The E-VAT Directive: Mitigating Tax Competition or Spurring IT?

Turnover taxes are generally considered to be risk-free from the tax competition point of view, forthey are levied exclusively at the place of consumption. The Value-Added Tax (VAT) imposed by all EuropeanUnion (EU) member states, though, has become a source of distortion in the trans-Atlantic trade: non-EUsuppliers of electronic services were not required to collect the VAT, while their EU competitors were. The levelplaying field in EU’s foreign trade in electronic services was restored in 2002 by the so-called e-VAT Directivethat obliged non-EU providers of electronic services to charge the VAT at the rate of the member state theirconsumer resides in. This paper argues that besides being largely unenforceable, the Directive has createdanother misbalance in the infra-EU electronic commerce. It is being demonstrated that since the Directive is notapplicable to EU vendors, non-EU businesses can and do circumvent it by establishing daughter companies inEU jurisdictions with the lowest VAT rates and thus spur the infra-EU tax competition