Indirect taxation of electronic commerce : the challenge to the European VAT system

Abstract

As commerce emigrates to cyberspace, tax authorities worldwide are concerned for their eroding tax bases. The countries which apply a Value Added Tax or Goods and Services Tax system are seeking ways in which to tax the on-line sale of goods and services. The European Union is struggling to forge new ways of indirect taxation for electronic commerce: While the EU present mechanism of taxation regulating distance and order catalogue sales can be used to tax the purchase of tangible goods over the Internet that are however delivered using traditional means, the products which are capable of being downloaded by a customer from the web-site of a supplier, and which can therefore be delivered electronically, pose a serious threat to indirect taxation. The EU VAT system consists of 25-year old enacted at a time when e-commerce belonged only to the realms of science fiction writing. The United States have decided that until 2006 all Internet sales will be free from taxation but Brussels has opted to amend its VAT laws. The need for change is driven by the present inability of European tax jurisdictions to collect VAT on sales effected from non-European web-sites to customers in the Community. This situation is also putting EU e-commerce operators at a competitive disadvantage since their non-EU competitors can sell their electronic products free of VAT. This thesis examines the current VAT treatment of e-commerce sales in EU highlighting its shortcomings. An overview of the initiatives which have been launched by the Organisation for Economic Cooperation and Development in an attempt to address the fiscal challenges of e-commerce will be followed by an in-depth study of the proposals for legislative amendment in Europe. The European Commission proposal to amend the VAT Directive however has encountered strong criticism from the other side of the Atlantic and also from EU Member States. American businesses are against the EU plans to make them collect VAT on their sales to EU consumers while the United Kingdom has, in June 2001, announced that it will not support the adoption of the proposal. The advent of e-commerce is also marked to have implications on the administration of VAT and because of this the EU has also proposed amendments to the regulation of VAT invoices by allowing electronic invoices to replace their paper-based predecessors.