- Except in some cases of interstate trade within federations or within an integrated economic area such as the EU (eg intra-Community supplies to private consumers are in principle taxed at origin, an intra-Community supply taking place between a supplier and a customer established in two different Member States of the EU).
- United Nations, Manual on Statistics of International Trade in Services (2010), p 9.
- On the gravity model of trade see eg Céline Carrère, ‘Revisiting the Effects of Regional Trade Agreements on Trade Flows with Proper Specification of the Gravity Model' (2006) 50 European Economic Review 223; JH Bergstrand, ‘The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence' (2005) 67 Review of Economics and Statistics 474; Robert C Feenstra, James R Markusen and Andrew K Rose, ‘Using the Gravity Equation to Differentiate among Alternative Theories of Trade' (2001) 34 Canadian Journal of Economics 431.
- OECD, ‘Implementation of the Ottawa Taxation Framework Conditions, The 2003 Report’, www.oecd.org/dataoecd/45/19/20499630.pdf, p 33 (‘2003 Report’). See also OECD, ‘The Future of the Internet Economy, A Statistical Profile’, June 2011 update.
- Through the technique of sampling, many items may indeed be digitised and delivered over the Internet. Digital products include, on the one hand, intangible versions of ‘goods’ (such as CDs, videotapes, newspapers, books and other printed matter, photographs and games) which have become competitive substitutes on the global market, even for the cheapest products. On the other hand, many services have also moved from the physical into the digital world (such as e-learning, information databases, lotteries and gambling).
- Collins Stewart expects worldwide revenues from online trade to reach $694 billion in 2012. Forrester foresees a growth of 12% to 15% per year between 2011 and 2015 in the US (from $197 to $279 billion), and in the EU, it estimates that online sales grew by 18% in 2010 compared to 2009, and were expected to grow by 13% in 2011. The number of online buyers in Europe should, still according to Forrester, grow from 157 million to 205 million by 2015, with total sales forecast to reach €133.6 billion. Let us notice, however, that, unfortunately, none of the figures available make the distinction between digital supplies and distance sales (ie tangible goods sold over the Internet).
- Council Directive (EC) 2006/112 of 28 November 2006 on the common system of value added tax [2006] OJ L347/1 (EU VAT Directive).
- Introduced by Council Directive (EC) 2002/38 of 7 May 2002 amending and amending temporarily Directive 77/388/EEC as regards the value added tax arrangements applicable to radio and television broadcasting services and certain electronically supplied services [2002] OJ L128/41, 15/05/2002. The Directive also provides for specific place of supply rules.
- Art 196 of the EU VAT Directive, as amended by Council Directive 2008/8.
- Art 196 of the EU VAT Directive (as amended by Council Directive 2008/8 on the place of supply of services (OJ L44/16, 20 February 2008) reads as follows: ‘VAT shall be payable by any taxable person, or non-taxable legal person identified for VAT purposes, to whom the services referred to in Article 44 are supplied, if the services are supplied by a taxable person not established within the territory of the Member State.’ Art 44 refers to the supply of services to taxable persons.
- Intra-Community supplies of electronically supplied services to private consumers are taxed at origin until 2015. As of 2015, they will also be taxed at destination.
- Arts 357–69 of the VAT Directive. Council Regulation (EC) 792/2002, temporarily amending Regulation (EEC) 218/92 on administrative co-operation in the field of indirect taxation (VAT) and subsequently included in Regulation (EC) 1798/2003, introduces additional measures necessary for the registering for VAT purposes of online suppliers not established within the EU and for distributing VAT receipts to the Member States in which the services are actually used.
- As noted above, the destination principle will also apply to these supplies as of 2015, and the one-stop-scheme will then also be available to EU suppliers for their intra-Community supplies.
- Sijbren Cnossen, ‘VAT Coordination in the European Union: It's the break in the audit trail, stupid!’, Congress of the International Institute of Public Finance (IIPF), Maastricht, The Netherlands, 22–25 August 2008.
- See I Lejeune, E Cortvriend and D Accorsi, ‘Implementing Measures Relating to EU Place-of-Supply Rules: Are Business Issues Solved and Certainty Provided?’ (2011) 22 International VAT Monitor 144.
