I thank the Vice Chairman. At the committee meeting of 11 January 2006 it was decided to invite us to discuss this proposal. Reference was made to the EU services directive, which will be voted on in the European Parliament tomorrow. The directive is designed to establish a legal framework governing the establishment and free movement of services within the EU. While services are mentioned in today's subject, it is an entirely different proposal.
Concerning the directive under discussion this afternoon, in July 2005 the European Commission brought forward an amended proposal concerning the place of supply rules governing the VAT treatment of cross-border services. The proposal, which deals with cross-border business-to-business, B2B, services and cross-border business-to-consumer, B2C, services replaces the Commission's earlier proposal of December 2003 which proposed changes in the rules governing B2B services only. This latter proposal, COM (2003) 822, was examined by the committee on 28 April 2004 and further material was provided by my Department to the committee in response to certain issues raised at that stage.
On that occasion it was clear that the changes proposed to the B2B supplies were mostly Exchequer neutral and, in many cases were designed to simplify VAT arrangements for cross-border services in order to reduce the administrative burdens on businesses, both on the supply side and on the recipient side. At that stage, it was also recognised that the main effects of changing the place of supply rules for services would manifest themselves in the B2C arena.
The new Commission proposal which we are discussing today brings together the full set of proposals for the place of supply rules for both B2B and B2C services. The Commission has simply merged the original B2B proposal of December 2003 with the new B2C proposals. Therefore, the only new material which the committee has not yet examined concerns the B2C services. In these circumstances, I propose to focus my opening remarks on the changes to the B2C services. We are prepared to answer any questions the committee may have regarding any part of the dossier.
In a VAT context, the place of supply rules determine the place of taxation, and since we are dealing here with cross-border services where the service provider is established in one member state and the recipient of the service is in another, the place of supply rules determine in which member state the VAT liability falls due. The overall objective of the Commission's proposal is to ensure that VAT accrues to the member state in which services are consumed. In other words, in most cases under the new proposal, the member state of the consumer would become the place of taxation rather than the member state of the supplier as dictated by existing rules. Discussions on the proposal are continuing under the Austrian Presidency and, while a number of member states maintain reservations on the proposal, it is likely that agreement, at least at a technical level, will be reached soon.
The reason proposals have been put forward at this stage to change the existing place of supply rules is that developments have taken place in the nature and volume of cross-border trade within the developing Internal Market. The existing place of supply rules no longer sufficiently guarantee that VAT applied to services accrues to the member state where services are consumed. In addition, the existing rules based on the location of the supplier provide an incentive for suppliers, particularly those engaged in certain on-line and telecommunications services, to locate to low VAT rate jurisdictions to gain competitive advantage over suppliers located in relatively high VAT regimes. This can lead to a diversion of trade and loss of VAT revenue in some cases.
Further difficulties may arise between non-EU and EU-based service providers of e-commerce and telecommunications services because, under a special scheme introduced in 2002, suppliers from outside of the EU are obliged to charge the VAT rate applying to such services in the member state of the consumer. For example, an e-commerce provider from outside the EU supplying services to a Swedish consumer is obliged to charge the 25% Swedish VAT rate, while under current EU rules, an EU-based supplier based in Luxembourg would charge the 15% Luxembourg VAT rate to the same Swedish consumer. The special scheme for non-EU providers is due to expire on 1 July 2006.
I will now examine in some detail the Commission proposal for B2C services and highlight where the main effects will occur. I will then consider the implications for Ireland from a business, consumer and Exchequer point of view. As already mentioned, the Commission's proposal for B2C cross-border services seeks changes in the place of supply rules for certain services which would locate the place of taxation in the member state of the consumer. This aligns with the overall objective of securing taxation in the place of consumption.
The Commission's B2C proposal affects services provided to private consumers and focuses primarily on services which can and are being delivered easily across frontiers. As a result, the key changes are confined to a small number of services, notably to those which can be readily supplied at a distance. These include electronically supplied services, telecommunications services and radio and television broadcasting services. Changes are also proposed in the areas of restaurant and catering services, short-term car hire and longer term car leasing services.
For completeness, the proposal also deals with certain B2C services which, for practical reasons, are governed by special rules and for which, in effect, the Commission does not suggest any change in VAT treatment. For the committee's information, these include services relating to property, which will remain taxable where the property is located, and services consisting of cultural, artistic, sporting, scientific, educational, entertainment or similar activities which are currently taxed where they "are physically carried out" and which, for clarity, will now be taxed where these events take place. At a practical level, this will not involve any real change as regards their place of taxation and will have no impact on our Exchequer receipts. It is also proposed that the rules concerning the place of taxation of intra-Community transport of goods and services will remain unchanged.
