Skattenytt nr 12 2013 s. 870

Review of Cristina Trenta ’VAT in Peer-to-peer Content distribution’

1 Introduction

Cristina Trenta defended her doctoral thesis ’VAT in Peer-to-peer Content distribution’ at the International Business School in Jönköping on 15 May this year.1 In one aspect, this was a rather remarkable event, since Cristina Trenta already had written and successfully defended one doctoral thesis in tax law in her native country, Italy.2 This fact definitely colours her second thesis, since ambitions have been set high. The total length of the thesis is 651 pages, and the list of references and bibliography cover no less than 87 pages.

The author was faculty opponent, and the examining committee consisted of Professor Hans Kogels, Erasmus University, Rotterdam, Professor Claudio Sacchetto, University of Turin, and Professor Vivian Vimarlund, Jönköping International Business School.

Trenta, Cristina, VAT and Communication Services in the European Tax System and in the Italian and Swedish Experience, Bologna 2007.

2 Aim and purpose of the thesis

The purpose of the thesis, according to the author, is "to access whether P2P transactions configure acts of consumption as an indirect indication of the economic capacity of individuals and, generally, to evaluate the economic capacities of P2P networks by taxing the activities of traders and professionals using P2P who, through the practice of shifting the burden, pass on the levy to the final consumer”.3 In my ears, to "evaluate the economic capacities of P2P network” sounds more of a subject suitable for economic research than a question for legal research. Furthermore, to evaluate the economic capacities by taxing the businesses in the field seems not to be the first-hand choice of method if the purpose is only to evaluate the economic capacity.

The purpose is obviously a less fortunate rewording of a statement contained in an opinion of an ECJ Advocate General in a VAT case.4 Cristina Trenta also delivers a primary research question that her book tries to answer: "Do peer-to-peer transactions fall under the scope of VAT?”5 At the first glance, the question seems to indicate a traditional de lege lata approach. But, as mentioned above, the ambitions of her thesis are high. Cristina Trenta also presents some further research questions: "Should they? Will they in the foreseeable future? What benefits might the business community, the EU and national tax authorities achieve by considering them fully integrated with different VAT systems?”5 The additional research questions open up for a de lege ferenda perspective, but they are not uncomplicated. If the normative question "Should they?” is introduced in legal research, it must be clarified "according to what normative ground should the transactions be taxed?”7 It is not until later that it becomes clear that it is in the light of the principle of neutrality.8

Apart from the main research question and the de lege ferenda questions mentioned above, Cristina Trenta also introduces a further nine questions later.9 In the context, it is not quite clear whether these questions are to be considered as research questions covered by the thesis. But from the conclusions of the thesis, it is obvious that they are research questions of the same importance as the questions mentioned earlier. From a reader’s perspective, it would have been easier if all research questions had been concentrated in one place.

Thesis, p. 24.

C-240/05, Opinion of Advocate General Ruiz-Jarabo, para 27.

Thesis, p. 28.

Thesis, p. 28.

Similar questions are discussed by Persson, Österman, Roger, in Anmälan av Robert Påhlsson: ”Levnadskostnader–gränsdragningsproblem vid beskattning av förvärvsinkomster”, SN 1998, p. 305–306.

P. 524.

P. 63.

3 Method and material

Cristina Trenta points out that a traditional tax law approach was neither feasible nor productive for her study. In addition to a legal dogmatic approach she has also used what she has labeled as an exploratory legal research method.10 According to Trenta, "Exploratory legal research is organized around collecting detailed information with a goal of analyzing the research subject, operationalizing or explaining variables or aspects of the topic, and generating hypotheses”.10 Further, exploratory research aims at developing new theories rather than confirming pre-existing ones.12 The sources referred to by Trenta regarding the exploratory legal research method seem, however, mainly to be sources from social science. The concept of theory seems to be quite different in legal science compared to mainstream social science.13 Trenta has not made clear her position regarding the role of legal theory and what consequence this might have on legal theory emanating from the exploratory legal research method. She also states that historical analysis and the analysis of intellectual property law and criminal law are examples of the exploratory method applied.12 The comparative method, involving comparisons of different countries or systems of law, has sometimes been described as a different discipline than traditional legal dogmatic aproach.15 However, a comparative approach regarding different parts of the same legal system, for example between civil law and tax law is, as far as I can see, not uncommon in modern legal research and is generally not considered to be anything other than traditional legal science.

