FROM THE OFFICE OF PUBLIC AFFAIRS

The Administration has serious concerns with both the substance and process associated with the European Commission's proposal regarding the application of value-added taxes (VAT) to one form of electronic commerce.

The United States, the European Commission and the EC member countries have all been working with other governments, the business community, and other stakeholders within the OECD on issues associated with electronic commerce taxation. The OECD process is proceeding well and is on target for completion next year. The global nature of electronic commerce makes it critical that tax proposals are developed through a deliberative and inclusive process, such as the OECD. Unilateral proposals, even though intended to be consistent with the OECD framework conditions, increase the risk of unintended consequences. They can undermine the OECD process and weaken the resolve of those who have been resisting unilateral measures while awaiting the results of that process. We hope that does not happen.

It appears that the system proposed by the EC has the potential to operate in a non-neutral manner so that value-added taxes on electronically delivered products may be higher than value added taxes on their physically delivered functional equivalent. For example, it appears that, in practice, the value added taxes applied to electronically delivered books and newspapers may be higher than those applied to sales of the same physical books and newspapers.

The EC proposal addresses the taxation of products that are digitally delivered to consumers, as well as certain radio and television broadcasting, which currently represent a very small part of the electronic marketplace. Furthermore, technology in this area is changing rapidly. Finally, the policy issues are extraordinarily complex and, in some cases, could have effects outside the taxation area. Given the relatively small amounts involved, the unintended implications of the EC proposal are not worth the short-term tax revenues that may result.

We appreciate that the EC indicates in its proposal that it intends to continue working within the OECD regarding compliance issues. The EC's unilateral action, if implemented as announced, could well hinder the development of this new global medium of commerce.