and non-
EU operators is not a problem as far as VAT is concerned and nobody would wish to 
revert to the position which existed prior to its adoption. 

Although not the primary objective, the Directive has contributed to the tax receipts of 
Member  States.  In  addition  to  tax  collected  and  paid  by  non-EU  operators  registered 
under  the  special  scheme,  the  amounts  accounted  for  by  businesses  which  opted  for 
establishment within the Community are likely to be significant. The total is however 
difficult to quantify as companies opt to set up in the EU for a variety of reasons and it 
is  not  practical  to  identify  VAT  receipts  from  the  particular  services  covered  by  the 
Directive with precision in published revenue statistics. A further effect on tax revenue 
is  attributable  to  VAT  from  existing  EU  businesses  who,  with  the  adoption  of  the 
Directive, no longer had any incentive to move their operations outside the Community 
to  protect  their  competitive  position.  The  combined  effect  of  these  three  factors 
confirms the case for extending the provisions 

During  the  last  three  years,  the  market  for  B2C  downloads  and  on-line  services  has 
matured and become more sophisticated over the time since the Directive was adopted. 
According  to  the  IFPI,  the  music  industry's  global  trade  body,  sales  of  digitally 
distributed music tripled during 2005. Regulatory and legal issues such as for instance 
those  associated  with  rights  management  and  illegal  downloads  are  in  the  process  of 
being resolved. Uncertainty about future tax treatment would be a backward step and 
which can only be removed through this prolongation measure.  

In addition to creating uncertainty, failure to extend the measures would re-awaken the 
concerns  about  displacement  of  business  activity  which  were  a  major  driver  in  the 

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changes adopted in 2002. 

•  Existing provisions in the area of the proposal 

This is a simple extension of the existing Directive 2002/38/EC. In time the provisions 
which  expire  this  year  will  be  given  permanent  effect  by  the  adoption  of  the  two 
proposals  already  mentioned,  COM  (2004)  728  and  COM  (2005)  334.  These  are 
measures which deal respectively with the simplification of administrative obligations 
and  the  place  of  taxation  of  services  in  general.  Largely  because  of  their  very  broad 
scope, legislative progress has been slower than expected. Nevertheless, they are likely 
to be adopted in the near future but not in time to cover the expiry of the provisions in 
the 2002 Directive. 

Taken  together,  these  two  proposed  measures  will  ensure  the  correct  long  term 
functioning  of  the  application  of  VAT  to  e-services  in  line  with  the  goals  set  out  in 
Article 5 of Directive 2002/38/EC. 

•  Consistency with the other policies and objectives of the Union 

The provisions whose extension is being proposed are fully in line with established EU 
VAT  policy  as  set  out  in  the  6th  VAT  Directive.  The  original  2002  Directive  was 
occasioned  by  a  lacuna  in  the  coverage  of  the  6th  Directive  caused  by  technological 
change and the need to assure consistent application of the tax. 

2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

Consultation methods, main sectors targeted and general profile of respondents 

Participants in two seminars in the Fiscalis Programme held during the last three years 
to monitor the operation of the 2002 Directive included representatives of all Member 
States and representatives of a majority of the operators involved. 

Summary of responses and how they have been taken into account 

Because  of  the  sensitive  nature  of  the  relationship  between  taxpayers  and  tax 
administrations,  it  is  not  appropriate  to  identify  individual  contributions  to  this 
dialogue.  All  significant  issues  raised  are  however  addressed  in  the  Report  from  the 
Commission to the Council. 

•  Collection and use of expertise 

There was no need for external expertise. 

•  Impact assessment 

The  only  other  option  open  to  the  Commission  would  have  been  to  allow  the  2002 
provisions to lapse.  

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The  reasons  why  this  was  not  a  realistic  option  are  set  out  in  the  Report  from  the 
Commission to the Council. 

3)  LEGAL ELEMENTS OF THE PROPOSAL 

•  Summary of the proposed action 

The  proposal  will  extend  the  period  of  application  foreseen  in  Article  1  of  Council 
Directive  2002/38/EC  thereby  ensuring  that  the  measures  adopted  for  the  correct 
taxation  of  certain  electronically  supplied  services  and  radio  and 
television 
broadcasting services remain in place. 