Cristina Trenta also states that she uses an interdisciplinary approach.10 According to her definition, the interdisciplinary approach "aims at integrating the different contributions of different disciplines”.17 Studies in computer science, economics, intellectual property law and copyright law, business and media studies have all been used by Trenta in her very impressive bibliography. In addition to mentioning what a specific "discipline has to say in respect of the problem being discussed”, she also states "why its specific approach is valuable or more valuable than others, and to what end”.18 Compared to the large amount of non-legal sources Cristina Trenta uses, I cannot see that these statements are very common. On the contrary, for the intended reader of the thesis, presumably a tax lawyer, it is very difficult to ascertain the value of the various sources gathered from different disciplines.

In my opinion, Trenta has not conducted ’research’ in its real sense regarding the non-legal disciplines. In her own words, she has integrated contributions of different disciplines. It would therefore be incorrect to label the study as ’multidisciplinary’ in the true sense. However, the findings of other scientists have been of great use in drawing a picture of the technical and economic background of P2P distribution.

P. 28.

P. 28.

P. 29.

In Swedish legal literature, the role of the legal theory has been discussed by Sandgren, Claes, in Om teoribildning och rättsvetenskap, JT 2004/05, p. 297–333.

P. 29.

See for example Sandstedt, Johan, Sakrätten, Norden och europeiseringen, Stockholm 2013, p. 39–41.

P. 28.

P. 30.

P. 31.

4 The study

The book consists of no less than seventeen chapters. Following a traditional introduction, the second chapter describes the technical design of peer-to-peer and traditional computer networks. In the third chapter, business models for P2P networks are described. The fourth chapter is a departing point for the legal analysis. The EU VAT law concepts of ’taxable persons’ and ’economic activity’ are analyzed using traditional legal research methods. The fifth, sixth, and seven chapters analyze how actors in P2P networks fit into the concepts of taxable persons and economic activity. In chapter eight, the focus is moved to the definition of ’taxable transactions’ in VAT law. The eighth chapter therefore also contains a traditional legal study. The following chapter then analyzes taxable transactions that can occur in a P2P network. In the tenth chapter, search engines are described and investigated with regard to the VAT regulations. Since search engines are generally not examples of P2P distribution, their position in the study seems a somewhat strange. Then, in the eleventh chapter, Trenta is back on track again and analyzes the taxable amount in VAT law and also what could constitute ’consideration’ for the purpose of VAT. In the following chapter, Trenta analyzes what could be regarded as consideration and taxable amounts in P2P networks. Then, in the thirteenth chapter, she turns to the VAT concept of ’place of supply’. This chapter deals both with EU VAT regulations and problems with identifying the place of supply in a P2P network. In chapters fourteen and fifteen Cristina Trenta shifts focus completely. These chapters deal with intellectual property law and copyright law and the VAT liability in respect of criminal activities. In chapter sixteen, Trenta summarizes the findings from her study. However, her thesis does not end here. In the seventeenth chapter Trenta outlines her proposal for a broadband tax that will supposedly solve the problems concerning taxation of P2P transactions.

The structure of the study, as far as regards VAT, can be considered to be rather traditional. Focus is placed on the main components of VAT such as the concepts of taxable persons, taxable transactions, taxable amounts and place of supply. In this respect, the study does not differ greatly from similar studies in VAT law and maybe even not very much compared to this author’s thesis on excise taxes. It is, however, not really obvious from the headings what Trenta is aiming to investigate. The concept of taxable persons and the principle of economic activity are of importance as regards the question of whether members of a P2P network conduct any economic activity that should be liable to VAT. In defining a taxable transaction for VAT purpose, it is of equal importance if a transfer of a file in a P2P network could constitute a taxable transaction and, if such a transfer should be regarded as taxable, how should the taxable amount be calculated?

