Explanatory Memorandum to COM(2006)210-1 - Amendment of directive 2002/38/EC as regards the period of application of the VAT arrangements applicable to radio and television broadcasting services and certain electronically supplied services - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2006)210-1 - Amendment of directive 2002/38/EC as regards the period of application of the VAT arrangements applicable to radio and ... |
|---|---|
| source | COM(2006)210  |
| date | 15-05-2006 |
Grounds for and objectives of the proposal Council Directive 2002/38/EC 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, the so called e-commerce VAT Directive, contains a number of provisions which are due to expire on 30 June 2006 unless extended. When enacted, it was intended that the provisions covering the place of supply of these services and certain facilitation measures for non-EU businesses should be reviewed by the Council before the end of the first three years of operation and, on the basis of a proposal from the Commission, revised or extended as needed. The review is on the basis of a report from the Commission to the Council and this report is accordingly adjoined to this proposal. The timely adoption by the Council of proposals from the Commission on the place of supply of services (COM (2005) 334) and on the simplification of VAT obligations (COM (2004) 728) would have obviated the need to extend the provisions in question since these more general proposals included measures to ensure the long term fulfilment of the aims of Directive 2002/38/EC. The slow rate of legislative progress by Member States in the Council however means that these changes will not be in place in time before the 2002 measures expire. If the provisions are not to expire this year - an outcome which nobody would welcome - the Commission has no choice but to propose their temporary extension. The main objective of Directive 2002/38/EC was precise - rectifying an obvious shortcoming in one of the basic provisions of VAT law. Electronic delivery of services had not been foreseen at the time the 6th VAT Directive was enacted and the application of the provisions as they stood prior to the 2002 changes gave a perverse result. Not only did they fail to tax electronic services provided by third country operators but European businesses were obliged to tax all such supplies - regardless of where the customer was located. This outcome conflicted with the neutrality which is central to VAT and seeks that the tax does not 'distort conditions of competition or hinder the free movement of goods and services' (First Council Directive on VAT 67/227/EEC). The issue was where these services should be taxed. VAT is a general tax on the consumption of goods and services and any exclusion requires a specific provision. If developments in technology or commercial practices produce lacunae in the coverage, it has always been standard practice to rectify them The Directive 2002/38/EC included simplified registration and reporting obligations to assist compliance by non-EU operators, allowing them to deal with a single European tax administration of their choice. This provision was a significant departure from the existing norm where taxpayers are required to deal directly with each administration in whose jurisdiction taxable activities took place. Although limited in coverage to non-established e-commerce service suppliers, the novel nature of this single point for VAT compliance was a contributory factor to the insertion of a review clause which obliged the Commission and Member States to re-visit the issue before the end of three years. The report from the Commission to the Council concludes that the 2002 Directive has operated in a satisfactory manner and has achieved its objective. In the absence of a decision on renewal or replacement, its main provisions would expire and the rules for e-services would revert to those prevailing prior to the changes effected from 2003. In order to avoid such a situation, the Commission is therefore proposing that the existing provisions which are set to expire this year should be extended by a period of 30 months until 31 December 2008. This will allow sufficient time for the adoption of the two proposals mentioned above and for Member States to ensure that the infrastructural changes necessary are in place. This proposal will also ensure that the provisions of Council Regulation (EC) No 1798/2003 which deal with the exchange of information between Member States needed for registering foreign e-service traders for VAT purposes and for distributing the VAT receipts to the appropriate Member State, will remain in force as this is linked to Directive 2002/38/EC.
