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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 

Organisation 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.

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 websites or  web-  hosting services;

● 

downloaded software (including updates of software);

● 

downloaded images, text or information, including making databases available;

● 

digitised books or other electronic publications;

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downloaded music, films or games;

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electronic auctions; or

● 

Internet service packages.

The UK VAT rules are as follows:

● 

if the supplier (residence) and the customer (source) are both in the UK, VAT will be 

chargeable;

● 

exports to private customers in the EU will attract either UK VAT or local VAT;

● 

exports outside the EU will be  zero-  rated (but tax may be levied on imports);

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Chapter 4  E‑environment

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imports into the UK from the EU or beyond will attract local VAT, or UK import tax 

when received through customs (for which overseas suppliers need to register);

● 

services attract VAT according to where the supplier is located. This is different from 

products and causes anomalies if online services are created. This law has since been 

reviewed.