Examination of Witness (Questions 1200
WEDNESDAY 7 JUNE 2000
1200. That is very helpful. We understand that
a certain amount of "brigading" is now taking place
between Industry and Internal Market Directorates-General. Should
this not lead logically to the subsuming of the Industry and Internal
Market Council into a new Competitiveness Council?
A. Yes. Your first question is a very interesting
one. I think the question of whether there should be a single
Council for the two, frankly is open to debate. I do not think
that we have any firm position on that. As far as we see the differences,
where I can respond directly is regarding the differences between
the two Directorate-Generals, which I think are pretty well drawn.
We work closely together but the Internal Market Directorate-General
is really the one that deals primarily with Regulation, Internal
Market Regulation. If you take the area of electronic commerce
as an example of that, we are responsible in effect for the regulatory
framework, in other words for the Directorate. Our colleagues
in the Industry DG, our Enterprise DG as it is now known, work
with us but are far more involved in looking at pilot projects,
putting more into new schemes, awareness programmes, this sort
of thing. That is not always as clear cut as that. Also they have
responsibility for certain sectors. So in the area of e-commerce,
for example, one sector which will be subject to quite strong
changes, I would suspect, is pharmaceuticals where again there
is a pharmaceutical unit in the Enterprise DG. As I understand
it there has been a working group set up with the Member States
to review the Regulation of pharmaceuticals, advertising and services,
largely again because of the implications of e-commerce. The big
issue there, as you probably know, is that in the United States
it is possible to advertise and sell prescribed pharmaceuticals
whereas we have a total ban in the Community on that. That is
an issue, a very delicate one, which has wide ramifications for
social security systems and health systems in general which they
will be looking at. Speaking on a personal basis, it would not
make any difference to me if there was such a move towards a Competitiveness
Council but I think in terms of the kinds of issues we deal with
they are complementary but different, let us put it that way.
I do not know if that answers your question. I am happy to take
follow on questions.
1201. I think it goes some way towards it. The
interesting bit is where there are clear overlaps obviously we
take the steps to adjust.
1202. It is when you get into the position you
have just described where there is a debate to be had and it is
really trying to look a bit further ahead to see whether they
are going to come closer and, if so, is it not better to prepare
A. Sure. From our point of view, given there
is a complementary nature between our two services, I do not think
it will pose a problem in the report to my Council. Where we see
a stronger problem of co-ordination is when we have issues which
are dealt with, for example, by the Consumer Affairs Council,
where we feel sometimes there is a strong overlap between what
we are doing and where we do not necessarily alwaysand
I know this is going on the recordhave the same views in
the different services which will respond to that Council. That
would be a stronger problem than in this proposal.
1203. We congratulate the Commission on the
speedy progress of the E-Commerce Directive. We are pleased to
see that the internal market imperatives have emerged without
too many hostages to fortune. But, one exclusion is the supervision
of financial services where, currently, for prudential reasons,
the principle of "country of destination" obtains. On
the face of it, this seems incompatible with the E-Commerce Directive's
"home country" rule. What is being done to bring financial
services more strongly into the mainstream of the internal market?
Is this in the European Commission's work programme for this year?
A. I thank you on the second question for your
congratulations. As you know, that Directive was adopted by the
Parliament in early May. I actually think that the official adoption
was the day before yesterday.
A. Is it tomorrow?
1205. We have seen the MEPs today from all parties,
the United Kingdom ones. It was quite interesting to see how they
were working together and they deserve congratulations as well.
A. What was interesting in that was the recognition
by the Parliament of the urgent need for this Directive. I am
sure you will understand better than most that there is a very
strong will, notably from politicians, to think "ah, yes,
but I can amend this and improve it" and Parliament refrained
from doing that in order to get the text through as quickly as
possible, largely because I think it saw the need for that regulatory
certainty to encourage investment in e-commerce in Europe. The
rapporteur who was key in getting that through was, in fact, the
chair lady, Mrs De Palacio, and she did a really sterling job.
There were a lot of United Kingdom people, Malcolm Harbour and
Lord Inglewood, who were all involved in that and it was a great
effort, very good for us as well. Now, as you know, there is an
18 month transposition period, which is quite short actually,
again reflecting the urgency. Certainly from the Council point
of view I think that was recognised as well. In terms of financial
services, it is true that there are derogations to the Internal
Market principle of country of origin control for certain aspects
of financial services, albeit not all. For example, banking services
would be subject to the country of origin rule. The derogations
do not actually lead to an automatic application of country of
destination. I do not want to get into a long legal argument but
in brief terms, as an economist, I will try to explain. The basis
of the Directive is the principle of free movement of services
as enshrined in the Treaty. That is the primary law on which it
was based. Even without the Directive that principle applies.
