VAT In The European Union and Electronically Supplied Services to Final Consumers
16 April 2004
Posted by: TaxFind™
VAT In The European Union and Electronically Supplied Services to Final Consumers1 Background
The European Union’s (EU) basic but non-definitive model for indirect taxation (such as Value-Added Tax (VAT)) is commonly called the Sixth VAT Directive. When the Sixth Directive was put in place, it was unheard of that products could be delivered electronically. It provided that in the EU,the supply of services would, generally, take place in the state in which the supplier has established his business, has a fixed establishment from which to service his supply, or has a permanent address where he usually resides, subject to a number of exceptions.
When these rules were applied to electronic supplies, few problems were experienced in respect of business-to-business (B2B) transactions, as an EU VAT registered business buyer is required to self-assess the tax under the reverse charge mechanism, whether or not the supplier of services or electronic products was from the EU. But problems resulted from business-to-consumer(B2C) transactions. Unless special provision is made, the default position of section 9(1) applies, despite the fact that this section was initially designed to deal with national supply, on the assumption that services are consumed where they are supplied. In terms of this general provision, electronic deliveries from an EU supplier were taxed where the supplier was established, whether the consumer was in the EU or elsewhere. This gave rise to a number of undesirable consequences. The first concerned supplies between Member States. Because of the different VAT rates levied by Member States, the application of the origin principle could lead to a distorted consumption pattern, as consumers could choose to buy from a Member State with the lowest VAT rate. With intra EU B2B supplies, the receiver of a supply could theoretically claim an input credit refund for the VAT in respect of the transaction. But the refund procedure is cumbersome and expensive. If a business should decide not to claim the refund, VAT would remain locked in, which would lead to tax accumulation and hence a rise in the consumer price. Both effects discouraged cross-border activity and compliance with VAT regulations. The application of the origin principle also led to undesirable consequences in cross-border transactions, as EU suppliers had to charge VAT not only in respect of transactions with EU consumers, but when they supplied non-EU consumers. But a non-EU supplier could sell to an EU consumer without any obligation to charge EU VAT, as electronically delivered services and products supplied in these circumstances were not subject to VAT under the old Sixth Directive rules. The seller was not required to collect EU tax, and the buyer was not required to self-assess. If the supplier’s country did not have a VAT regime, the service would remain untaxed. It was felt that because of the fact that most of the new types of digital delivery from outside the EU did not fit into the special place of supply provisions, they would under article 9(1) and so would remain untaxed. This gave a tremendous competitive advantage to non-EU suppliers who could deliver goods electronically VAT free, while their EU competitors had to charge VAT when they supplied final consumers in the EU and elsewhere. For example, European exporters to the United States had to pay EU VAT, whilst American exporters were not under a similar obligation.
With the advent of e-commerce, trade was no longer constrained by geographic or economic borders, and it became possible for a business to perform transactions in jurisdictions in which it had no fixed place of establishment. This dramatic shift from the old conditions governing commercial activity required an adjustment of the legal principles governing various aspects of trade, as it was feared that the existing position resulted in distorted consumption patterns— final consumption would shift to VAT-free international suppliers, which might induce EU businesses to supply services through web sites in VAT free countries in order to retain their market share of final consumers. This was recognized by the EU. In 1998, it was proposed that the VAT legislative base should be amended to take the new principles into account and to review compliance models, while the need for international collaboration was taken into account. The EU worked with the Organization for Economic Cooperation and Development (OECD) to provide an international forum and, in 1998, adopted a set of guidelines that gave due recognition to the need for international accord. As a response to a Round Table Conference and a working paper in 1999, the first real attempt to finalize a solution came in the form of the Proposal of 7 June 2000. But this proposal failed to garner enough support and was replaced by the Proposal of 7 May 2002, which contained many of the basic objectives of its June 2000 predecessor.
Source: By BA Van Der Merwe - University of South Africa (SA Merc LJ)
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