Taxation can be broken down into two parts: Direct and Indirect Taxation (VAT).
Direct taxation (Income Tax and Corporation Tax):
It is not envisaged that this form of taxation will be affected by e-commerce, as Revenue are committed to an approach that "will be one of neutrality as between traditional commerce and e-commerce" Where this might be affected is in the area of website hosting. If a businesses website is on a server which either they own or rent in another country then they can be liable to pay tax in that country.
Indirect Taxation: (Value Add Tax (VAT) and Withholding Tax)
VAT rates differ greatly across the EU ranging from 15% in Luxembourg to 25% in Denmark and Sweden with Ireland?s rate at 21%. At present VAT on B2B electronically delivered (digital) services taking place within the EU is paid by the consumer business under the ?reverse charge system?, i.e.: self-assessment. If an EU based business supplies digital services to a non-EU based business, the EU based business must charge VAT, even though this can not be recouped within the EU, making his service more expensive and leading to unfair advantage for non-EU based businesses, who do not charge VAT.
How the VAT System Works
Since the single market was introduced in 1993 the onus of VAT payments on B2B "intra-Community" supplies of services is on the receiving business. The VAT Information Exchange System (VIES) was set up to speed up the flow of data within the EU. This is a distributive system where each member state has access to each others VAT registration database through VIES. This is done through a Central Liaison Office (CLO) in each member state and "validation needs legally to take place prior to any intra-Community transaction".
There is no extra reasonability due to e-commerce, professional fees are held in the usual way.
Withholding taxes mainly apply to types of income such as dividends, interest and royalties.
Under a new VAT Directive adopted informally by the EU on the 12th of February, 2002 and due for enforcement by members states by 1st July, 2003 digital services supplied to a non-EU country are no longer subject to VAT thus removing the unfair disadvantage from EU based businesses. This Directive is a direct result of agreement on a report on Taxation Framework Conditions at the OECD Ministerial Conference. Part of that report states that
"rules for consumption taxation (VAT), of cross-border trade should result in taxation in the jurisdiction where the consumption takes place".