USCIB Letter on Imposition of a Value Added Tax on Electronic Commerce Transactions
February 7, 2002
H. E. F. Javier Conde de Saro
Permanent Representative of Spain
Boulevard du Régent 52
B-1000 Brussels
Commissioner Frits Bolkestein
Taxation and Customs Union Directorate General
European Commission
Rue de la Loi 200
1049 Brussels
Belgium
Dear Ambassador Conde de Saro and Commissioner Bolkestein:
We are writing on behalf of the U.S. Council for International Business (USCIB), the U.S. affiliate of the Business and Industry Advisory Committee (BIAC) to the OECD, with regard to the recent reports that the European Commission and the Member States have agreed on an approach for the imposition of value-added tax (VAT) on electronic commerce transactions entered into by non-EU firms and EU consumers, to be considered at the ECOFIN meeting scheduled for February 12, 2002.
As you know, the USCIB has repeatedly expressed its concern about the approach proposed by the European Commission and the Member States for the imposition of VAT on electronic commerce transactions. We know that there has been an enormous amount of work devoted to this issue and appreciate the Commission’s willingness to discuss the issue with USCIB members on several occasions. We continue to have concerns with the proposed Directive, which will impose excessive burdens on non-EU firms engaging in electronic commerce with EU consumers. We have identified these concerns below, together with an explanation of the business impact and our suggested solutions, with the hope that these views will play a constructive role in improving the regulatory approach. We hope to continue working with the Commission and Member State tax authorities in the implementation of the specifics of the proposed Directive.
Our identification of these issues is necessarily based on press reports and discussions we have had with informed persons, as no current text of the proposed Directive has been released. Therefore, we regret if there are any inaccuracies in our understanding of the proposed Directive. We also recognize that ultimately, the Directive will be applied to non-EU firms only through the mechanism of national implementing legislation in the Member States.
1. Customer Location: A fundamental concern is that firms should not be required, in order to comply with the Directive, to adopt expensive and burdensome methods in order to verify the location of their customers – especially since there is no solution that is reliable enough to justify its use. This issue remains significant since the proposed Directive specifically requires firms to collect VAT based on the location within the EU of their customers. That is, firms will need to identify supplies to customers in each EU country in order to collect VAT at a different rate based on the location of the customer. (We note that Commissioner Bolkestein himself stated in April 2001 that he
opposed this approach as unworkable.)
The proposed Directive leaves it unclear how firms are supposed to identify the location of their customers. The OECD Technology TAG has considered several technical options for identifying customer location and no workable model has emerged. Moreover, obtaining customers’ physical location – from whatever source – is not part of most companies’ business model. Such a requirement therefore imposes substantial additional costs on firms to develop necessary software and devote human resources to this task. Particularly in an emerging market such as electronic commerce, business models may not be able to accept these additional costs.
To avoid such expensive and burdensome verification procedures, the Directive should provide that firms are not required to collect VAT if the consumer states that s/he is located in country outside the EU. Absent any evidence of fraud, firms should be able to rely on such customer declarations. The Directive could appropriately require that this consumer certification be made in a standard format, and that VAT must be collected where a business can determine, from information otherwise obtained in the normal course of the transaction, that the customer is located in an EU country.
2. Equal Treatment with Equivalent Physical Goods: The Directive does not address the important issue of ensuring non-discriminatory treatment for electronic and physical supplies that are essentially equivalent. As you know, the OECD agreed 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.” Under EU rules, sales of physical products (such as books and newspapers) may be exempted from VAT, or subject to a much-reduced rate, due to their “cultural” status. The digital counterparts to these physical products should also have the same consumption tax treatment. Failure to provide parallel treatment should be avoided as it inevitably distorts the market. While some distinguish digital products based on their interactive nature, this is a distinction without a difference; e.g.
these products remain “cultural” products. The Directive therefore should ensure that Member States do not discriminate in their consumption tax policies between digital products and their physical counterparts.
3. Rate Discrimination: Under the current EU national VAT regimes, the Directive will result in VAT rates being based on origin for EU suppliers but on destination for non-EU suppliers. Since EU Member States maintain different VAT rates, such a situation will result in disparate tax treatment for the EU and non-EU suppliers. When a non-resident company supplies to a customer in a high-tax jurisdiction, the tax burden will be higher than the tax burden on a resident company that is located in a low-tax jurisdiction within the customs union. To the extent that these rate differentials persist both between EU vendors located in differing jurisdictions and between EU vendors on origin systems and non-EU vendors on a destination system, distortion will continue to arise. The application of the two different systems is not compatible with the Ottawa framework and needs to be corrected as soon as possible so that all vendors, regardless of place of establishment are on the same footing. The Directive should be revised to ensure that the tax treatment results in a level playing field for EU and non-EU suppliers in all contexts, so as not to distort the market and to be fully consistent with WTO rules on non-discrimination.