In the context, let us say, that there were a restriction applied
for a particular type of financial service, say an insurance service,
being sold across the border, the Member State that restricted
that would still have to prove compatibility of that restriction
with the Treaty. Because there is a derogation to Article 3, which
is the country of origin principle restated, if you like, in the
Directive, it does not automatically follow that means it is country
of destination control. It is unfortunately in a grey area. I
am not saying it is an ideal situation. The reason why there were
specific derogations for certain financial services was, in fact,
we already had certain Directives which at the time that they
were adopted, in my opinion quite rightly, had emphasised or had
tried to facilitate the establishment of, let us say, branches
in other countries because that was the way prior to the development
of the Internet and the communications revolution, if you like,
that one had to offer the service. It was a face to face service,
as with many other services. The Directive sought to facilitate
the establishment of a branch network, a single passbook idea.
In doing that they then had clauses that stated "and the
branches will apply the local marketing laws", for example,
or "the laws regarding financial prospectuses", etc.
That is the problem now. Until those Directives are altered we
cannot impose country of origin because obviously it would be
contradicting the existing Community law. The work in terms of
reviewing those Directives is all in the Financial Services Action
Programme which we are currently working on. It is not as if we
have forgotten about them, on the contrary, we are actually looking
first at the specific Directives that concern UCITS and also insurance
Directives and we are looking at the whole issue. It could be
a revision of those Directives, not only so that we can allow
for country of origin but also to see whether in fact some of
the existing provisions need to be changed now because of the
possibility of supplying on-line. That is the reason. In terms
of the timing, the official deadline for completing the Financial
Services Action Programme is 2005. Regarding certain aspects of
it there is a shorter deadline of 2003. That work is actively
being undertaken by our services at the current time. I do not
know if that explains where we are. Again, I am quite happy to
take further questions on that second question.
1206. What are your expectations of the French
Presidency? How will the French deal with the legislative framework
for e-commerce, and issues such as the Copyright Directive, dual-use
controls, jurisdiction and e-money? How much progress do you think
will be made on the five new Directives governing the telecommunications
A. What are my expectations of the French Presidency?
Lord Faulkner of Worcester
1207. It is going to be a huge success, is it
A. I am half French, I have got a schizophrenic
character anyway. Let me try to answer that in terms of your follow-on
questions. If I can start with the issue of jurisdiction which
may be one that is more clear cut. It is clear from the negotiations
that we had regarding e-commerce that the French felt very, very
strongly that as regards contractual obligations where there is
a derogation for the country of origin control principle in the
Directive they are very strongly in favour of country of destination.
I think that whole issue is going to be resolved in the discussions
regarding the Brussels Regulation where there is currently a parliamentary
opinion being prepared by Mrs Wallace. You know this as well as
us because the issue is hot in many Member States, including your
own where the DTI have launched an enquiry, a hearing. If I may
say so, looking at it from the Internal Market perspective, as
the Regulation stands at the moment it poses a problem because
it leads to a situation where any information society service,
any website, as far as contractual obligations are concerned,
could be subject to be sued in any Member State. There is a big
argument on this, or rather simplified argument, where people
say "yes, but if you push country of origin all the way through",
which is our tendency "that works against consumer protection".
We do not agree with that. We think, as our Directive has suggested,
that the flip side of country of origin control is improved cross-border
redress mechanisms. We have given a very strong signal to encourage
the development of Alternative Dispute Resolution systems particularly.
I am sure many of you will be aware that seeking redress for a
consumer complaint for the typical value of the consumer claim,
going through the courts is rather ridiculous in terms of the
costs involved. Not only that, the country of destination approach
does not help you because although the consumer will have access,
or supposedly will find it easier to have access, to his international
court, he then will have to get that judgment executed in the
court of the country of origin anyway. Unfortunately, frankly
that whole argument has become a kind of dogmatic argument, country
of destination against origin. If you like, we have left the objective
facts of what could facilitate on the one hand the Internal Market,
which after all needs to rely on consumer trust if it is to work.
Our whole objective is to encourage cross-border trade. If consumers
cannot trust a site simply because it is in another Member State
that kills our objective. We feel that cross border redress and
improved judicial co-operation is far more a challenge that we
must meet rather than suggesting the country of destination control
is some kind of panacea for the consumer which it is not. That
is very much our view, I would not say that it is necessarily
shared by all the services of the Commission. I would make that
point. Regarding the Dual-use Controls, as far as I am aware the
Regulation should be agreed. It has certainly been agreed in COREPER
and it should be going to Council quite soon. It is going through
the 113 Council. The French, as I understand it, also with the
United Kingdom, wantedI stand to be correcteda little
more in terms of controls on encryption systems on that. From
our point of view, again purely talking here on a technical basisand
this is a service line, this is not a Commission linewe
do find it odd that this is being done through the 113 Committee.
We are completely in agreement that there should be export controls.