- Art 18 of Council Regulation 282/2011 of 15 March 2011 laying down implementing measures for Directive (EC) 2006/112 on the common system of value added tax [2011] OJ L77/1 (Council Regulation 282/2011) reads as follows: ‘Unless he has information to the contrary, the supplier 1. may regard a customer established within the Community as a taxable person: (a) where the customer has communicated his individual VAT identification number to him, and the supplier obtains confirmation of the validity of that identification number and of the associated name and address in accordance with Art 31 of Council Regulation (EC) No 904/2010 of 7 October 2010 on administrative cooperation and combating fraud in the field of value added tax; (b) where the customer has not yet received an individual VAT identification number, but informs the supplier that he has applied for it and the supplier obtains any other proof which demonstrates that the customer is a taxable person or a non-taxable legal person required to be identified for VAT purposes and carries out a reasonable level of verification of the accuracy of the information provided by the customer, by normal commercial security measures such as those relating to identity or payment checks. 2. Unless he has information to the contrary, the supplier may regard a customer established within the Community as a non-taxable person when he can demonstrate that the customer has not communicated his individual VAT identification number to him. 3. Unless he has information to the contrary, the supplier may regard a customer established outside the Community as a taxable person: (a) if he obtains from the customer a certificate issued by the customer's competent tax authorities as confirmation that the customer is engaged in economic activities in order to enable him to obtain a refund of VAT under Council Directive 86/560/EEC of 17 November 1986 on the harmonization of the laws of the Member States relating to turnover taxes–Arrangements for the refund of value added tax to taxable persons not established in Community territory; (b) where the customer does not possess that certificate, if the supplier has the VAT number, or a similar number attributed to the customer by the country of establishment and used to identify businesses or any other proof which demonstrates that the customer is a taxable person and if the supplier carries out a reasonable level of verification of the accuracy of the information provided by the customer, by normal commercial security measures such as those relating to identity or payment checks.’
- The VAT Information Exchange System (VIES) is an electronic platform where information relating to the VAT registration (ie the validity of VAT numbers) of companies registered in the EU is available. Under the VIES, suppliers are also requested to report intra-Community supplies of each buyer (along with their VAT identification number) and the buyer has to report its intra-Community acquisitions, allowing for cross-checking.
- ie place of taxation under Art 44 of the VAT Directive.
- Art 20 of Council Regulation 282/2011: ‘Where a supply of services carried out for a taxable person, or a non-taxable legal person deemed to be a taxable person, falls within the scope of Article 44 of Directive 2006/112/EC, and where that taxable person is established in a single country, or, in the absence of a place of establishment of a business or a fixed establishment, has his permanent address and usually resides in a single country, that supply of services shall be taxable in that country. The supplier shall establish that place based on information from the customer, and verify that information by normal commercial security measures such as those relating to identity or payment checks. The information may include the VAT identification number attributed by the Member State where the customer is established.’
- Art 21 of Council Regulation 282/2011: ‘Where a supply of services to a taxable person, or a non-taxable legal person deemed to be a taxable person, falls within the scope of Article 44 of Directive 2006/112/EC, and the taxable person is established in more than one country, that supply shall be taxable in the country where that taxable person has established his business. However, where the service is provided to a fixed establishment of the taxable person located in a place other than that where the customer has established his business, that supply shall be taxable at the place of the fixed establishment receiving that service and using it for its own needs. Where the taxable person does not have a place of establishment of a business or a fixed establishment, the supply shall be taxable at his permanent address or usual residence.’
- Art 11 of Council Regulation 282/2011.
- Lejeune, Cortvriend and Accorsi (n 15) 147.
- ibid.
- Nevertheless, a VAT (or any other type of consumption taxes) might have to be collected in the jurisdiction of consumption.
- Art 368 of the VAT Directive reads as follows: ‘The non-established taxable person making use of this special scheme may not deduct VAT pursuant to Article 168 of this Directive. Notwithstanding Art 1(1) of Directive 86/560/EEC, the taxable person in question shall be refunded in accordance with the said Directive. Articles 2(2) and (3) and Article 4(2) of Directive 86/560/EEC shall not apply to refunds relating to electronic services covered by this special scheme.’
- There are only 8 registrations in France, 5 in Sweden, 3 in Denmark, 2 in Spain, 1 in Belgium, Bulgaria, Cyprus, Greece and Malta, and 0 in Austria, Czech Republic, Estonia, Finland, Hungary, Latvia, Lithuania, Poland, Portugal, Romania and Slovakia. (Figures communicated by the UK Treasury, March 2012.)
- Online domestic supplies may also be easily concealed, but this paper (and the EU VAT Directive) deals only with cross-border transactions.
- Art 364 of the EU VAT Directive.
- ibid, Art 365.
- Art 23(2) of Council Regulation 282/2011.
- ibid, Art 24(2).
- As of 1 January 2015, this exception will also apply to services supplied to EU consumers by foreign (ie non-EU) suppliers. Broadly, the ‘use and enjoyment’ clause is therefore an exception to the wide use of proxies to define the place of consumption rather than ‘real consumption tests'.