•  Legal basis 

Article 93 of the Treaty and Council Directive 2002/38/EC 

•  Subsidiarity principle 

The proposal falls under the exclusive competence of the Community. The subsidiarity 
principle therefore does not apply. 

•  Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s). 

The Proposal is a simple extension of the period of application of an existing measure 
in the 6th VAT Directive. There is no other reasonable alternative. 

The measures adopted in 2002 have worked satisfactorily for both Member States and 
the businesses concerned. There is no alternative option which would better achieve the 
objectives of the original measure.  

•  Choice of instruments 

Proposed instruments: directive. 

Other means would not be adequate for the following reason(s). 

This  Proposal  extend  the  period  of  application  of  a  provision  already  enacted  in  a 
Directive. There is no alternative means to achieve this objective.  

4)  BUDGETARY IMPLICATION 

The proposal has no quantifiable implication for the Community budget. 

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5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

The proposal includes a revision clause. 

•  Correlation table 

The  Member  States  are  required  to  communicate  to  the  Commission  the  text  of 
national  provisions  transposing  the  Directive  as  well  as  a  correlation  table  between 
those provisions and this Directive. 

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2006/0069 (CNS) 

Proposal for a 

COUNCIL DIRECTIVE 

amending directive 2002/38/EC 
as regards the period of application of the value added tax arrangements applicable to 
radio and television broadcasting services and certain electronically supplied services 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 93 thereof, 

Having regard to the proposal from the Commission1, 

Having regard to the opinion of the European Parliament2, 

Having regard to the opinion of the European Economic and Social Committee3, 

Whereas:  

(1) 

(2) 

The review provided for in Article 5 of Council Directive 2002/38/EC of 7 May 2002 
amending and amending temporarily Directive 77/388/EEC as regards the value added 
tax arrangements applicable for radio and television broadcasting services and certain 
electronically supplied services has been carried out. 

In  the  light  of  that  review,  it  is  appropriate  that,  in  the  interests  of  the  proper 
functioning of the internal market and in order to ensure the continued elimination of 
distortion,  the  value  added  tax  arrangements  applicable  to  radio  and  television 
broadcasting  services  and  certain  electronically  supplied  services  should  continue  to 
apply until 31 December 2008. 

(3) 

Directive 2002/38/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DIRECTIVE: 

Article 1 

Article 4 of Directive 2002/38/EC shall be replaced by the following: 

'Article 1 shall apply until 31 December 2008.' 

1 
2 
3 

OJ C , , p. . 
OJ C , , p. . 
OJ C , , p. . 

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Article 2 

1. 

Member  States  shall  adopt  and  publish,  by  30 June  2006  at  the  latest,  the  laws, 
regulations  and  administrative  provisions  necessary  to  comply  with  this  Directive. 
They  shall  forthwith  communicate  to  the  Commission  the  text  of  those  provisions 
and a correlation table between those provisions and this Directive. 

They shall apply those provisions from 1 July 2006. 

When  Member  States  adopt  those  provisions,  they  shall  contain  a  reference  to  this 
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official 
publication. Member States shall determine how such reference is to be made. 

2. 

Member States shall communicate to the Commission the text of the main provisions 
of national law which they adopt in the field covered by this Directive. 

This Directive shall enter into force on the day following that of its publication in the Official 
Journal of the European Union. 

Article3 

Article 4 

This Directive is addressed to the Member States. 

Done at Brussels, 

For the Council 
The President 

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REPORT FROM THE COMMISSION TO THE COUNCIL 

on COUNCIL DIRECTIVE 2002/38/ECof 7 May 2002 
amending and amending temporarily Directive 77/388/EEC as regards the value added 
tax arrangements applicable to radio and television broadcasting services and certain 
electronically supplied services 

1. 

