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230 Part 1 Introduction

Government revenue is normally protected since, taking the UK as an example, when
goods are imported from a non-EU territory, an excise duty is charged at the same rate as
VAT. While this can be levied for physical goods imported by air and sea it is less easy to
administer for services. Here agreements have to be reached with individual suppliers.
In Europe, the use of online betting in lower-tax areas such as Gibraltar has resulted in
lower revenues to governments in the countries where consumers would have formerly paid
gaming tax to the government via a betting shop. Large UK bookmakers such as William
Hill and Victor Chandler are offering Internet-based betting from ‘offshore’ locations such
as Gibraltar. Retailers such as Amazon, Play.com and Tesco.com have set up retail operations
on Jersey to sell items such as DVDs and CDs which cost less than an £18 Low Value Con-
signment Relief threshold, so no VAT or excise duty needs to be paid.
This trend has been dubbed LOCI or ‘location-optimized commerce on the Internet’ by
Mougayer (1998).
Since the Internet supports the global marketplace it could be argued that it makes little
sense to introduce tariffs on goods and services delivered over the Internet. Such instru-
ments would, in any case, be impossible to apply to products delivered electronically. This
position is currently that of the USA. In the document ‘A Framework for Global Electronic
Commerce’, President Clinton stated that:
The United States will advocate in the World Trade Organization (WTO) and other appro-
priate international fora that the Internet be declared a tariff-free zone.

Tax jurisdiction
Tax jurisdiction determines which country gets tax income from a transaction. Under the
pre-electronic commerce system of international tax treaties, the right to tax was divided
between the country where the enterprise that receives the income is resident (‘residence
country’) and that from which the enterprise derives that income (‘source country’). In
2002, the EU enacted two laws (Council Directive 2002/38/EC and Council Regulation (EC)
792/2002) on how Value Added Tax (VAT) was to be charged and collected for electronic
services. These were in accordance with the principles agreed within the framework of the
Organization for Economic Co-operation and Development (OECD) at a 1998 conference
in Ottawa. These principles establish that the rules for consumption taxes (such as VAT)
should result in taxation in the jurisdiction where consumption takes place (the country of
origin principle referred to above). These laws helped to make European countries more
competitive in e-commerce. An announcement from the EU explained:

Under the new rules, EU suppliers will no longer be obliged to levy VAT when selling prod-
ucts on markets outside the EU, thereby removing a significant competitive handicap.
Previous EU rules, drawn up before e-commerce existed, oblige EU suppliers to levy VAT
when supplying digital products even in countries outside the EU.
The proposals are designed to eliminate an existing competitive distortion by
subjecting non-EU suppliers to the same VAT rules as EU suppliers when they are
providing electronic services to EU customers, something which EU businesses have
been actively seeking.
The VAT rules for non-EU suppliers selling to business customers in the Union (at least
90% of the market), will remain unchanged, with the VAT paid by the importing company
under self-assessment arrangements.
The OECD also agreed that a simplified online registration scheme, as now adopted by the
European Council, is the only viable option today for applying taxes to e-commerce sales by
non-resident traders. The tax principles are as follows in the UK interpretation of this law
implemented in 2003 for these electronic services:

supply of web sites or web-hosting services
downloaded software (including updates of software)