The technical background could be described briefly as follows. Traditionally, files and digital content have been distributed through a client – server system. This means that all downloadable files are stored on one central computer. It has not been very difficult to adopt this kind of distribution to the VAT scheme. If it is a commercial transaction, it is obvious that the operator of the server is the seller and somebody who is downloading a file as a client must be the buyer/consumer. Since the client must in some way identify themselves, it is not complicated for the seller to levy VAT on the invoice to the buyer. The client – server system can be recognized as a centralized means of distribution. The peer-to-peer network (P2P), however, can be described as a decentralized means of distributing digital content. The P2P network is often associated with BitTorrent technology (BT). One main feature of BT is that a file can be divided into smaller parts, where each part can be stored on different computers (peers). If someone wants to download a file, their computer will then search for the parts on the computers belonging to the network and download them into one complete file. Translated into business language, this means that the person (or company) that uploads a file is the provider of the service and also the seller, if they seek to get paid for the use of the file. The end user, who downloads the reassembled file, is the consumer and, if they also pay for the file, the buyer. The persons who are storing the smaller parts of the original file can be described as parts of a swarm. These persons are usually unaware of the content of the small part of a file, who the provider is, who the consumer is and where the other parts of the file are stored. Typically in a P2P network, the provider, the consumer, and the other peers are not known to each other. Furthermore, the same person usually also plays all of the roles in the network. In order to have the access to the network, it is often a requisite that the user also makes their computer accessible to other peers to store parts of their files. It is also not uncommon that the new user also is expected to upload new material to the network.

The special features of the P2P network raises questions both from a business and a tax law perspective. It is quite clear from the description above that the P2P networks must have emerged on a non-profit basis, providing the possibility of file sharing with equals without any economic aim. P2P networks are of course mainly known for their capacity to distribute materials involving an infringement of copyright. Whether such a distribution should be liable for VAT is a question in itself, which Trenta also addresses later in her thesis. But is it possible to use P2P technique in a legal and legitimate business scheme? In this respect, Trenta provides numerous examples in different parts of the thesis. But, since they are presented in different chapters and also mainly seem to be referable to business activities other than a seller-to-buyer relationship, the reader of the thesis is left with a feeling that the use of P2P networks as a business model is not exemplified convincingly, at least not as regards the situation where the seller and buyer are unknown to each other. For example in chapter three, which deals with business models for P2P networks, Trenta exemplifies with the sharing of material in academia and by governments and also the fact that an artist was distributing his songs for free to listeners.19 The situations mentioned should, however, not be subject to VAT regardless of how they were distributed. Some more typical business schemes are also mentioned regarding downloading of movies or TV programmes, but in these schemes it must be obvious who the end user is or that the material otherwise can be downloaded for free.20 In chapter six Trenta returns to the economic nature of P2P networks. The example of a P2P business model used in this chapter is Wikipedia, which is known for being a noncommercial activity that can be used for free and where the writers contribute on a non-profit basis. In chapter twelve Trenta describes the Skype business model, which to large extent is free and otherwise is already subject to VAT.21 Not until page 357 is there a comparison between different business models regarding the distribution of music. The overall impression is that Trenta has not clearly proved to the reader whether a business model based on P2P networks where the seller and buyer are unknown to each other currently exists or even how it might work.