BACKGROUND  

Directive 2002/38/EC requires the Commission to make a report by 30 June 2006 on 
its  operation  and,  if  needed,  to  propose  either  changing  the  way  it  operates  or  to 
extend its applicability. This report responds to the first obligation. The Commission 
is  also  proposing  to  extent  the  application  of  the  Directive  to  the  end  of  2008.  To 
avoid duplication with the Explanatory Memorandum to the extension proposal, the 
report  concentrates  on  the  practical  impact  of  the  Directive  and  how  it  works  in 
practice. 

The  2002  measures  meant  that  the  EU  became  the  first  tax  jurisdiction  to  tax  e-
services in line with the principles developed by the Organisation for Economic Co-
operation  and  Development4.  The  OECD  principles  on  the  taxation  of  e-commerce 
were  agreed  in  1998  in  Ottawa  and  provide  that  when  applied  consumption  taxes 
(like VAT) should result in taxation where consumption takes place.  

This review looks at the services covered by the Directive and the practical questions 
in the administration of the tax as well as its longer term operational framework. 

2. 

SCOPE OF THE REPORT 

2.1. 

E-services 

The  electronically  supplied  services  covered  by  the  Directive  in  Annex L  are 
described  as  an  “illustrative  list  of  electronically  supplied  services  referred  to  in 
Article 9.2.(e)” and mentions the following examples: 

Website supply, web-hosting, distance maintenance of programs and equipment. 

Supply of software and updating thereof. 

Supply of images, text and information, and making of databases available. 

Supply of music, films and games, including games chance and gambling games, and 
of  political,  cultural,  artistic,  sporting,  scientific  and  entertainment  broadcasts  and 
events. 

4 

Ottawa Taxation Framework Conditions for e-commerce at 
http://www.oecd.org/dataoecd/45/19/20499630.pdf 

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Supply of distance teaching. 

Annex L goes on to add that simply communicating by email does not of itself create 
an electronically supplied service. 

If the illustrations seem less than definitive, this should be balanced against the need 
to  be  sufficiently  broad  to  take  account  of  possible  innovation  in  the  range  of  e-
commerce services. 

This  part  of  the  text  was  augmented  by  guidelines  of  the  VAT  Committee  which 
were eventually implemented as part of a Council Regulation5. 

This approach has worked well in ensuring that the services in question are clearly 
identified.  New  developments  have  not  given  rise  to  any  concerns  and  no  further 
measures are needed at this stage.  

2.2. 

Broadcasting 

As well as addressing e-services, the Directive also changed the place of taxation for 
radio and television broadcasting. The special measures for non-established e-service 
operators  do  not  apply  here  and  non-established  broadcasters  must  register  in  each 
Member State where they have taxable activities. 

Although definition for broadcasting has not given rise to problems, any distinction 
from the wider category of e-services has blurred over recent years. The growth of 
podcasting, video-on-demand, streaming and digital broadcasting means that content 
can  be  accessed  in  several  ways.  Delivery  of  similar  content  can  be  made  via 
internet, over interactive and traditional broadcasting networks or via 3G networks. 

It will be increasingly difficult to justify differences in tax treatment as broadcasting, 
telecommunications and e-services converge. References to broadcasting in the Sixth 
Directive  reflect  the  intention  of  legislators  at  a  time  of  simpler  technology.  Apart 
from the consequential competitive imbalance which is likely to increase over time, 
it is hard to see how the increasingly sophisticated applications now evolving match 
the intent of legislators at a time when the reception of broadcasting services was a 
much simpler, perhaps even a localised6 service. 

The evolution of technology and the rapid acceptance of new channels of distribution 
over  the  last  3  years  raise  new  issues  which  the  Directive  did  not  address.  The 
Commission  will  not  however  consider  whether  these  implications  need  to  be 
addressed in legislation before looking at the issue in greater depth. 

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Council Regulation (EC) No 1777/2005 of 17 October 2005 laying down implementing measures for 
Directive 77/388/EEC on the common system of Value Added Tax. O.J. 29.10.2005 L 288 p. .1. 
The  inclusion  of  the  reception  of  broadcasting  services  in  the  same  indent  as  "admissions  to  shows, 
theatres, circuses, fairs, amusement parks" etc., would seem to confirm this. 

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3. 