We note that a substantive revision of Article 9 is on the Commission’s priorities list. We believe that to the extent that the rate distortion issue is not addressed in the finalization of the Swedish proposal, that the commission must address that distortion in the revision process. However, given the rapidly evolving nature of the e-commerce marketplace, a rate disparity that exists for even a few years could have very significant impact upon market development. Therefore, we urge that the Commission revise the Directive to ensure that there is no potential – even in the short term – for significant rate disparities to exist.
4. Record-keeping requirements: The proposed Directive leaves ambiguous some issues regarding non-EU firms’ obligation to keep records of their transactions with EU-based consumers. In particular, it is unclear whether firms must keep records in the language of their customers: e.g., if a firm supplies to a customer located in France, must the firm keep records regarding that transaction in French? Since administrative burdens are already being imposed by the Directive, and keeping records in numerous languages would add to that burden, the Directive should clarify that firms may comply with the Directive by keeping records in English or in the national language of the country where a firm is registered for VAT purposes.
More generally, a market distortion can arise from administrative burdens that differ significantly between non-EU and EU suppliers. For instance, if non-EU suppliers are required to adopt expensive customer verification procedures, while EU suppliers are not, this introduces a significant cost disparity to the marketplace. The Directive should ensure that Member States do not impose administrative burdens that differ significantly between non-EU and EU suppliers, and that any regulatory approach is fully consistent with World Trade Organization (WTO) rules requiring that non-EU suppliers be treated no less favorably than EU suppliers.
5. Application of Directive: We are concerned about the lack of clarity as to the application of the Directive to suppliers who do not intend to do business in the EU, but may supply electronic products to EU-based customers inadvertently due to the difficulty of identifying customer location in electronic transactions. Ambiguity in application will mean that companies are forced to adopt burdensome administrative procedures to identify EU-based customers and/or will face the risk of penalties if their procedures are insufficient. When a supplier does not intend to sell to EU customers, and adopts reasonable mechanisms to avoid such sales, the Directive should ensure that Member State legislation respects businesses’ good faith efforts to comply and does not seek to impose penalties after the fact, using information not available in the course of the transaction.
A related point regarding the scope of the Directive’s application is the need for a process whereby non-EU suppliers can determine whether a particular electronic supply is considered as within the scope of the Directive (and the national implementing legislation). For instance, it is unclear whether subscriptions to music download sites and Web-based services are within the scope of the Directive. Without a process for clarifying such questions, firms must operate in an environment of uncertainty. Firms will inevitably collect excess VAT on some supplies, and will face potential penalties for failure to collect VAT on other supplies. Moreover, there is a risk that national authorities will take different approaches in identifying supplies on which VAT must be collected. Therefore, the Directive should require that the national implementing legislation create a standard process whereby firms can obtain rulings on their obligations to collect VAT, and should require that such rulings be reported to the Commission in order to ensure the necessary uniformity of approach.
In addition, the scope of the Directive’s application would be clarified by adopting a “priority” rule between types of supplies which might come under both Articles 9(2)(f) and 9(2)(e) so that it is clear which provision applies. We suggest that in this situation, the supply should be treated under Article 9(2)(f). This approach would reduce the administrative burden by avoiding the need for country-by-country registrations in those three Member States which have applied the Article 9(3)(b) opt-out to electronic supplies.
We also suggest a revision to the single point of contact registration system. Under the current proposal, the opportunity to use the single point of contact is available for non-EU vendors who are not otherwise registered. Thus, if a non-EU vendor has already registered for VAT in France to comply with France’s implementation of the Article 9(3)(b) opt out, they may be required to register in every other EU country in which they make e-commerce supplies. We request that the single point of contact registration system be made available to non-EU vendors not otherwise established in the EU (as opposed to not otherwise registered).
6.. Enforcement Measures
EU officials have suggested that failure to comply with the Directive could lead to a loss of intellectual property protection. As the OECD WP9 Report pointed out, the OECD Taxation Framework Conditions recommended that “counter-acting measures {be} proportionate to the risks involved.” Intellectual property rights 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 suggestions, therefore, are inappropriate ways of promoting compliance. The Directive should address the issue of proportionate enforcement measures and make clear that draconian measures, such as take down procedures and the denial of intellectual property protection, are not “proportionate” enforcement measures.
Finally, one of the most critical concerns with the VAT proposal remains unresolved: from the outset, the Commission has said that it will treat all digital deliveries as “services.” The treatment of digital deliveries as services has potentially negative implications for liberalized trade in electronic products, which would be of major concern to USCIB members. Moreover, such treatment appears unnecessary in order to achieve a meaningful update of the VAT for the digital economy.
In conclusion, we urge the Commission to act cautiously in order to avoid unnecessary and unintended consequences, and to continue improving its regulatory proposal. In our view, a fair and comprehensive solution to this tax issue can be best accomplished through close cooperation with the OECD’s ongoing work on this issue.
We appreciate the opportunity to submit these comments and would be pleased to discuss this matter with you, if you so desire.
Very truly yours,
Daniel Nichols Richard M. Hammer
Chairman, Committee on Taxation International Tax Counsel
cc: Member State Ambassadors
Office of the U.S. Trade Representative
U.S. Department of Treasury
