The Internet has transformed the way business is done. Through the medium of the Internet, businesses of all sizes are able to market and sell their products anywhere in the world and gain direct access to customers in new markets. They are able to sell directly to the final customer with existing intermediaries removed from the sales structure altogether, removing a layer of commissions and associated costs. E-business also provides opportunities to diversify into other areas and to market ancillary services, related products or internal expertise. In a 'virtual market' it is also much easier to restructure a business, moving business activities into new companies with little physical presence. For example, a music company which formerly had its own production plant and distribution network for sales to wholesalers and retailers is now able to operate as a business in a low tax jurisdiction selling digitised products directly to the public over the net, with all other functions being outsourced to third parties.
Although e-business is fundamentally no different from any other business, e-businesses have the ability to contract across borders particularly freely which creates risks in relation to compliance with the tax regimes of the territories in which business is conducted. The cross-border nature of e-business and the complications that raises for VAT is the main focus of this section.
In the past, European VAT legislation did not deal adequately with e-business. The result was that some supplies would not be taxed at