VAT on e-commerce

Directive relating to VAT on digital services entered into force on 1 July 2003


The new legislation


Council Directive 2002/38/EC on the VAT arrangements applicable to radio and television broadcasting services and certain electronically supplied services was adopted on 7 May 2002 and entered into effect on 1 July 2003. As far as electronically supplied services are concerned, these measures are explained below.


Council Regulation (EC) 792/2002, temporarily amending Regulation (EEC) 218/92 on administrative co-operation in the field of indirect taxation (VAT) introduces additional measures necessary for the registering of foreign e-commerce traders for VAT purposes and for distributing the VAT receipts to the Member States where the services were actually used.


Under these new rules, EU suppliers are no longer obliged to levy VAT when selling on markets outside the EU, thereby removing a significant competitive handicap. Previously under tax rules drawn up before e-commerce existed, EU suppliers had to charge VAT when supplying digital products even in countries outside the EU.


The changes eliminate an existing competitive distortion by subjecting non-EU suppliers to the same VAT rules as EU suppliers when they are providing electronic services to EU customers, something which EU businesses had been actively seeking for some time.


The VAT rules for non-EU suppliers selling to business customers in the Union (at least 90% of this market) remain unchanged, with the VAT paid by the importing company under self-assessment arrangements.


OECD principles


These measures mean that the EU became the first significant tax jurisdiction in the world to develop and implement a simplified framework for consumption taxes on e-commerce in accordance with the principles agreed within the framework of the Organisation for Economic Co-operation and Development (OECD). The Directive therefore complements the international process at the OECD. The OECD principles on the taxation of e-commerce were agreed at a 1998 conference in Ottawa. These principles establish that the rules for consumption taxes (such as VAT) should result in taxation in the jurisdiction where consumption takes place. The OECD also agreed that a simplified online registration scheme, as now adopted by the Council, is the only viable option today for applying taxes to e-commerce sales by non-resident traders.