What is more worrying is that through this we are imposing also
intra Community export controls, which we feel from the Internal
Market perspective should have been dealt with through a harmonisation
initiative. The reason I say that is not in any way contesting
the issue but it does seem a bit odd that for what is effectively
an export controli.e, to third countriesRegulation
which is being taken by the Council, which requires, as I understand
it, unanimous votes and unanimity, that we are in fact regulating
also intra Community exports. Usually if we had dealt with this
intra Community dimension in a harmonisation initiative from the
Internal Market perspective it would have gone through the European
Parliament so from a democratic perspective we are a little worried,
let us put it that way. From a legal perspective we are also concerned
because the Commission might get caught out by allowing that to
happen if somebody was to take it before the court. That is a
discussion being held within the services at the current time.
As far as I know anyway it is going through and probably, as I
understand it, could be adopted next week. It is not really an
issue for the French Presidency any more. The Copyright Directive,
I have just mentioned that my Director could not be here because
of that. He is actually in COREPER right now and as I understand
it there should be agreement on a common position. Apparently
the problems are resolved. That is the common position. Then there
will be the Second Reading in the European Parliament. If you
ask what the French view on copyright protection is, it seems
to me to be the more the better. I disagree with it but anyway
that is another story altogether. In terms of E-Money, the Directive
defining E-Money has been agreed, that is not the important one.
Obviously the key one is regarding authorities responsible for
supervision of issuance. It is in Second Reading, this Directive.
Apparently there have been very few amendments made to it. I understand
it could be adopted also before the French Presidency, that is
what I have been briefed. That is as much as I can tell you on
that one. How much progress do we think on the five new telecommunications
Directives? Well, as we understand it, our information is that
the French Presidency wants to pursue two of the five, namely
the Framework Directiveand the Inter-Connection Directive. They
will be focusing on those two which are probably the most important.
I suspect they will give quite a lot of emphasis to that. I think
that is as much as I can say on those. I do not know if there
are any other questions you want to ask me which I will try to
1208. It is not your area but we have the tax
one still outstanding.
A. I thought you might raise that. On tax, there
is within the Commission now a proposal which in fact is dealing
moreand which will come outwith the issue of tax
vis a vis third countries, e-commerce and third countries.
The idea would be a revision of the Sixth VAT Directive in a similar
way that we did for the telecommunications services. It is the
Treasury, the Ministers of Finance who have the problem with leakage.
The problem regarding e-commerce remains though. Obviously it
is a very thorny issue to grasp but it is one that I think does
need to be grasped on a personal basis. I say that because effectively
the Sixth VAT Directive is the ideal framework to impose country
of origin, as you know. The problem is that the exceptions in
its annexes list many services, including information services
which will cover the bulk of e-commerce services which means currently
they will be subject to different reporting and different VAT
regimes across the Member States. The Commission proposal I have
seen regarding the specific problem of third country imports,
which would have to be taxed now, refers to the fact that this
more general issue will have to be looked at, and I think the
sooner the better. Obviously it is a highly sensitive area. I
do not know if that covers it? I cannot really say much more than
that on tax. It is a problem. It is particularly a problem for
SMEs because e-commerce is a wonderful opportunity for SMEs to
trade for the first time across borders and having to meet the
tax requirements of registering in each country for tax purposes,
different registration recording periods, etc., language problems
is really an enormous amount of red tape that they could do without.
There are other key issues as well. There is a discrimination
even now between on-line goods and, let us say, off-line goods.
1209. Bricks and mortar.
A. Absolutely. That is crazy. The zero rating,
for example, on the press does not apply to online which is very
difficult to understand, quite frankly. Something has to be done
on that. It is a question of political will actually and obviously
the Member States feel very strongly about that. I think it will
come but the current proposal coming out of the Commission is
dealing more with the problem of the fact that goods coming, for
example, from the US are not taxed, or escape VAT, and the solution
that certainly I have seen is the idea that a US company or third
country traders would have to register for tax purposes in the
EU in order to sell on-line. How that will work in practice I
have no idea. I am not a fiscal expert so I could not answer any
questions on that.
1210. How long can they put off dealing with
the internal taxation issues?
A. Do you want a frank answer to that?
1211. It just goes on and on.
A. What I hear from business, I think they cannot
put it off for very long. Largely also from this small business
angle, many large enterprises are in any way established in many
of the Member States so they are already used to it but it is
highly dissuasive to start ups.
1212. While in the United States we were struck
by the pivotal role said to be played by access at an early stage
to venture capital. Lisbon called for a Commission review with
Member States to improve the coherence of available instruments.
What lessons have you learnt from this review? What innovations
in raising capital (e.g. public-private partnerships) are you
working on? How will they affect the availability of venture capital?
