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Symantec, an American company selling its software to Europeans through its web site,1 encourages customers to download the software directly by saying that there is "no value-added tax, shipping or export charge."2 At first sight, this one-sentence scenario may not sound strikingly problematic to anyone. However, it gives a condensed summary of the problem constituting the core of this paper, following from the awkward situation of European online traders being at a handicap under the present system of European value added tax compared to their American competitors. This essay is an inquiry into the efforts made by the European Community3 to preserve the functionality of the European system of value added taxation within the digital trade environment.
In general, the legislative efforts examined in this essay form the part of the comprehensive amendatory legislation necessitated worldwide by the emergence of electronic commerce.4 E-commerce, by utilizing the Internet for commercial purposes takes advantage of all the benefits of this network of interconnected computers: it is quick, convenient and not bothered by geographical or physical barriers.5 Such a radical change in the traditional conditions of commercial activity requires legislators to adjust all branches of law governing trade to the new circumstances.
Tax law is one of the fields of law that are not entirely functional within this new `virtual' world. This is especially true with respect to taxes on transactions, such as value added tax. Traditional value added tax concepts are mainly designed to operate based on the geographic location of the parties or the transactions. These tax points disappear when business activity is pursued through the Internet.6 Governments therefore are facing the task of defining new tax points capable of catching online transactions if they wish to preserve their revenues.7
The law of the European Community is the most appropriate context for examining the interaction between electronic commerce and the value added tax (hereinafter referred to as: `the VAT'). The VAT has a special task in the European integration process. Apart from contributing to the resources of the Community,8 the VAT, as a tax on transactions, has an outstanding role in ensuring the free flow of trade within the Community,9 which is the primary ambition of the integration process.10 The result of the European VAT harmonization therefore is a good example of how to tackle the inter-jurisdictional problems of this tax in order to avoid any barriers to international trade. Community efforts to adjust the VAT system to the digital environment might also serve as a model for global co-operation on this field.
Before delineating the route of further discussion a few comments seem necessary with respect to the background of European VAT harmonization.
Following from the unprecedented opportunities brought about by e-commerce for improving the efficiency and competitiveness of the economy,11 governments generally intend to enhance the flourishing thereof even if extending the existing regulatory framework to online trade.12 The European standpoint in this question is expressed in the Green Paper on Electronic Commerce13 that presents the general structure of policy instruments, including tax policy, necessary to encourage the development of e-commerce. Despite favoring regulation, the principle of "no regulation for regulation's sake"14 is defined as one of the basic premises of an appropriate legislative framework. VAT legislation therefore should take account of this ambition.
The European Community should also consider the international context of the legislation concerning e-commerce. By cutting through national borders with ease electronic transactions might be the subjects of several jurisdictions. Unless the laws of these jurisdictions are coordinated internationally, the conflicts thereof will represent a major obstacle to the flourishing of e-commerce.15 The inherently global nature of online trade, therefore, makes international co-operation indispensable and assigns a significant role to international fora in policy harmonization.16 International agreement in the specific field of taxation is even more crucial. If governments wish to avoid double- or non-taxation, they must find a way to approximate their views. Consequently, success of the European proposals largely depends on their international acceptability.
The discussion will proceed as follows. Part II of this essay contains an overview of the European VAT system. In chapter 1 the characteristics of the internal market as a background to the operation of VAT will be examined. After the discussion of the basic features of VAT in chapter 2, chapter 3 gives a brief survey of the historical development thereof within the Community. The survey will show that the problems of the VAT system arisen due to e-commerce mainly have their roots in the inconsistencies of the present regulation. Other difficulties are owing to the special new features of online trade. Therefore, part III will start by describing the basics of e-commerce transactions. Further inquiry will be narrowed down to direct electronic commerce, the value added taxation of which seems to be the most problematic. Chapter 3 specifies the problems and establishes the serious dysfunction of the present VAT rules by closely scrutinizing the application thereof to electronic supplies. At the end of part III attempt is taken to show the possible impact of this dysfunction to the common market. Part IV, after giving a brief overview on the principles that should guide any prospective legislation on this field, describes the proposed Community legislation in detail. The main analytical work is contained in chapters 3 and 4, which intend to highlight the inconsistencies of the Commission's Proposal and to explore possible alternatives. Analysis in these chapters will examine Community actions from the viewpoint of the different interests concerned with the results of legislation on this field: requirements of the VAT system in abstract, the special requirements of the common market, the interests of electronic commerce and that of the international trading partners. Part V contains the conclusion.