PRACTICAL ADMINISTRATION OF THE TAX 

The  2002  Directive  was  an  innovative  measure  in  providing  special  measures  for 
non-resident operators. It introduced here new concepts and procedures in collection 
of  VAT.  These  innovations  had  an  impact  on  businesses  as  well  as  tax 
administrations. There were in addition concerns that the technology and protocols at 
the heart of e-commerce might prove incompatible with tax collection, even putting 
in  question  the  viability  of  VAT  as  a  general  tax  on  all  consumption  of  goods  and 
services.  

As  experience  has  shown,  these  concerns  were  without  foundation  and  the  system 
gives  rise  to  little  operational  difficulty  on  a  day-to-day  basis.  This  indeed  would 
have to be an essential pre-condition its continuation in an un-altered form. 

Because  of  the  many  novel  aspects  of  the  tax,  its  detailed  implementation  needed 
special attention. The Commission services worked closely with tax administrations 
and  other  stakeholders.  In  addition  to  two  Fiscalis  seminars,  this  involved  contacts 
were  with  a  number  of  commercial  actors  including  professional  advisors  and 
infrastructure providers. The Commission services also worked with the OECD on e-
commerce  tax  issues,  in  particular  on  guidelines  for  determining  the  place  of 
consumption. 

This has proven a useful in considering the working of the Directive and identifying 
potential difficulties. In terms of the overall functioning of the provisions, they have 
delivered  on  their  objectives  and  that  there  is  no  pressing  need  to  change  the 
legislation beyond extending its period of application. On the other hand, aspects of 
detailed implementation were difficult to foresee and it is unsurprising that here there 
are some issues requiring mention in the context of a general review. 

The  Commission  organised  two  Fiscalis  seminars  to  help  the  process.  The  first 
focused on assisting Member States in introducing and operating the new provisions. 
The  second  seminar,  in  2004,  looked  at  how  they  were  functioning  and  sought  to 
identify  operational  issues  which  might  cause  difficulties.  At  both  speakers  from 
business and from agencies concerned with other regulatory aspects of e-commerce 
made valuable contributions. 

3.1. 

Link with One Stop Scheme 

For  the  Commission  and  for  Member  States,  it  was  soon  clear  that  the  new  single 
point of identification not only worked well for e-services but was a promising model 
for dealing with a number of aspects of intra-Community trade where difficulties had 
been  identified.  This  was  the  genesis  of  the  One  Stop  Scheme  (OSS)  and  which 
formed  the  core  of  a  wide  ranging  proposal  to  simplify  VAT  obligations7.  This 

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COM(2004  )728.  Proposal  for  a  Council  Directive  amending  Directive  77/388/EEC  with  a  view  to 
simplifying value added tax obligations; Proposal for a Council Directive laying down detailed rules for 
the refund of value added tax, provided for in Directive 77/388/EEC, to taxable persons not established 
in  the  territory  of  the  country  but  established  in  another  Member  State;  Proposal  for  a  Council 
Regulation  amending  Regulation  (EC)  No  1798/2003  as  regards  the  introduction  of  administrative 
cooperation  arrangements  in  the  context  of  the  one-stop  scheme  and  the  refund  procedure  for  value 
added tax. 

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envisages a far wider area of application that the very specific one covered by the e-
commerce services scheme.  

Not  all  aspects  e-commerce  services  scheme  were  seen  as  scaleable  for  a 
significantly larger platform. The proposed OSS model differs in certain aspects, in 
particular  in  the  manner  in  which  tax  payments  are  handled,  although  for  most 
purposes will be broadly similar.  

The volume of activity handled by the OSS will be larger by a significant multiple 
than the e-commerce services scheme. It would be inefficient to keep both schemes 
operating and the intention is that the OSS will absorb the e-commerce scheme.  

The  proposal  for  the  OSS  indicated  a  start  date  of  1 July  2006,  which  dove-tailed 
with  the  expiry  of  the  e-services  Directive.  However  progress  in  the  Council  is  far 
slower than the Commission could have imagined. This applies also to the proposal 
on  the  place  of  supply  of  services8  where  implementation  was  also  foreseen  for  1 
July 2006, allowing for the continuity of the current rules in Directive 2002/38/EEC 
on the place of consumption.  

