Concerned that foreign, especially US exporters of digital goods into the EU have an unfair advantage over internal EU suppliers because of not having to charge VAT, the EU Commission is expected this week to publish proposals to bring such sales of intangible goods to consumers into the VAT net.
The Commission must wish that such an outcome could be achieved by magic, because, as it must know very well, it faces a host of difficulties, beginning with the need for unanimous agreement among all 15 member states, which have some quite divergent interests when it comes to the growth of e-commerce.
At present, the EU has classified digital goods as 'services' because of the difficulty of taxing foreign sales to consumers. Physical goods ordered by EU residents from non-EU countries are taxed at the border (if the customs spot them). Services supplied from outside the EU to a corporate entity are 'self-taxed', ie the receiving company accounts for the tax at its national rate on its own VAT return - ideally the Commission would like consumers to do the same, but not even Brussels imagines that consumers are going to be communautaire when it comes to voluntary payment of taxes.
Internally, an EU company supplying digital goods from its EU server to an EU consumer simply includes VAT in the price, although if it also offers those goods for export (= download in a non-EU country) it wouldn't have to charge VAT. However, there is nothing to stop an EU customer giving a non-EU address and evading the VAT; equally there is nothing at present to stop an EU supplier having a sales subsidiary in Bermuda which can sell the digital goods to an EU consumer without VAT.
So the problem seen from Brussels is not just that US companies have an advantage over EU companies; it is that VAT is becoming an optional tax for all B2C sales of digital goods. So the Commission has to do something. The question is, what?
The rules to be proposed are likely to require a foreign supplier of digital goods to register in at least one EU country, and to account for VAT through that country. But, there are more questions than answers: at what rate of VAT (there are many different rates in the EU)? who gets the tax (the country of registration or the country of the consumer)? won't all companies choose to register in the country with the lowest rate of VAT (Luxembourg)?
Most importantly, will the US accept what it will immediately call extra-territorial taxation? Remember the Boston tea-party! If the US doesn't agree (or Bermuda, or the Isle of Man etc etc) then how can the EU impose its will on foreign companies?
Speaking last week after a meeting of the Irish Institute of Directors, David Byrne, the EU Commissioner for Health and Consumer Protection, said EU exporters were at a disadvantage against their U.S. counterparts in the burgeoning online products market.
"The problem for EU exporters exporting to the United States is that in many states, there is a sales tax and that puts EU exporters at a disadvantage. Whereas in the case of sales from the U.S. into the EU, there is no VAT on those items. We need to get that harmonised," he said.
He estimated that 29 percent of online digital product sales in the United States were heading for the European Union. He said VAT or sales taxes were an issue but consumer confidence also played a role.
Byrne said he was unable to gauge what sort of reception the proposals would receive from U.S. administrators.
The proposals will be presented on Wednesday, an official from Byrne's department said. He rejected suggestions the EU might move toward abolishing VAT on online products.
"There's just too much business moving to the Net for us to do that. We couldn't do it. It would create a huge revenue hole," the official said, adding that the EU hoped to put the proposals into firm legislation by 2001.
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