Turnover taxes are generally considered to be risk-free from the tax competition point of view, for
they are levied exclusively at the place of consumption. The Value-Added Tax (VAT) imposed by all European
Union (EU) member states, though, has become a source of distortion in the trans-Atlantic trade: non-EU
suppliers of electronic services were not required to collect the VAT, while their EU competitors were. The level
playing field in EU’s foreign trade in electronic services was restored in 2002 by the so-called e-VAT Directive
that obliged non-EU providers of electronic services to charge the VAT at the rate of the member state their
consumer resides in. This paper argues that besides being largely unenforceable, the Directive has created
another misbalance in the infra-EU electronic commerce. It is being demonstrated that since the Directive is not
applicable to EU vendors, non-EU businesses can and do circumvent it by establishing daughter companies in
EU jurisdictions with the lowest VAT rates and thus spur the infra-EU tax competition.