Until these changes are in place, the existing special scheme and rules on the place of 
taxation will have to be extended. Moreover, if the provisions are not renewed, the 
original problematic taxing issues would resurface. The 2003 changes are now well 
settled  and  present  little  problem  to  the  industry.  A  disruptive  change  in  the  tax 
regime, such as a reversion to the pre-2003 situation, would not be a welcome move 
at this time, neither for operators nor for tax administrations. 

3.2. 

Day-to-day operational issues 

When  the  Directive  was  implemented,  concerns  were  expressed  about  the 
administrative  and  compliance  difficulties  for  non-European  companies  selling  e-
services into the Community. Time has shown that these were not as burdensome as 
some at first envisaged. 

For  most  non-European  companies  the  changes  did  not  lead  to  any  compliance 
obligations.  B2B  accounts  for  the  greater  part  of  on-line  e-services  and  here 
compliance  is  a  matter  for  the  European  customer.  The  business  receiving  these 
services has to account for the VAT to its home tax administration.  

It is only when the non-European company delivers supplies to non-business or final 
customers  in  the  EU  that  tax  obligations  commence.  Determining  whether  the 
customer  is  a  business  or  not  is  generally  a  verifiable  question  of  fact  and,  on  the 
basis  of  the  information  received  does  not  seem  to  have  posed  any  significant 
problem other than in isolated instances. 

A non-EU company with the obligation to collect and remit tax under the Directive 
has  three  options  for  achieving  compliance.  The  first  would  be  to  establish  in  a 
Member  State.  Effectively  this  would  mean  operating  on  the  same  basis  as  a 
European business and, for a significant number of operators, seems to have been the 

8 

COM(2005)334. Amended proposal for a Council Directive amending Directive 77/388/EEC as regards 
the place of supply of services. 

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most  attractive  choice.  This  may  well  have  been  motivated  by  the  attraction  of  the 
applicable  rate  of  VAT,  but  equally  some  companies  appear  to  have  chosen  their 
place of establishment on the basis of other non-VAT reasons. 

The  second  option  under  existing  provisions  for  non-established  operators,  would 
have been to register in each Member State where the operator has taxable activities 
but without creating an establishment. There was little indication of significant take-
up under this heading. In all likelihood, the prospect of up to 25 registrations and an 
equivalent number of different obligations was seen as unattractive. 

To avoid an unreasonable burden on 3rd country businesses, the Directive provided a 
third  option  allowing  for  a  single  registration  with  a  selected  “Member  State  of 
identification”  using  innovative  simplified  arrangements.  VAT  is  then  charged  and 
collected  according  to  the  standard  rate  of  tax  of  the  customer's  the  Member  State. 
Finally,  these  collected  taxes  should  be  paid  to  the  tax  administration  of 
identification  together  with  a  return  in  a  standard  format  showing  the  details  of 
taxable activities over the different Member States. Independently, a system was also 
put  in  place  to  ensure  that  the  right  share  of  tax  revenue  and  the  data  needed  for 
the  appropriate  Member  State9. 
confirmation  purposes  was  channelled 
Administratively,  this  put  non-established  operators  in  a  comparable  position  to  an 
established taxable person dealing with only one tax administration. 

to 

3.3. 

Determining place of taxation 

Some  evidence  has  been  adduced  in  relation  to  the  potential  for  conflict  between 
proxies  used  for  the  place  of  taxation  (the  place  where  the  customer  is  established 
under the Directive) and a strict interpretation of the place of actual consumption. A 
billing address is usually a dependable indication of place of consumption but may 
not always give the correct result under a pure test of consumption. As the services 
covered  by  the  Directive  become  increasingly  mobile  this  may  become  a  more 
significant issue. In certain circumstances the outcome could impinge on the taxing 
rights of non-EU countries which would be at odds with the intent of the Directive. 
When the place of actual consumption is located in a non-EU country, issues arise on 
conformity  with  the  OECD  principles  as  well  as  ECJ  case  law  on  the  territorial 
limitations of the Directive (e.g., Trans Tirreno Express v Ufficio Provinciale Iva C-
283/84 as well as Kohler v Finanzamt Dusseldorf-Nord C-58/04).  