General context Council Directive 2002/38/EC was introduced with the primary aim of eliminating an undesired and unintended effect of the 6th VAT Directive whereby EU businesses found themselves charging and collecting VAT in circumstances which placed them at a competitive disadvantage vis-à-vis 3rd country based operations. The Directive has delivered on this objective. Today the balance between EU and non-EU operators is not a problem as far as VAT is concerned and nobody would wish to revert to the position which existed prior to its adoption. Although not the primary objective, the Directive has contributed to the tax receipts of Member States. In addition to tax collected and paid by non-EU operators registered under the special scheme, the amounts accounted for by businesses which opted for establishment within the Community are likely to be significant. The total is however difficult to quantify as companies opt to set up in the EU for a variety of reasons and it is not practical to identify VAT receipts from the particular services covered by the Directive with precision in published revenue statistics. A further effect on tax revenue is attributable to VAT from existing EU businesses who, with the adoption of the Directive, no longer had any incentive to move their operations outside the Community to protect their competitive position. The combined effect of these three factors confirms the case for extending the provisions During the last three years, the market for B2C downloads and on-line services has matured and become more sophisticated over the time since the Directive was adopted. According to the IFPI, the music industry's global trade body, sales of digitally distributed music tripled during 2005. Regulatory and legal issues such as for instance those associated with rights management and illegal downloads are in the process of being resolved. Uncertainty about future tax treatment would be a backward step and which can only be removed through this prolongation measure. In addition to creating uncertainty, failure to extend the measures would re-awaken the concerns about displacement of business activity which were a major driver in the changes adopted in 2002.
Existing provisions in the area of the proposal This is a simple extension of the existing Directive 2002/38/EC. In time the provisions which expire this year will be given permanent effect by the adoption of the two proposals already mentioned, COM (2004) 728 and COM (2005) 334. These are measures which deal respectively with the simplification of administrative obligations and the place of taxation of services in general. Largely because of their very broad scope, legislative progress has been slower than expected. Nevertheless, they are likely to be adopted in the near future but not in time to cover the expiry of the provisions in the 2002 Directive. Taken together, these two proposed measures will ensure the correct long term functioning of the application of VAT to e-services in line with the goals set out in Article 5 of Directive 2002/38/EC.
Consistency with the other policies and objectives of the Union The provisions whose extension is being proposed are fully in line with established EU VAT policy as set out in the 6th VAT Directive. The original 2002 Directive was occasioned by a lacuna in the coverage of the 6th Directive caused by technological change and the need to assure consistent application of the tax.
Consultation of interested parties
Consultation methods, main sectors targeted and general profile of respondents Participants in two seminars in the Fiscalis Programme held during the last three years to monitor the operation of the 2002 Directive included representatives of all Member States and representatives of a majority of the operators involved.
Summary of responses and how they have been taken into account Because of the sensitive nature of the relationship between taxpayers and tax administrations, it is not appropriate to identify individual contributions to this dialogue. All significant issues raised are however addressed in the Report from the Commission to the Council.
There was no need for external expertise.
Impact assessment The only other option open to the Commission would have been to allow the 2002 provisions to lapse. The reasons why this was not a realistic option are set out in the Report from the Commission to the Council.
Contents
Summary of the proposed action The proposal will extend the period of application foreseen in Article 1 of Council Directive 2002/38/EC thereby ensuring that the measures adopted for the correct taxation of certain electronically supplied services and radio and television broadcasting services remain in place.
Subsidiarity principle The proposal falls under the exclusive competence of the Community. The subsidiarity principle therefore does not apply.
Proportionality principle The proposal complies with the proportionality principle for the following reason(s).
The Proposal is a simple extension of the period of application of an existing measure in the 6th VAT Directive. There is no other reasonable alternative.
The measures adopted in 2002 have worked satisfactorily for both Member States and the businesses concerned. There is no alternative option which would better achieve the objectives of the original measure.
Proposed instruments: directive.
Other means would not be adequate for the following reason(s). This Proposal extend the period of application of a provision already enacted in a Directive. There is no alternative means to achieve this objective.
The proposal has no quantifiable implication for the Community budget.
Review/revision/sunset clause
The proposal includes a revision clause.
Correlation table The Member States are required to communicate to the Commission the text of national provisions transposing the Directive as well as a correlation table between those provisions and this Directive.