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The European Commission has adopted a proposal which would extend the application period of the e-commerce VAT directive to December 2008, it emerged earlier this month. Council Directive 2002/38/EC on the VAT arrangements applicable to radio and television broadcasting services and certain electronically supplied services was adopted on 7 May 2002 and entered into effect on 1 July 2003.

On May 15, the EC adopted a report to the Council on the operation of this Directive, as well as a proposal to extend the period of its application.

Council Regulation (EC) 792/2002, which temporarily amends Regulation (EEC) 218/92 on administrative co-operation in the field of indirect taxation, introduces additional measures necessary for the registering of foreign e-service traders for VAT purposes and for distributing the VAT receipts to the Member States where the services are actually used.

Under these new rules, EU suppliers are no longer obliged to levy VAT when selling on markets outside the EU, thereby removing a significant competitive handicap.

Under previous tax rules, drawn up before e-service existed, EU suppliers had to charge VAT when supplying digital products even in countries outside the EU.

The changes 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 for some time.

The VAT rules for non-EU suppliers selling to business customers in the Union (at least 90% of this market) remain unchanged, with the VAT paid by the importing company under self-assessment arrangements. Speaking with regard to the proposed changes, EU Taxation Commissioner L?szl? Kov?cs announced: "I urge the EU Council of Ministers to rapidly reach an agreement on this extension as I cannot imagine we would revert to the rules prevailing before the E-commerce Directive was introduced."