The E-VAT Directive: Mitigating Tax Competition or Spurring It?
| Author | Oleksandr Pastukhov |
| Position | LL.M. (Northwestern) Associate Researcher, Center for Law and ICT (ICRI) K.U.Leuven, Leuven 3000, Belgium |
| Pages | 54-57 |
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A version of this paper was published in Kierkegaard, S. (2006) Business Law and Technology Vol. 1 and presented in the 2006 IBLT Conference , Denmark.
Page 54
The Value-Added Tax (VAT) is universally considered less exposed to the risk of harmful tax competition than direct taxes and especially corporate income taxes. There are several reasons for this. First, turnover tax bases are generally less mobile than those of the income tax. Although trans-border shopping has been known for quite a while now, consumers are normally less inventive in matters of tax minimization than entrepreneurs.
Second, since turnover taxes of the VAT type are typically included in every end product's price and are paid by final consumers, they are not a cost factor for businesses. The latter can hardly avoid collecting indirect taxes imposed by any jurisdiction, unless they sell their products in specially designated tax-free zones, international waters, Antarctica or, more realistically, cyberspace.
Third, such taxes are normally applied according to the destination principle in cross-border transactions. This is not a result of a treaty, but rather of a silent consent. Moreover, VAT rates are not as diverse as income tax rates, a standard rate of around 20% being normal (Deloitte, 2006). In the European Union (EU), where the VAT is a subject of advanced harmonization, the minimum rate of 15% and a restrictive list of goods and services eligible for a reduced rate or exemption were introduced (Sixth Directive, 1977).
Finally, international market forces lead countries to align tax rates to those of their trading partners and thus remain competitive in attracting international business. For most of the EU member states, membership in the European Monetary Union is an additional institutional and political factor contributing to the ongoing process of 'spontaneous' tax harmonization.
The above said does not mean that there is no opportunity for intra-jurisdictional tax competition in turnover taxes or harmful practices in this realm. It is namely the EU that has addressed the problem of unequal competitive playing field effects caused by the existence of low and no-VAT jurisdictions, which naturally attract volatile Internet businesses wishing to sell goods or services in countries with higher VAT rates. Thus, harmful tax competition between the EU member states was recognized by the Commission "possible insofar as divergences in the application of the current ... VAT system impact on transnational economic activities or on activities in a neighbouring Member State" (Towards tax co-ordination, 1977). Differences in indirect taxation of investment gold, passenger transport services and energy products were mentioned among tax distortions to the infra-community trade (Ibid, p. 9).
Page 55
The distortions to economic competition and perceived tax leakage that came to the Commission's attention resulted from the fact that non-EU providers of electronically supplied services (including Internet access and digital downloads) were not obliged to account for the VAT in the member states, whereas their EU competitors had to do so and thus were significantly disadvantaged.
In 2002, a special directive (Directive 2002/38/EC, 2002) was adopted in order to ensure that the EU VAT regime no longer provided an unjust competitive advantage to non-EU businesses over their EU counterparts and that electronic services consumed within the member states were duly taxed. New legislation was required in each of the then-15 member states...
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