There is currently no Community guidance on an acceptable method of verification, 
particularly where alternatives exist. There may be a case for some form of guidance 
on  verifying  the  location  of  customers,  particularly  where  an  operator  acts  in  good 
faith, but before that some confirmation of how significant the problem is would be 
needed. Article 29a of the Sixth Directive allows the Council to adopt implementing 
measures and might then be an appropriate instrument if justified. 

9 

Council  Regulation  (EC)  No  1798/2003  of  7  October  2003  amending  temporarily  Regulation  (EEC)  No 
218/92 on administrative cooperation in the field of indirect taxation (VAT) as regards additional measures 
regarding electronic commerce OJ L 264, 15.10.2003, p. 1 

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3.4. 

Geographical segmentation 

Although  e-commerce  is  widely  seen  as  a  borderless  activity,  there  are  in  reality 
many  examples  of  where  an  international  operator  segregates  customers  on  a 
geographic basis. This may be for several reasons including commercial objectives, 
copyright restrictions or other regulatory obligations. It may also make it easier for 
the operator to deal with EU VAT issues. 

Where a customer accessing the website is detected as coming from an EU location 
(perhaps on the basis of geo-location software), they are automatically directed to the 
EU  site  where  VAT  obligations  are  a  part of  the  normal  transaction  procedures.  In 
the  overwhelming  majority  of  cases  this  functions  without  problems  and  has  the 
advantage  of  ensuring  that  sales  to  EU  based  customers  are  handled  in  the  correct 
manner for VAT since they are isolated from other business. 

It  is  not  particularly  easy  to  circumvent  these  systems  but  it  can  be  achieved  with 
some  determination  and  knowledge.  The  motivation  may  be  increased  choice  or 
better  prices  (which  may  not  necessarily  be  attributable  to  VAT)  or  simple 
perversity. Whatever the reason, the result is that an EU consumer acquires a taxable 
service from a source that is not geared towards handling EU transactions. There is 
no evidence that this is a widespread phenomenon but it may cause difficulties for an 
otherwise compliant taxpayer. 

The absence of a threshold in the Directive means that tax exposure can arise from a 
single transaction. It is hard for an operator to identify such "spill-over" transactions 
in  real  time  and  they  may  subsequently  find  themselves  liable.  The  result  is  one 
which  could  not  have  been  reasonably  foreseen  at  the  time  the  Directive  was 
introduced and for which there is no proper provision. 

For practical reasons tax administration should be encouraged to see these occasional 
or unintended transactions for what they are and, as long as they remain such, to be 
handled  in  the  context  of  materiality  and  proportionality.  If  deemed  necessary,  in 
order  to  ensure  conformity  and  consistency,  the  correct  treatment  could  be 
considered by the VAT Committee and, where appropriate, confirmed by the use of 
Article 29a. 

3.5. 

Taxable status of customer 

Verifying the taxable status of the customer is central to any taxing decision and the 
Directive  does  not  give  any  guidance  on  how  an  operator  should  make  this 
distinction.  In  this  respect  the  provision  of  electronically  supplied  services  is 
generally  no  different  to  any  other  taxable  transaction  and  the  seller  must  make  a 
choice on the basis of all available information. The one aspect where these services 
are unique is in the almost instantaneous nature of most e-service transactions where 
there is little time to reflect on a decision or to adjust it retrospectively. 

Some  operators  have  expressed  the  view  that  they  should  be  permitted  to  make  a 
distinction  solely  on  the  basis  of  information  which  can  be  verified  in  real  time 
against the VAT Information Exchange System (VIES) database. Although this may 
seem superficially reasonable, there are a number of drawbacks. Whilst VIES is an 
on-line  service  which  permits  the  instantaneous  confirmation  of  the  validity  of  a 

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customer's  VAT  identification  number,  it  can  never  be  expected  to  function  as  a 
definitive guide to taxable status. It is merely one element in a wider process. For the 
moment however VIES provides a tool for identifying a business and the absence of 
a verifiable VAT number is, in most cases, a prima facie indication that the supplier 
is  not  dealing  with  a  taxable  operator.  The  Commission  will  continue  to  work  on 
upgrading the quality and functionality of VIES. Most recently, it has been extended 
to handle batch verification requests in response to demands from business. 

