Commentators differ in their opinions as to whether the British have spiked the EU's attempt to impose VAT on digital downloads originating outside the EU in response to US pressure, or because the Treasury thinks the directive is unworkable, or for some other, more inscrutable Brownian reason which will become apparent in time.
Meanwhile, evidence accumulates that using VAT is the wrong way to try to tax e-commerce.
A European Federation of Accountants convention in Brussels recently heard Arthur Kerrigan, principal administrator of the EU Commission's Taxation Customs Union, admit that enforcement is a major and unsolved problem with the EU's proposals for taxing non-EU e-commerce suppliers. 'How does one make them register?' he asked, and what does one do if they don't? The remoteness was fundamental, he thought: only full co-operation between taxation authorities around the world might assist the EU in dealing with those who are non-compliant, but what were the chances of that?
Mr Kerrigan speculated that large companies who wish to be seen to be operating fairly and wish to build up trade in the EU might choose to register for EU VAT, but he admitted that a small businessman who has identified a niche market with his website is unlikely to want to comply with VAT regulations in another continent. Failure to register for VAT would result in heavy penalties and might be seen as a criminal offence, but was that a sufficient threat?
Me Kerrigan left the impression in his hearers' minds that he didn't really expect to see the directive come into effect. If it does, the trader who wants to comply with the law in the EU will be able to consult documents such as the guidance thoughtfully issued by the UK's Customs and Excise on the application of VAT to digital downloads. But Information Sheet 3/01 on VAT: Digitised Publications attempts to nail a cloud to the ground.
The information sheet states that a supply of a digitised publication is a supply of services, the place of supply of which is determined by the nature of its content. Where the content is essentially fiction, such as a novel, the place of supply is always the supplier's country. This would mean that for instance, a US website supplying fiction to UK consumers would not have to register for VAT in the UK as the place of supply would be the US.
Where the content of a publication is essentially non-fiction, on the other hand, it is treated as a supply of information under paragraph 3 to Schedule 5 of the VAT ACT 1994 and such supplies are treated as made:
The Information Sheet goes on to give examples of non-fiction:
There are more holes in this guidance than in a non-EU Swiss cheese, and that's just one country out of 15 (soon to be 26). If there are any publicly-listed tax consultancies in the EU, now is the time to buy their shares. One good thing: if we ever want to try to charge you for our news service, at least you won't have to pay VAT!
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