Before entering into the main analysis, part II aims to lay the historical groundwork and basic characteristics of the European VAT system.
2 Europe Targets E-Commerce, Legal Brief, October 3, 2000, http://www.legalbrief.co.za/secure/archives/Eurotarg.htm
3 When using the terminology "European Community" this essay refers to the organization originally established as the European Economic Community by the Treaty of Rome in 1957, see the Treaty Establishing the European Community, March 25, 1957, consolidated version in Official Journal C340 10/11/1997 173-308 [hereinafter: `the Treaty of Rome."] The European Community is one of the three organizations constituting the European Union, which is not subject to discussion in this paper. Suffice to note here that the two terms are not interchangeable. See Josephine Shaw, European Union Law in Joseph H. H. Weiler, Introduction to the Law and Institutions of the European Union at 27 of Unit I (2000) [hereinafter: "Weiler, Introduction."]
4 See, e.g., A European Initiative in Electronic Commerce, The Commission of the European Community [COM (97) 157] April 15, 1997 [hereinafter: "Green Paper"], http://europa.eu.int/ISPO/ecommerce/legal/legal.html providing for the comprehensive legislative policy approach to electronic commerce of the European Community; and A Framework for Global Electronic Commerce, The White House, July 1, 1997, http://www.ecommerce.gov/framework.htm delineating the strategy of the United States in legislating with regard to electronic commerce.
5 See, e.g., The Green Paper, supra note 4, at 2; Eric Albarda, Electronic Commerce, in Caught in the Web 13-28 (Deventer ed., 1998) [hereinafter: "Albarda, Electronic Commerce"]; Peter Jenkins, VAT and Electronic Commerce: The Challenges and Opportunities, 10/1 VAT Monitor, 3, 3 (1999) [hereinafter: Jenkins, VAT and E-Commerce"]; DG XXI, Interim Report on the Implications of Electronic Commerce for VAT and Customs, XXI/98/0359-EN, April 3, 1998 [hereinafter: "Working Paper - 1998"]; G. Kortenaar & Chr. Spanjersberg, Taxation and E-Commerce: Dutch Tax Policy Implications, 27 Intertax, May 1999, 180-182 [hereinafter: Kortenaar & Spanjersberg, Taxation and E-Commerce]
6 Chapters 1 and 2 of part III of this essay expand upon this issue in detail. For reference see, e.g., Kortenaar and Spanjersberg, Taxation and E-Commerce, supra note 5, at 180-187; Ernst &Young, San Jose, VAT Traps and Opportunities in Electronic Commerce, Nov. 10, 1999 [hereinafter: "Ernst & Young"] http://www.ernsty.co.uk; David E. Hardesty, Introduction to the book Electronic Commerce: Taxation and Planning, in E-Commerce Tax News (1999) [hereinafter: "Hardesty, Introduction"], http://www.ecommercetax.com; DG XXI, see supra note 5; OECD, Electronic Commerce: The Challenges to Tax Authorities and Taxpayers, 4, Nov. 18, 1997, http://www.oecd.org/daf/fa/e_com/turku_e.pdf [hereinafter: "OECD, Report on the Turku Conference"]
7 OECD, Report on the Turku Conference, see supra note 6, at 4.
8 See, the Decision of the Council of the European Communities on the system of the Communities' own resources, [88/376/EEC, Euratom] June 24, 1988 in Official Journal L185, 15/07/1988 24-28
9 As it will be seen later, the VAT is levied on transactions in proportion to the price of the traded goods and services. By influencing the price of the products, VAT has an impact on the competitiveness of different products in different national markets and has the potential to distort international trading patterns. See Ben Terra & Julie Kajus, Value Added Tax in the EC after 1992, 24 (Kluwer Law and Taxation Publishers, 1992) [hereinafter: "Terra & Kajus, Value Added Tax in the EC"]; Andreas Haufler, Commodity Tax Harmonization in the European Community 7-11 (Physica-Verlag ed., 1993) [hereinafter: "Haufler, Commodity Tax."]