Nevertheless, there may be a case for some clarity and consistency in what level of 
verification  is  acceptable  for  on-line  transactions  generally.  Some  Member  States 
already accept that for real-time transactions of low value, a simple declaration from 
the customer suffices but this may not be acceptable to all administrations. 

This  is  an  issue  which  needs  further  consideration,  particularly  if  evidence  can  be 
adduced that for electronically supplied services, special considerations arise. 

3.6. 

Issues of equivalence 

There  has,  as  already  said,  been  expansion  in  the  commercial  activities  covered  by 
the Directive. In some cases this has been via organic growth where new applications 
are  readily  accepted  by  the  market.  In  others  it  has  come  via  transition  from 
traditional  to  digital  media.  For  the  publishing  industries,  the  effects  are  likely  to 
both significant and long term. 

This industry has benefited from the reduced VAT rate provisions in Annex H of the 
Sixth  Directive  for  printed  material.  The  benefits  of  this  measure  are  widely 
appreciated  and  generally  seen  as  a  sustainable  contribution  to  wider  public  policy 
objectives. When the 2002 Directive was been debated, the issue frequently arose as 
to whether some equivalent measure could apply to on-line publishing on grounds of 
neutrality between different channels of distribution. However the very nature of the 
shift  towards  digitalisation  would  present  numerous  impediments.  Electronic 
publication  opens  the  door  to  range  of  functionalities  which  give  a  service 
increasingly  removed  from  traditional  printing  and  rather  in  the  mainstream  of 
general  electronic  communication  and  distribution.  It  would  be  futile  to  try  to 
identify  and  isolate,  for  special  tax  treatment,  a  category  of  on-line  content  with  a 
direct equivalence to printed material. 

Digitalisation  is  going  to  continue  and  the  industry  faces  a  period  of  transition. 
Newspaper readership continues to decline and even advertising revenue stagnates as 
on-line resources develop. The contents of books are easily (at least technically) and 
widely  digitised.  Consumers  increasingly  look  to  digital  content  created  only  with 
on-line distribution in mind. The Commission's digital libraries initiative10 recognises 
the reality of this process and the need to address the challenges for Europe's cultural 
heritage and store of scientific knowledge. 

It  seems  difficult  to  envisage  a  way  in  which  fiscal  measures  might  be  usefully 
deployed here. The reduced rate facility in Annex H is not readily transposable to the 

10 

COM  (2005)  465  final  of  30.9.2005  –  Communication  from  the  Commission  to  the  European 
Parliament,  the  Council,  the  European  Economic  and  Social  Committee  and  the  Committee  of  the 
Regions titled "i2010 : Digital Libraries" 

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digital environment. There is however nothing in the move towards digitalisation that 
questions the continuance of a reduced VAT for printed material. Nevertheless, the 
reality increases non-recoverable VAT borne by institutions such as universities and 
libraries.  Whilst  aware  of  the  issue,  the  Commission  considers  that  this  is  not  the 
place to address it.  

3.7. 

Games of chance and gambling. 

A  significant  area  of  growth  since  2003  has  been  in  the  area  of  on-line  gambling, 
gaming and betting.  

In  many  instances  this  involves  an  on-line  electronic  game  or  electronic  platform 
where participants place wagers with each other or play for a share of a common pot. 
Frequently  the  provider  of  the  service  is  not  acting  as  the  "house"  or  providing  a 
bookmaking service but rather earns revenue from a charge based on access or use. 
What  is  being  offered  is  clearly  a  taxable  electronically  supplied  service  under  the 
Directive on which VAT should be charged. 

Betting and gambling services are VAT exempt  under Article 13(B)(f) of the Sixth 
Directive  but  only  when  they  fall  within  the  conditions  and  limitations  set  by 
individual Member States. This allows Member States to choose the activities which 
they wish to exempt with the consequence that betting and gambling activities which 
not  specifically  exempted  are  liable  to  VAT.  The  ambit  of  discretion  is  however 
restricted by the principle of neutrality laid down by the ECJ in several judgements11.  

