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Positions and Statements



USCIB Letter to European Commission on Proposed Directive

Regarding VAT Applicable to Electronically Delivered Services


July 14, 2000


Mr. Michel Aujean

Director, Tax Policy

Taxation and Customs Directorate General

European Commission

Rue de la Loi 200

1049 Brussels



Dear Mr. Aujean:


The U.S. Council for International Business (USCIB), the U.S. affiliate of the Business and Industry Advisory Committee (BIAC) to the OECD, has reviewed with interest the Proposal for a Council Directive regarding the value added tax (“VAT”) arrangements applicable to certain services supplied by electronic means, issued by the European Commission on 7 June 2000.  USCIB would like to provide you with the following views with respect to this Proposal.


As you may recall, BIAC wrote to you in October 1999 on the issue of the application of indirect taxation to electronic commerce.  This letter (attached) describes BIAC’s important role within the OECD process.  The letter expressed BIAC’s views on certain issues raised by the Working Paper issued on 8 June 1999 by the DGXXI Working Party No. 1, entitled “Indirect Taxes and E-commerce.”  In particular, BIAC urged “the importance of co-ordinating the efforts made in this area at the EU and OECD levels.”  BIAC also expressed its concern that the Working Paper proposed an approach under which digitized products (“on-line” deliveries) would bear a higher rate of VAT than an equivalent product delivered in a traditional method, in violation of the important principle of technological neutrality in taxation.


We appreciate the complexity of the application of indirect taxation to electronic commerce and the extensive work that the Commission has devoted to this issue.  Nonetheless, after careful review of the Commission’s 7 June Proposal, we still believe that the same concerns that BIAC expressed nine months ago continue to exist today.


First, with respect to the importance of coordinating action on this issue with the OECD, we are concerned that the Commission’s action risks undermining the valuable efforts of governments and business at the OECD.  The OECD has formed a Technical Advisory Group (TAG) specifically assigned to the indirect taxation area.  The OECD’s work on this issue is making progress and is on target for completion next year.  In light of the Commission’s stated intention that EU member states will implement the proposed Directive by 1 January 2001, it appears that the Directive could preempt the OECD discussions.  Such an impact would be unfortunate.  USCIB notes that the Trans-Atlantic Business Dialogue (“TABD”) has stated with regard to electronic commerce that “industry and governments should work together through existing fora (such as the OECD) to develop fair, effective and internationally compatible tax policies.”


The Commission’s action may lead other OECD members to proceed with their own initiatives in this area, further undermining the OECD work.  In particular, where other countries require their suppliers to collect the national consumption tax when selling to EU consumers, the EU approach would result in double taxation.  The foreign supplier would be required to collect tax once in its home country and again in Europe.  That is clearly an untenable situation, which would likely lead other countries to move to a taxing situs based on the location of the consumer rather than the supplier.  Thus, the Commission’s approach could coerce other jurisdictions into adopting the same approach in order to avoid imposing double taxation on their suppliers.  This is not only undesirable in itself, but would have a significant impact on the OECD discussions.


Second, the Proposal also does not resolve BIAC’s  and USCIB’s concern about the potential for divergent VAT rates being applied to digitized and physical products (e.g., between downloaded software and software on media).  Such divergent VAT rates would be inconsistent with the principle agreed by the OECD in October 1998 that “Taxation should seek to be neutral and equitable between forms of electronic commerce and between conventional and electronic forms of commerce.”  The TABD, as well, has stated that taxation should not impose “special burdens on electronic sellers.”   USCIB recognizes that the OECD has stated that in the consumption tax context, “the supply of digitised products should not be treated as a supply of goods.”  However, USCIB disagrees with the conclusion that a meaningful distinction exists between a product in physical form and the same product in electronic form whether it is in the context of taxation or classification more generally.   In any event, this statement must be interpreted in light of the baseline principle of neutrality in taxation between conventional and electronic commerce.


The Commission, in this context, recognizes “the possibilities of different rates of tax applying to ostensibly similar goods and services,” but promises to address this matter in a “future review.”  USCIB respectfully submits that given the importance of technological neutrality in tax policy, and the risk of introducing distortions into business planning, this concern should be addressed before the application of VAT to digitized products, not afterwards.  The most equitable and neutral solution would be to simply extend the same VAT rates currently applicable to physically delivered goods to their electronically-delivered counterparts.


A related, specific concern is that the Proposal does not contain any exemption for imports of low-value digitized products.  In contrast, under current VAT rules, low-value physical imports are exempt from VAT.  It would seem logical to extend this same treatment to digitized products.


Third, USCIB wishes to express significant concerns regarding the need to minimize the administrative burden imposed by the Proposal.  USCIB appreciates the significant efforts that the Commission has made in this respect, e.g. through the proposal for a “single registration” by non-EU suppliers and a “single rate” for such supplies, the availability of electronic compliance and electronic invoicing, and the exemption for such suppliers with annual EU turnover below 100,000 Euro.  However, the Proposal is ambiguous with regard to the procedure by which suppliers must ascertain the location of their customers.  For instance, it is unclear whether the suggested approach of requesting a verifiable credit card billing address is intended to create a “safe harbor” such that suppliers will be held harmless if they comply with this approach. It is similarly unclear how suppliers are supposed to adjust to the rise of anonymous payment systems that may not contain indications of the customer’s country of residence.  Such an approach would also impose costly systems adjustments on credit card companies (and would raise concerns about consumers’ privacy and confidentiality.)  In general, it is essential to achieve a simplified compliance system.  Again, USCIB submits that these questions should be addressed sooner rather than later. 


Fourth, USCIB objects to the enforcement measures that are contemplated. The Commission states that a “take down procedure” is “a significant interest for tax administrations.”  Such a procedure would be a drastic sanction, and there is no indication of what due process would be available as a protection against such unfair or arbitrary actions.  The Commission also threatens, none too subtly, to deny intellectual property protection to companies that do not comply with the VAT mandate.  The Commission states that:


Legitimate operators will moreover wish to ensure that they have access to legal protection and remedies in respect of infringements of copyright or other intellectual property rights.  To this end, they will also wish to ensure that they respect their own legal and regulatory obligations.

Intellectual property rights, however, are the subject of international obligations, particularly the WTO Agreement on Trade and Intellectual Property Rights (TRIPS).  Moreover, intellectual property rights also protect the original authors of the protected material, and there is no basis to penalize authors based on violations allegedly committed by companies distributing their work.  These threats are inappropriate ways of promoting compliance.


Last but not least, we are troubled by the jurisdictional precedent that could be established by the Proposal.  The proposed Directive assumes that it is an appropriate exercise of jurisdiction for a country to require registration by a foreign company – under threat of a “take down procedure” – simply because the country’s consumers purchase products from that company’s Internet site.  The question of national jurisdiction over the Internet is a very complex one, with important implications outside the field of taxation.  For instance, the approach taken by the Proposal, if adopted, would likely be used by other countries, such as China, to support their assertion of jurisdiction to regulate foreign Internet sites.  National authorities should carefully consider such implications of the Proposal.


In sum, USCIB has both procedural and substantive concerns regarding the Commission’s proposed Directive.  While we recognize the Commission’s desire to alleviate a perceived disparity that exists between EU and non-EU suppliers of electronic services, we urge the Commission to act cautiously in order to avoid unnecessary and unintended consequences.  In our view, a fair and comprehensive solution to this tax issue can be best accomplished through close cooperation with the OECD.


We would be pleased to discuss this matter with you, if you so desire.


Very truly yours,


Daniel Nichols

Chairman, Committee on Taxation


Richard M. Hammer

International Tax Counsel