10 See specifically, Article 2 and section (2) of Article 14 of the Treaty of Rome, supra note 3.
11 For the detailed discussion of the positive impacts of electronic commerce on economy in general see Eric Albarda, Electronic Commerce, supra note 5, 13, 26-28; Electronic Commerce - An Introduction, The Commission of the European Community, 5-7, July 2, 1998 [hereinafter: "Electronic Commerce - An Introduction"], http://www.europa.eu.int/ISPO/ecommerce/answers/what.html; C. Michael Armstrong, The Internet and E-Commerce, March 2000, http://www.internetpolicy.org/briefing.htm [hereinafter: "Armstrong, Internet and E-Commerce."]
12 As a background to taxing online trade an important policy debate must be mentioned. In this debate one side vindicates the necessity to extend the existing legal-regulatory framework to the Internet to maintain the coherence of the legal system. The European Community represents this view. With regard to the law of taxation this view argues that electronic transactions should be subject to tax just as traditional trade. See Green Paper, supra note 4. As opposed to this `regulatory' view, the advocates of the `laissez faire' approach believe that the stunning growth and power of the Internet follows from the fact that it is, and has always been, beyond national governments. They assert that taking full advantage of e-commerce is only possible if it is left to grow freely, including freedom from taxation. The most dominant representative of this approach is the United States. See The White House, supra note 4; Internet Tax Freedom Act, Title XI of P.L. 105-277 (1998), available at http://www.house.gov/cox/nettax
13 This is the common denomination of the "European Initiative on Electronic Commerce" put forward by the Commission, see supra note 4. In sharp opposition to the regulatory view of this document the White House explicitly states in the "Framework for Global Electronic Commerce", see supra note 4, that governments must adopt a non-regulatory, market oriented approach to electronic commerce. Contrary to the Green Paper that identifies trade in electronic goods and services as falling under the scope of indirect taxation, the United States believes that there should be no tax imposed on Internet transactions in the near future. In pursuance of this ambition the Congress enacted the "Internet Tax Freedom Act," see supra note 11, which introduces a three-year tax moratorium on Internet that has recently been extended until 2005. See Tom Squitieri, Net Tax Ban Survives for Another Five Years, USA Today, May 11, 2000, http://www.house.gov/cox/press
14 See The Green Paper, supra note 4, at 14.
15 See, e.g., John H. Jackson, The World Trading System 1-10 (The MIT Press, 2000) (1997) [hereinafter: "Jackson, World Trading System"]; Michael J. Trebilcock & Robert Howse, The Regulation of International Trade 1-17 (Routledge, 1999) (1995) [hereinafter: "Trebilcock & Howse"]; David E. Hardesty, E-Commerce and Harmonization of World Tax Systems, in E-Commerce Tax News, Nov. 26. 2000, http://www.ecommercetax.com; Luc Hinnekens, International Taxation of Electronic Commerce: An Emerging Framework in 27 Intertax 440-444 (1999) [hereinafter: "Hinnekens, International Taxation."]
16 The Organization for Economic Co-operation and Development [hereinafter: "the OECD"] plays a central role in the harmonization of fiscal legislation. Most importantly the OECD provides governments with a setting in which to discuss and perfect economic and social policy. The leading task in tax questions is assigned to the Committee on Fiscal Affairs, the duty of which is the drafting and submission of proposals to the Council of the OECD. See http://www.oecd.org; As the only global international organization dealing with rules of trade between nations, the WTO must also be mentioned. Within the framework of this institution the General Agreement on Tariffs and Trade contains the basic principles and requirements of international taxation. See Articles VI and XVI of the GATT at http://www.wto.org/english/docs_e/legal_e/gatt47.pdf; Trebilcock & Howse, supra note 15, at 190-210.