The place of taxation for betting and gambling supplied electronically by operators 
based  outside  the  EU  is  the  place  where  the  consumer  of  the  service  is  established 
and taxation is determined by the manner in which the exemption has been effected 
in the Member States of the consumer's establishment. When supplied by an operator 
established in a Member State, the place of taxation is currently the place where the 
operator is established and the tax treatment is determined by the way in which that 
Member State applies the exemption. 

Where  gambling  transactions  are  not  exempt,  the  manner  in  which  VAT  should  be 
charged has been set down by the European Court of Justice in case C-38/9312 which 
held the taxable amount to be the net receipts from the operation rather than the total 
amount staked. This interpretation is however based on specific elements present in 
this case and elsewhere13 the Court has expressed a different view in regard to some 
gaming activities. 

The  correct  interpretation  of  these  rulings  when  applied  to  on-line  gambling  and 
betting may need clarification, particularly where it seems that diverse treatment at 
the  level  of  Member  States  places  an  undue  burden  on  the  tax  compliant  operator. 
This may need further examination, particularly if the existing rules on the place of 
taxation for on-line services made by an operator established in the EU change. 

11 
12 
13 

E.g., Joined cases C453/02 and 462/02 5linneweber) and case C-283/95 (Fischer). 
Glawe v Finanzamt Hamburg-Barmburg-Uhlenhorst - case C-38/93.  
Town and Country Factors Limited v Commissioners of Customs and Excise - case C-498/99 

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3.8. 

Keeping and making available of records 

For  non-established  operators,  Article 26c.B(9)  of  the  Sixth  Directive  on  record 
keeping  and  access  to  records  reflects  the  reality  that  they  will  not  have  an 
establishment in the EU. The normal verification and audit procedures used to check 
compliance are no longer relevant when a business operates from a remote location. 
This distancing in itself creates  problems  and  the  Directive  deals with it  in  a  fairly 
straightforward manner by simply requiring that they keep records in sufficient detail 
to back up the tax return. These records should be available electronically to the tax 
administrations concerned on request and should be kept for 10 years. 

There has been no indication of difficulties on the part of operators in meeting these 
obligations. Neither have tax administrations indicated any problems in verifying the 
correctness of VAT returns submitted under the special scheme. A similar provision 
in  Article 22a  of  the  Sixth  Directive  allows  tax  administrations  generally  to  audit 
records  remotely.  The  absence  of  reported  problems  on  the  part  of  administrations 
should  perhaps  be  read  against  the  reality  that  there  is  no  evidence  to  suggest  that 
these provisions have yet been used on a systematic basis by Member States. 

4. 

CONCLUSIONS 

In  monitoring  the  practical  implementation  of  the  Directive  since  2003,  there  has 
been a consistent and extensive level of contact with both Member States and with 
many  of  the  operators  concerned.  This  allowed  the  Commission  to  identify  any 
issues  which  might  have  caused  concern  and  to  monitor  their  evolution  over  time. 
For  the  most  part,  they  have  turned  out  to  be  questions  of  relatively  minor 
significance or ones whose solution will  be  found  elsewhere.  Where  necessary,  the 
Commission  will  continue  to  monitor  these  latter  concerns  to  ensure  that  they 
achieve a satisfactory resolution. 

It  can  however  be  concluded  with  certainty  that  a  failure  to  prolong  the  Directive 
would  have  major  negative  on  all  interested  parties.  The  experience  over  the  last 
three years can lead to no other judgment. The extension being proposed will allow 
for  alignment  of  the  special  scheme  for  non-established  operators  with  the  more 
general  One  Stop  Scheme.  Some  of  the  technical  issues  mentioned  above  are 
horizontal in their nature and are more properly addressed in the wider context. 

In  moving  towards  full  implementation  of  the  One  Stop  Scheme,  the  Commission 
will therefore continue to take account of the experiences of both administration and 
commercial operators in the implementation of the e-services scheme. 

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