A logjam in the Brussels lawmaking machine has forced the European Commission to extend its existing rules governing value-added tax (VAT) on e-commerce until the end of 2008, the Commission said Tuesday.
The law covers all services supplied by electronic means, including websites, radio and television broadcasting services, and applies to all European Union (E.U.) countries.
The law passed in 2002 expires at the end of next month. The plan was to replace it with two general laws covering all VAT payments, not just electronic ones. However, the 25 member states of the Union have failed to reach agreement on the new laws.
If the VAT on e-commerce law was allowed to expire without a replacement, Europe-based e-commerce firms and broadcasters would be at an immediate disadvantage to competitors based outside the Union, because they would still have to pay VAT. It would also mean that E.U. suppliers would be subject to VAT even for services supplied to clients outside the E.U.
The 2002 law forced all e-commerce companies selling to European customers to pay the VAT charged in the country where the buyer is located. It also lifted liability on European firms selling their products or services electronically outside of the Union.
"We had to prolong the directive, otherwise the system would collapse," said Valerie Rampi, the Commission spokeswoman on tax issues, at a press briefing Tuesday.
Union-wide tax laws require unanimous support among the 25 member states, which is never easy as national governments are loath to give up any of their fiscal powers to Brussels.
In 2002, when there were just 15 E.U. member states, the only way to secure an agreement was by inserting a clause calling for the law to be reviewed by the end of June 2006. Without a review, the law would be suspended.
Lazlo Kovacs, the European commissioner in charge of taxation issues, urged the 25 member states "rapidly" to approve the extension of the existing law. "I cannot imagine we would revert to the rules prevailing before the e-commerce directive was introduced," he said in a statement.
He also urged the national governments to speed up work on the new laws: one proposal covers where tax for all goods and services sold in the Union should be imposed. The other proposal aims to simplify the process of paying VAT by creating a so-called one-stop-shop for VAT payments.
"I also request support from the E.U. Council to adopt as soon as possible the two proposals on the place of taxation of services and on the One Stop VAT Shop scheme, which will in essence give permanent effect to the measures in the e-commerce VAT Directive," Mr Kovacs said.
The two new proposals for VAT laws can be found at the following sites:
Facts about the existing VAT on e-commerce directive can be found at