The lack of working business models is not unknown to the author. Trenta reveals at an early stage that her departure point is almost the converse. By taxing P2P transactions it would be possible to adopt legitimate business models. This is shown already in the main research questions, where it is asked what benefits the business community might have if P2P transactions were fully integrated into the VAT system. The assumption that an efficient VAT regime will promote legitimate business leads to a study, where Trenta turns over virtually every stone in order to analyze whether P2P activities will fit into the current VAT regime. Her analyses do not only cover business-to-business models (B2B) and business-to-customer models (B2C), but also customer-to-customer relations (C2C). The later example is of course normally exempted from VAT, since there is no ’economic activity’ in the sense used for VAT. Regarding the distribution of material mainly involving an infringement of copyright by noncommercial subjects, whether C2C relationships can be subject to VAT is of course an interesting question. The conclusion of Cristina Trenta is that C2C P2P operations can be referred to as a ’secondary market’ providing uncontrolled digital content.22

As mentioned above, the relationship between seller and buyer/consumer is problematic regarding P2P activities, because they might not be known to each other. Also, as mentioned above, in my opinion Trenta does not convincingly show the structure that a business scheme where seller and buyer are unknown to each other might assume. However, one way to levy VAT on such a transaction would of course be to tax the seller, which is already done today in some other situations. One example is reversed taxation on house building services. Another one is the withdrawal of goods or service for private use. Free supply of services is discussed in the thesis, but not in this context.23 In my opinion, Trenta should have focused more on these two subjects, which might have solved some practical issues regarding the taxation of P2P distribution, instead of some of the more implausible issues to which she devotes a lot of space in her thesis.

If the relationship between seller and buyer in a P2P scheme might be possible to solve in the current VAT scheme, the remaining peers, the ones who only store a part of the transferred file and do not access the whole file, are more complicated to fit in. As mentioned, these peers offer space on their computers to store digital content, but do not normally receive any payment for their service and are also usually unknown to both seller and buyer. Trenta has a solution that she supports with very thorough reasoning. The distribution of the smaller parts of a file, where a party can both receive a part of a file and also let someone else share that file, may be considered to comprise a form of barter. Even if there is no payment for the file, there is an economic consideration involved. The advantage of this solution is that there is an economic consideration that will fit into the current VAT regime. The disadvantage on the other hand is that, considering the large number of transfers of these files, it would be impossible to levy VAT on all these transfers. In my opinion, it is not certain that the transfers of the smaller parts of a file, which in themselves are not possible to use by the person who stores them in their computer, must necessarily also constitute a transaction. If a comparison is made with physical goods, for instance if someone orders 100 tons of concrete, it would be possible for the seller to deliver four shipments of 25 tons from four different depots and only send one invoice in respect of all 100 tons to the customer. It might also be possible to distribute the concrete from four different depots that are not owned or operated by the seller. It may be discussed whether the transfer of a part of a file, that in itself is not possible to use without access to the others parts, really constitutes a ’delivery’ within the meaning of the VAT Directive. If that approach is considered, it might be easier to fit P2P transactions into the VAT regime.

P. 73.

P. 73–74.

P. 339.

P. 137.

P. 311–312.

5 Conclusions

In Chapter 16, Trenta summaries her findings from the earlier chapters. She also answers 21 questions in a table, which she labels as ’general conclusions’.24 The table is slightly confusing, since some of the questions are the same research questions raised earlier in the thesis.25 Some of the questions are rewritten compared to when they were initially introduced, and some seem to be completely new. In any event, the table is in a way worthy of imitation??, as it summarizes the extensive study. As already mentioned above, I am doubtful whether the concept of barter is the best way to deal with P2P transactions. In this respect, I do not concur with the general conclusions.

P. 524–525.

Pp. 28 and 63.

6 The broadband tax

As mentioned above, Trenta concludes her thesis with a proposal for new broadband tax. The aim for the last chapter is not so much to present the construction of the tax, but rather to analyze the possible obstacles for the tax. Since the proposed tax constitutes some kind of single-stage excise tax, an analysis of the underlying VAT and excise tax directives is especially important in order to conclude whether the proposal is coherent with these sources of law. Trenta’s definition of the broadband tax is a percentage of the sum of the broadband fee.26 One of the aims of the tax is to acknowledge the economic nature of P2P networks and equate them to traditional economic commerce. It is not quite easy to see how this may be done. The broadband fee is already subject to VAT and so is traditional electronic commerce. What are seen today as legitimate business will, from what I understand, to some extent be subject both to VAT and the proposed broadband tax, while P2P transactions will only be subject to the broadband tax. One of the advantages with the broadband tax is, according to Trenta, that it could be used to directly compensate authors for unauthorized distribution of their copyrighted work. In this respect, the broadband tax shows a resemblance to taxes or fees previously levied on cassette tapes or CD-records.27 As also recognized by Trenta, a tax on internet communication is not a new idea, and she also clarifies the difference between the proposed bit tax from the nineties and her own broadband tax.28