I will now examine the specific areas of short-term hiring and long-term leasing of cars, restaurant and catering services and electronically delivered and distance services under the new business to consumer proposals. It is proposed that the short-term hiring of motor vehicles, will be taxable where vehicles are "put at the disposal of the customer". Under the existing rule, this service is taxed where the supplier of the hire service is established. It is intended that the new rules will result in taxation being applied in the country where the car is used.
For long-term car leasing, the place of taxation will be where the customer is established or has his or her permanent address or normally resides. As for restaurant and catering services, the latest draft of the proposal provides that "the place of taxation of restaurant and catering services is the place where those services are physically carried out". At present, these services are taxed in the place where the supplier has established his or her business. For restaurant services, the change will have little or no effect as the services will be physically carried out at the restaurant, invariably also the place where the supplier has established his or her business.
However, there will be an effect for mobile catering service providers trading across borders. Mobile caterers who have established their business and are registered for VAT in the State would have to register and account for VAT at the 17.5% rate applicable in the UK when they carry out a catering service in Northern Ireland. Under current rules, they account for VAT at the rate applicable in the State for such services, in other words the rate where their business is established, which is 13.5%.
The Commission and most member states see these proposed changes as better reflecting the reality of where services are consumed and ensuring a level playing field between suppliers wherever they are located in the Community. This is of particular importance for Ireland where electronic services and services supplied at a distance are concerned. It is also proposed to shift the place of taxation to the member state of the customer. Electronically delivered services include those delivered on-line over the Internet, for example, software and digital music, games and videos and also distance teaching services. The scope of this change also extends to telecommunications services, including telephone services and radio and television broadcasting services.
Ireland's interest in a change of rules for distance services specifically relates to our growing e-commerce industry and the need for Ireland to be in a position to compete effectively in this global market. In this regard, the enterprise strategy group under the auspices of the Department of Enterprise, Trade and Employment identified the current VAT rules for e-commerce services as a "significant competitive disadvantage" for Irish companies operating in the B2C market. In its report of July 2004, Ahead of the Curve — Ireland's Place in the Global Economy, the group concluded that "this affects indigenous companies and it also makes Ireland less attractive to foreign companies that distribute B2C services electronically". The report recommended that "the Government should recommend to the EU that VAT on B2C electronic transactions be charged at the standard rate in the customer's location".
I will now consider the implications of the proposal for Ireland from a business point of view. Companies supplying services to private consumers in the B2C arena will be able to compete on a more equal footing with competitors in other member states. This is because B2C services will carry the VAT rate operating at the location of the consumer irrespective of where these services originate. Services distributed electronically from Ireland will, in general, become more competitive as a result and companies involved in this area should see a boost in demand for their products.
However, the new B2C arrangements will require Irish businesses to register for VAT in the member states where they supply services to private consumers. To cater for this, the Commission has proposed a one-stop-shop facility which would allow traders to meet their EU-wide VAT obligations electronically through their national tax authorities. Discussions are continuing under the auspices of the Austrian Presidency on the issue of the one-stop-shop. The proposal was examined by this committee at its meeting of 6 April 2005.
Returning to the B2C proposal, private consumers in Ireland buying services over the Internet or receiving TV broadcasting services directly from operators established in other member states will pay Irish VAT for these services, irrespective of where they originate. This would lead to consumers incurring an increased VAT rate where they are currently receiving services from providers operating from member states with VAT rates lower than Ireland's. While there would be an Exchequer gain from VAT in respect of TV and online distance services supplied directly from providers in other member states to Irish consumers, we have no information at present on the size of such revenue.
On the other hand, VAT currently accruing to the Exchequer in respect of online e-commerce services distributed from Ireland to private consumers in the EU would now accrue to other member states. Based on current data, it is not possible to estimate the implications for VAT revenue in this area. The new B2C rules should deliver significant benefits for Irish companies involved in supplying e-commerce and Internet based services with the prospect of increased demand for their products. New job opportunities could be expected in respect of indigenous companies involved in this area and also from increased foreign investment as a result of Ireland's enhanced attractiveness as a location from which to deliver e-commerce and Internet based services.
