Europeans Taxing the Internet
by Paul McGoldrick
They have been talking about it for a couple of years but it now looks certain that the countries that make up the European Union (EU) are going to find a way of taxing transactions on the Internet that are virtual. So a company that does not have a physical presence in an EU country would have to register and collect tax on the transaction.
The tax in question is value-added tax, which is a tax on the supply of goods or services. The way it works is that in the supply chain the buyer of original products or services is charged at the going VAT percentage rate. If you modify or add value to those goods or services and sell them on you will charge VAT on the increased value. You deduct what you paid your supplier and pay the difference to the governmental authority (for some extraordinary reason it is the customs and excise department in most countries.) The only person to get stuck for the full amount of VAT is the end user. VAT rates vary according to the type of item being sold but there is a base rate in each country determined by the mandarins in Brussels. Luxury VAT rates go up to 33% while things such as food and children's clothing is "unrated" or rated at zero percent.
Having a VAT system is mandatory for membership in the EU. It is an insidious tax because of the bureauracy involved at every level and by the fact that the VAT numbers are an easy double check of a company's complete books. The exception to VAT is on exports outside the EU - between EU countries VAT is charged but the rate can vary according to the Brussels decisions. It used to be that in the Far East there was the "suitcase" trade. On any one day the price of a quantity of, say, cameras could be cheaper in Singapore, Hong Kong, Taipei or Kuala Lumpar. The buyers would fly to the city with the lowest prices on that day with a suitcase of currency. In the same manner, in the EU, VAT makes some things cheaper to buy from one country compared to another because VAT is charged at the rate existing in the country of supply - you can save about 25% of the retail price of a car, for example, by buying a left-hand drive car in Belgium instead of Britain.
The way that VAT is supposed to be going to work for virtual services is that a supplier of, let's say, software, or music, downloaded over the Internet will have to register in an EU country if the sales per annum are greater than 100,000 Euros (about US$96,000 at the moment.) When that supplier sells into the EU it must charge the VAT rate of the country it is registered in; at the end of each quarter it then sends that money to that EU contry.
Sounds simple? Hardly. The pundits say that a company with any sense will register in Luxembourg which has a basic VAT of 15% -- lower than any other continental country - and that this will be a major business boost for the Duchy. (In fact, most of those pundits don't appear to realize that the lowest base rate is 12% which is allowed in the Madeira Islands (Portuguese) off the coast of Africa. But that is not the main point.) Why should a company outside the EU register at all? How will they make a company register? How does a company know that the end user is in the EU? (There are millions of end users who use .com extension in their e-mail addresses, for example: who knows where a CompuServe or AOL customer lives?)
This will be like the ill-conceived "use tax" that states such as California say you should pay the Franchise Tax Board if you buy something out of state (like Oregon, where there is no sales tax), supposedly replacing the lost sales tax. Absolutely unenforceable law is useless law.
It would be nice if the EU focused on cleaning up its existing VAT mistakes
before going for protectionist moves like this. Explain why, for example,
buying a book in a store in Luxembourg carries a 3% rate of VAT. Download
the same book over the Internet and the e-tailer is required to charge 15%.
Hopefully at least one country will be jealous of the money that will come
Madeira's way and veto everything. Then they can spend another few years
working out how to spread the loot they think is due to them.