- See Marie Lamensch, ‘Unsuitable EU VAT Place of Supply Rules for Electronic Services: Proposal for an Alternative Approach’ (2012) 4 World Tax Journal 77.
- At the moment, these far-reaching obligations concern only foreign suppliers, given that intra-Community supplies to private consumers are currently still taxed at origin (but, as mentioned above, taxation at destination will also apply to EU e-suppliers as of 2015 and the one-stop-scheme will then also be available to them).
- Broadly, the OECD recommendations on the consumption taxation of online supplies consist of the so-called 1998 ‘Ottawa Framework’ (Electronic Commerce: Taxation Framework Conditions, A Report by the Committee on Fiscal Affairs, as presented to Ministers at the OECD Ministerial Conference, ‘A Borderless World: Realising the Potential of Electronic Commerce’, 8 October 1998), and implementation guidelines released by the Committee on Fiscal Affairs (CFA) and the specialised Technical Advisory Groups between 2000 and 2003 (available at www.oecd.org).
- With the nuance that the OECD reports also suggest making use of registration thresholds which have not been implemented in the EU. But the EU VAT Directive provides for a special scheme for all small and medium sized enterprises (ie not specific to online suppliers), under which businesses whose turnover does not exceed a certain threshold may be exempt from registration obligations. This special scheme is, however, only available to small and medium sized businesses in the Member State where they are established (and taking into account the turnover generated in this Member State only). See Case C-97/09 Schmelz v Finanzamt Waldviertel [2010] ECR I-0000, in which the Court had to decide whether the difference in treatment of taxable persons that is linked to the place of establishment of that person was not contrary to the principle of non-discrimination, freedom of establishment, freedom of services or any other fundamental rights under the Treaty. See also the Opinion of AG Kokott, delivered on 17 June 2010, in particular p 5.
- Consumption Tax Aspects of Electronic Commerce: A Report from Working Party n° 9 on Consumption Taxes to the Committee on Fiscal Affairs, www.oecd.org/dataoecd/37/19/2673667.pdf (‘2001 Report’) p 17; 2003 Report (n 4) 14.
- 2001 Report, Ibid, 8. This is also highlighted in the ‘principle of flexibility’ which is identified by the OECD as one of the key taxation principles to be observed in relation to the taxation of e-commerce, and is defined as follows: ‘The systems for taxation should be flexible and dynamic to ensure that they keep pace with technological and commercial developments.’ Ottawa Framework (n 35) 4.
- Tax and e-commerce @ OECD (Report of the Technology TAG, December 2000) (‘Technology TAG Report’) p 20.
- ibid, p 4.
- Press release IP/02/673, ‘VAT: Commission Welcomes Council Adoption of Rules for Application of VAT to Electronically Delivered Services', 7 May 2002.
- Communication from the Commission to the European Parliament, the Council and European Economic and Social Committee on the future of VAT, ‘Towards a simpler, more robust and efficient VAT system tailored to the single market’, COM(2011) 851 final, p 7.
- 2003 Report (n 4) 20.
- 2001 Report (n 37) 14.
- ibid, 13.
- This aspect was clearly highlighted in the Technology TAG Report (n 39) 6. A last reason for us to reject IP tracking as a possible solution, but that is not considered by the OECD, is the fact that it would constitute an exception to the general use of proxies for defining the place of supply for the purpose of levying consumption taxes.
- 2001 Report (n 37) 13.
- OECD, ‘International VAT/GST Guidelines' (February 2006), www.oecd.org/dataoecd/16/36/36177871.pdf.
- ibid, Chapter III C, pts 15–17.
- ibid, Chapter III C, pt 12.
- OECD, ‘International VAT/GST Guidelines', ‘International Trade in Services and Intangibles', ‘Public Consultation on Draft Guidelines for Customer Location’ (from 1 February to 30 June 2010) (‘2010 draft guidelines'), www.oecd.org/dataoecd/19/63/44559751.pdf.
- For a description of and commentary on the 2010 draft Guidelines, see Marie Lamensch, ‘OECD Draft Guidelines on VAT/GST on Cross-Border Services' (2010) 21 International VAT Monitor 271.
- OECD (n 48) 8 (‘Guidelines n° 3′).
- ibid, 6.
- See Lamensch (n 52).
- In recent decades, the OECD, through its Committee on Fiscal Affairs, has managed to present itself as an informal yet efficient ‘world tax organisation’, which has prompted a series of reforms resulting in effective tax cooperation between States. On that topic see Arthur J Cockfield, ‘The Rise of the OECD as Informal “World Tax Organization” through National Responses to E-Commerce Tax Challenges’ (2006) 8 Yale Journal of Law and Technology 136.
