Taxing Services Under the EU Vat and Japanese Consumption Tax : A Comparative Assessment of New EU Place of Taxation Rules for Services and Intangibles

Place of taxation rules are the seminal cross-jurisdictional provisions of any consumption tax regime. They determine where among competing jurisdictions a particular service is taxed. They are not important for transactions that are restricted to a single jurisdiction and to businesses or individuals belonging to that jurisdiction. However, when two or more jurisdictions are involved, these are the essential tools for revenue allocation and avoidance of double taxation. It is therefore of considerable importance to Japanese businesses and consumers when the European Union (EU) undertakes a wholesale revision of the place of supply rules for services and intangibles. The European Commission has advanced two sets of proposals for reform of these rules. If adopted, these changes will be comprehensive, covering business-to-business (B2B) as well as business-to-consumer (B2C) transactions, effective July 1, 2006. The importance of these proposed changes is amplified by the Organization for Economic Cooperation and Development's (OECD's) recent assessment of global place of taxation rules. Examining the taxation of services and intangibles in the world's consumption tax regimes the Committee of Fiscal Affairs (CFA) concluded that these rules exhibit a general "lack of international consistency and coherence." According to the OECD, this lack of consistency and coherence has erected global trade barriers (double taxation), and provided opportunities for global tax avoidance. This article first considers the proposed changes in the EU place of taxation rules for services and intangibles from the historical context of their development. It then takes up the companion rules under the Japanese Consumption Tax (CT). Less historical context is presented because these rules have a more limited history. A final section offers a comparative assessment that seeks to answer two questions. First, is there a lack of consistency and coherence between the Japanese and EU rules as currently constituted? Secondly, have the proposed changes in the EU place of taxation rules minimized or exacerbated differences? Although the EU Commission is contemplating major changes in the place of taxation rules for services and intangibles, at least with respect to transactions between the EU and Japan these changes will do nothing to eliminate the double taxation or double non-taxation in B2B transactions that currently exist. These reforms do however reinforce earlier efforts of the EU to impose the VAT on sales to EU final consumers from businesses not established in the EU. This area has been problematical for Japan. If Japan wishes to impose its CT on similar B2C transaction it should consider reforming its place of taxation rules for these transactions in a manner similar to that of the EU. However, the EU experience is that this change should not be just one of changing the place of taxation. In conjunction with this change Japan should consider adopting the electronic filing and reporting procedures adopted by the EU in its one-stop shop efforts under Article 26c and proposed Article 22b. Moving in this direction would also be in harmony with OECD recommendations