P. 549.

See, for example, regarding the Swedish Tax on Certain Cassette Tapes Act (1982:691) and Chapter 2 a Section 26 m Act on Copyright in Literary and Artistic Works (1960:729).

P. 553. See further Landgren, Christina, Internet och dess betydelse för mervärdesskatten – en internationell studie, SN 1998, p. 454–471.

7 About the thesis

As already mentioned, Trenta uses an impressive list of sources in her thesis. Although the thesis is written in English, it is defended at a Swedish university; it should therefore be a requirement to demonstrate knowledge of the most important Swedish legal literature. She has quoted at least three sources in the Swedish language by her supervisor and must consequently have at least some knowledge of Swedish. Regarding leading Swedish VAT researchers, only one work of Peter Melz (in English) has been quoted and none by Eleonor Kristoffersson. In my opinion, two thesis, namely Sonnerby, Mikaela, Neutral uttagsbeskattning på mervärdesskatteområdet, Stockholm 2010, and Henkow, Oskar, Financial Activities in European VAT, Lund 2007, (in English), are of specific relevance to the study, yet neither was quoted.29 Nor is Pernilla Rendahls thesis Cross-Border Consumption Taxation of Digital Supplies mentioned, although there is a close connection with Trenta’s own subject.

As far as I can judge, the overall impression is that Trenta uses good English, but she sometimes drifts into almost colloquial Swedish.30 However, sometimes the formalities of the thesis do not fulfill the required standard for a completed thesis. The numbering of the headings is not consistent. The extensive use of footnotes is favoured by the author, but needs a second revision.

It must be concluded on an overall assessment that the thesis is too long. The disposition as regards the main VAT issues is sound, and resembles previous studies. However, the description of the technical and economic background, which of course is crucial to understanding the phenomena of P2P, could have been more concentrated in the opening chapters. As already exemplified, a number of business schemes have been presented in various parts of the thesis. Trenta reverts many times to the special circumstances of P2P distribution. The most serious objection to the disposition must, however, concern the parts on intellectual property and copyright law. This is a thesis which is no doubt written for VAT specialists. No real description is given concerning the basic structure and main elements of VAT. At this point in the progress of Swedish and international VAT research, nor should it have been.31 But when Trenta turns to intellectual property law, the presentation reverts to a simpler level. The detailed analysis is halted and about fifty pages of a more descriptive nature follow. In my opinion, it would have been preferably for chapters 14 and 15 to have been left for another book.

The former title deals with withdrawal for private use, while the later addresses a field which shows similarities in difficulties in upholding taxation.

For example p. 460.

It was a different matter when for example Peter Melz conducted his study in 1990, and the presumptive readers could be expected to be well oriented in income tax, but not in VAT. (Mervärdeskatten – rättsliga grunder och problem, Stockholm 1990, p. 15.)

8 Final comments

Cristina Trenta has set her aim high and therefore subsequently exposed herself to criticism in several aspects, as expounded on in this review. The comments made in this review should, however, not overshadow the achievement made by Trenta in this, her second doctoral thesis. At a time when more research is being conducted than ever before in both national and international tax law, also concerning VAT, it is not particularly easy to produce a thesis that stands out in the crowd. By using findings in computer science and economics as a basis for her legal analysis, Trenta has definitely pushed the boundaries of legal science and tax law research forward. It will certainly be worth waiting for Trenta’s preannounced study of the proposed broadband tax, regardless of whether or not that book will comprise her third doctoral thesis.

Stefan Olsson is a professor in tax law at Karlstad Business School, Karlstad University.