- At that time, the main motivation from the EU perspective was to restore the competitive position of EU suppliers by ensuring that supplies made by non-EU suppliers to EU customers would bear EU VAT as is the case with supplies made by EU suppliers to EU customers, and that supplies made by EU suppliers to non-EU customers would not bear EU VAT.
- European Commission, Green Paper on the Future of VAT, ‘Towards a Simpler, More Robust and Efficient VAT System' COM(2010) 695 final 12.
- ibid.
- In that sense, see Richard T Ainsworth, ‘Technology Can Solve MTIC Fraud: VLN, RTvat, D-Vat Certification’ (2011) 22 International VAT Monitor 154. As stated by the author, ‘fraud must be prevented (before the fact), not pursued (after the fact). In the digital world, everything evaporates when pursued.’
- European Commission, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee on the future of VAT: ‘Towards a Simpler, More Robust and Efficient VAT Aystem Tailored to the Single Market’, COM(2011) 851 final 5.
- Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: ‘A Digital Agenda for Europe’, COM(2010) 0245 final. The ‘Digital Single Market’ is part of the ‘Digital Agenda for Europe’ strategy, which is one of the seven flagship initiatives of the Europe 2020 Strategy. The Europe 2020 Strategy aims to exit the crisis and prepare the EU economy for the challenges of the next decade. Europe 2020 sets out a vision to achieve high levels of employment, a low carbon economy, productivity and social cohesion, to be implemented through concrete actions at the EU and national levels. In that context, the Digital Single Market project defines the key enabling role that information and communications technologies will have to play for the EU to meet its objectives for 2020 (‘A Digital Agenda for Europe’, p 3). The Digital Agenda is built upon wide consultations, particularly inputs from the Digital Competitiveness Report 2009, COM(2009) 390; the Commission's 2009 public consultation on future ICT priorities; the Conclusions of the TTE Council of December 2009, the Europe 2020 consultation and strategy; and the ICT Industry Partnership Contribution to the Spanish Presidency Digital Europe Strategy, the own-initiative report of the European Parliament on 2015. eu and the Declaration agreed at the informal Ministerial meeting in Granada in April 2010. These are all available at http://ec.europa.eu/information_society/eeurope/i2010/index_en.htm.
- In its Communication ‘A Digital Agenda for Europe’ (n 62), it actually only makes reference to VAT Directive provisions related to e-invoicing, aimed at ensuring equal treatment for e-invoicing with paper invoices (p 11); there is nothing on the current challenges faced by businesses in terms of collecting VAT in a digital environment.
- There is not a single reference to it in the 2011 Digital Agenda Annual Report (http://ec.europa.eu/information_society/digital-agenda/documents/dae_annual_report_2011.pdf), nor in the 2010 European Council Conclusions on A Digital Agenda for Europe (3017th Transport, Telecommunications and Energy Council meeting Brussels, 31 May 2010).
- Draft Proposal for a Council Regulation amending Implementing Regulation 282/2011 as regards the special schemes for non-established taxable persons supplying telecommunications services, broadcasting services or electronic services to non-taxable persons (January 2011), http://ec.europa.eu/taxation_customs/resources/documents/taxation/vat/key_documents/legislation_proposed/com_2012_2_en.pdf.
- See in particular ‘export-rating’ by Cnossen (Sijbren Cnossen, ‘Is the VAT's Sixth Directive Becoming an Anachronism?’ [1983] European Taxation 434); ‘VIVAT’ by Keen and Smith (M Keen and S Smith, ‘The Future of Value Added Tax in the European Union’ (1996) 23 Economic Policy 375; M Keen and S Smith, ‘Viva VIVAT!' (2000) 7 International Tax and Public Finance 741); ‘CVAT’ by Varsano and elaborated by McLure (R Varsano, ‘Subnational Taxation and the Treatment of Interstate Trade in Brazil: Problems and a Proposed Solution’ in SJ Burki and G Reary (eds), Decentralisation and Accountability of the Public Sector: Proceedings of the World Bank Annual Bank Conference on Development in Latin America and the Caribbean 339; CE McLure, ‘Implementing Subnational VATs on International Trade: The Compensating VAT (CVAT)' (2000) 7 International Tax and Public Finance 723).
- Switching to origin-based taxation was a historical objective of the EU Member States because a destination-based system requires border tax adjustments, which are difficult to implement in an area without frontiers such as the Internal Market. The destination-based VAT system that has been in use for more than 40 years was therefore initially meant to be transitional.
