On Tuesday, the European Council of Economics and Finance
Ministers gave its political agreement, without discussion, to
proposals for a Directive and a Regulation. The rules will apply to
products such as computer games and software, delivered on-line as
opposed to in a physical form, as well as to subscription-based and
pay-per-view radio and television broadcasting. Member States are
due to implement the new rules by 1st July 2003.
European Commissioner for taxation Frits Bolkestein
commented:
"I am delighted that the Council has at last
been able to agree the important Directive on applying VAT to
digital products. This measure will remove the obligation for EU
firms to apply VAT when exporting to world markets and thus remove
a major competitive handicap."
The new rules will ensure that EU suppliers will no longer be
obliged to levy VAT when selling these products on markets outside
the EU. Current VAT rules, drawn up before e-commerce existed,
subject electronically delivered services originating within the EU
to VAT irrespective of the place of consumption, whilst those from
outside the EU are not subject to VAT even when delivered to
consumers within the EU. The new rules will also eliminate an
existing competitive distortion by subjecting non-EU suppliers to
the same VAT rules as EU suppliers when they are providing
electronic services to EU customers, something which EU businesses
have been actively seeking.
Under these new rules, no obligations will be imposed on non-EU
suppliers selling to business customers in the EU (so-called B2B
sales which constitute at least 90% of the market), since the VAT
will be paid by the importing company under self-assessment
arrangements.
However, the rules will require for the first time that
suppliers of digital products from outside the EU will have to
charge VAT on sales to private consumers (B2C), just as EU
suppliers have to do. Non-EU suppliers will be required to register
using special simplified arrangements with a VAT authority in any
one Member State of their choice, and to levy VAT at the rate
applicable in the Member State where the customer is resident. The
country of registration will re-allocate the VAT revenue to the
country of the customer. This system concerning how the non-EU
suppliers should fulfil their obligations and concerning revenue
re-allocation will be applied for three years following
implementation of the proposal and may then be extended or
revised.
Non-EU suppliers' B2C sales into the EU will not be treated
identically to EU suppliers for VAT purposes but the Commission
says that the rules will be fair and will meet fully
non-discrimination obligations under the World Trade Organisation
(WTO). Non-EU suppliers will be subject to simpler and lighter
administrative requirements than those applied to EU traders and
other non-EU businesses carrying on activities in the EU.
The Council can formally adopt the Directive once the text
agreed has been translated into all eleven of the EU's working
languages and once the Parliament has given its opinion about the
Regulation that establishes the procedures for co-operation between
Member States' VAT authorities and for revenue-sharing.