A. I saw you had a very interesting question
about venture capital. This is probably even more dissuasive to
developing on-line trade within the Community. There is not an
official position in the Commission as far as I am aware. I would
say it is extremely urgent. You have been speaking to MEPs as
well and you will know the position in the United Kingdom. One
feels that could be a major stumbling block to real growth in
the e-economy in Europe and that would be a shame frankly. To
build on that in the area I do know, I think the E-Commerce Directive
sets the standard because we realise also that we are not working
in a closed European environment, that our companies are facing
global competition more than ever in this context. The framework
that we have adopted and that the Member States have agreed to
in the E-Commerce Directive is something that the American administration
is quite interested in as well for once which, from our point
of view, is largely because many of the laws regarding contract,
regarding advertising, etc., are state driven in the States as
well, so they have the same problem that we were facing in terms
of regulation. They had the same problem with state tax as well.
1213. There are big problems in some areas.
A. Absolutely. I think it is an issue that you
hear spoken of not only at the European, national levels but at
the international level in terms of the gaps. People realise that
something needs to be agreed rather rapidly. Of course, it does
force the question, and this is why it is delicate, of harmonisation.
That is the big problem, particularly when you have zero rating
on certain products as you know. We have evidence, albeit anecdotal
evidence, that from the SME angle it is restricting the development
of on-line services and that is a shame. The other thing to say
is what we think when we see disclaimers on websites saying "we
only trade in the United Kingdom" or whatever, that there
are various reasons for that, it can be logistics problems or
distribution problems. However, another problem is some of the
regulatory legal uncertainty which we hope the Directive will
help us on. The third one is certainly tax differences. The costs
of being able to offer or sell across the different frontiers
in terms of tax registration or the formalities you have to go
through far outstrip the benefits originally when you are starting
Lord Faulkner of Worcester
1214. Tax is a huge barrier to cross-border
e-commerce, is it not?
A. Personally I am convinced of this. In many
of these areas I think that there could be very rapidly some sort
of agreement to take it forward, particularly with on-line because
any business that you talk to about this will raise this point.
The biggest players, some of them quite like the idea because
it means they canoff the record
1215. Keep it to themselves.
A. Absolutely, it is that. It is a strong entry
barrier for the new innovatory firms that we keep talking about,
the start-ups in particular.
1216. Can you give us any idea of what the cost
A. I cannot give it to you. To give you an anecdotal
answer, and I am sorry I have to rely on this but it is an example
which was given to me, a small United Kingdom antiques firm had
started putting their catalogue on the Internet and had built
up a kind of network, thanks to that, with other antiques dealers
in other countries. They had different pieces that were more or
less wanted in different countries and they were trading between
each other and they started selling. This was a small business,
a three man enterprise. When they found what the tax formalities,
the hurdles were: to register in each country; the different reporting
periods; the different tax rates themselves; and also having to
report in different languages as well, they stopped trading. They
still had their site showing what they were selling in the United
Kingdom but they were never able to develop the commercial side
of it, the sales side. It is very anecdotal. I do not think there
have been any studies looking at the real costs in administrative
terms of time to go through these formalities.
1217. So if someone was able to do the research
there would be evidence that a business with a turnover of less
than X would probably find it impossible to engage in cross-border
A. Absolutely. With the E-Commerce Directive,
when we were looking at the regulatory costs we put out a questionnaire
to federations and to individual businesses, we had a magazine
we could use for that, simply to get a feel of what were the legal
costs of checking the regulations in different Member States when
you are establishing a website. I am not talking about the physical
administrative side but the actual legal costs. It was very interesting
because first of all those companies who had done it were the
big players, companies such as Yahoo, Amazon or whatever. They
were talking about 15, 20 full-time lawyers working for two years
to work it out. Then you had small firms who said either they
risked it and said "we cannot afford to check so we go on
the basis that we state very clearly we are within the United
Kingdom and hope that we will not be sued in one or other Member
State" or many replied "we just put a disclaimer and
at this stage we are not trading across borders because we cannot
afford the legal search cost to see what the regulatory regime
is". Those arguments helped, certainly in both the Council
and the Parliament, to get the Directive adopted. I think it is
exactly the same problem with tax but probably revealed even more
because you not only have to register for tax purposes but need
a physical presence, a tax person responsible for your tax returns
in each Member State. In terms of the actual costs of doing that
for a small firm, particularly if we are talking about micro-enterprises,
that is quite significant.
1218. In terms of the expansion of e-commerce,
or e-retailing, there is obviously a great deal of misunderstanding
or lack of knowledge of the regulations and, therefore, there
is a lack of confidence.
1219. If the information was made available
in a way that people could understand it and they could get hold
of it, because of course SMEs do not necessarily have the ability
to spend a lot of time getting hold of it, as you have just said,
but even more so for confidence of individual consumers, if that
was made available it would accelerate e-commerce dramatically.
A. It would convince them.