- See European Commission Press Release IP/11/1508, ‘Future VAT System: Pro-Business, Pro-Growth’. At the moment, Arts 402 ff of the VAT Directive still require that the Commission present a report every four years to the European Parliament and the Council, inter alia on the operation of the transitional arrangements for taxing trade between Member States, and that the report be accompanied, where appropriate, by proposals concerning the definitive arrangements.
- Still, the administrative burden for businesses related to their VAT obligations accounted for 60% of the total burden measured in the EU Action Program for Reducing Administrative Burdens (European Commission, ‘Action Program for Reducing Administrative Burdens in the EU, Sectoral Reduction Plans and 2009 Actions, Measurement Studies' COM(2009) 544). According to the industry, this makes the EU a less attractive place to invest. This finding was one of the drivers of the European Commission's 2010 Green Paper on the Future of VAT (n 58). See also BusinessEurope Position Paper of 20 October 2009 on a partnership for a fair and efficient VAT system.
- For information on the RTvat project see www.rtvat.eu.
- Marc Bacchetta, Patrick Low, Aaditya Mattoo, Ludger Schuknect, Hannu Wager and Madelon Wehrens, ‘Electronic Commerce and the Role of the WTO’ (1998) 2 WTO Special Studies 8.
- This is where our proposal differs from the RTvat. The RTvat proposal derives the necessary information for splitting up payments from suppliers' business records, and relies on a ‘Tax Authority Settlement System’. This is, in our view, the weakness of the proposal. Also in that sense, see Ainsworth (n 60).
- In the EU, electronically supplied services must be subject to the standard tax rate, in accordance with Art 98 of the VAT Directive, which provides: ‘1. Member States may apply either one or two reduced rates. 2. The reduced rates shall apply only to supplies of goods or services in the categories set out in Annex III. The reduced rates shall not apply to the services referred to in point (k) of Article 56(1)' (Art 56(1)(k) refers to ‘electronically supplied services').
- The EU BIOP@SS project (Europe's largest chip reader research project) reveals that there are 380 million IDs in circulation in 27 EU Member States (see www.biopass.eu). Finland was the first country to issue eID tokens. Since then Austria, Belgium, Italy, Estonia and Sweden have followed suit. In Finland, Belgium, Italy Estonia, Germany, Spain and France, the State issues eID tokens. In Austria, both the State and private organisations issue them (Amir Hayat and Thomas Rössler, ‘Proposed Framework for an Interoperable Electronic Identity Management System’ (2006) 18 Proceedings of the EGOV06-International Conference on e-Government 179). Hayat and Rössler also make reference to an informal working group, InteropEID, composed of members from several EU Member States, which is also working on a software solution addressing eID interoperability issues (www.comune.grosseto.it/interopEID); and to FIDIS (future of identity in the information society), another important project aimed at developing a deeper understanding of how identities and identity management should be handled in the future European information society (www.fidis.net).
- See https://www.eid-stork.eu/index.php?option=com_frontpage&Itemid=1 Before STORK, several projects were funded by the EU for the concrete implementation of a pan European eID concept: the eEurope Smart Card (eESC) Charter (http://ec.europa.eu/idabc/en/document/4484/5584.html), the GUIDE project (Government User IDentity for Europe, http://cordis.europa.eu/search/index.cfm?fuseaction=proj.document&PJ_RCN=6526790), and the Modinis program (Modinis Identity Management Initiative, http://ec.europa.eu/information_society/eeurope/2005/all_about/modinis/index_en.htm).
- https://www.eid-stork.eu/index.php?option=com_content&task=view&id=186.
- ibid.
- As mentioned above (n 73), electronically supplied services are mandatorily subject to the standard VAT rate in each Member State.
- Hayat and Rössler (n 74) 6, referring to Republik Österreich, ‘Verordnung des Bundeskanzlers, mit der staatliche Tätigkeitsbereiche für Zwecke der Identifikation in E-Government-Kommunikationen abgegrenzt waren (E-Government-Bereichsabgrenzungsverordnung–E-Gov-BerAbgrV)’ StF: BGBl II Nr 289/2004, www.ris.bka.gv.at.
- Hayat and Rössler (n 74) 6. See also Peter Schartner, ‘Unique Domain-Specific Citizen Identification for E-Government Applications’ (Sixth International Conference on Digital Society, 2012), which also discusses unlinkable (and unique) identifiers, and makes a proposal that differs slightly from the Austrian system.
- The author welcomes any comments or suggestions regarding these three (or other) alternative solutions; she may be contacted at [email protected].
World Journal of VAT/GST Law
Volume 1, 2012 - Issue 1
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