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Ecommerce Forum

EU to levy 15% VAT
on sales by non-EU websites to EU residents

 12:36 pm on May 8, 2002 (gmt 0)

I do not know if you guys have discussed this already, but I picked up the news item from the BBC website.


I know the discussion had been going around but it appears to be a 'done deal' now.


brotherhood of LAN

 12:38 pm on May 8, 2002 (gmt 0)

im sure we covered a "little" about it somewhere

sounds like a natural step anyways, in accordance with some "other" countries' economic decisions (like steel :) )....well....you know what its like


 5:58 pm on May 8, 2002 (gmt 0)

Yeah, we briefly discussed it a few months ago when it way a "twinkle in the taxman's eye." Here's another AP wire story, much the same coverage

Like most tax issues, this is likely to remain dormant until it gets closer to the July 1, 2003 start date. Then US businesses will suddenly take notice and there will be a great wailing and gnashing of teeth.


 6:06 pm on May 8, 2002 (gmt 0)

I think commerce sites outside the EU will implement a quick & easy 15% surcharge for all orders originating within the EU, just like many US merchants now have a sales tax automatically added for orders originating within specific US tax jurisdictions.

Plain and simple: pass it on to the consumer. That's how it generally works already.

At present, EU consumers can avoid paying VAT on many products by ordering them online from US-based e-commerce companies.

Does this really save any money once you figure in shipping costs anyhow?</added>


 6:12 pm on May 8, 2002 (gmt 0)

> US merchants now have a sales tax automatically added for orders originating within specific US tax jurisdictions.

The cost of changing the various and assorted programs used to collect sales tax will run into the billion$. Then there's the administrative cost of oversight and compliance. Then there's the international mail.... or will it be by bank draft? Trust me, it's not as simple as slapping on another 15%.


 7:10 pm on May 8, 2002 (gmt 0)

Ah, you're thinking of corporations and larger volume businesses... I was thinking of small/low volume retailers. My employer can count his number of EU sales on one hand, I'm sure... and just slapping on an extra 15% for VAT probably wouldn't be too much of a problem for us. Since there are only two people in the company who would ever process an EU order, oversight & compliance is no problem.

However, any change to taxation structure would certainly be a nightmare for a large business. Good thing they're the ones most able to afford it... I have a bit of a hard time feeling too much sympathy in this case, if EU retailers have already had to implement similar changes. Why should non-EU retailers have a lower cost of entry into the EU market?

(Maybe larger companies could charge a 20% surcharge instead... ;) )


 7:30 pm on May 8, 2002 (gmt 0)

Note that this particular EU tax is directed at downloads, not physical product... so this, in theory, affects every one-man script shop with PayPal.

Actually, it's been my experience that small businesses bear the heaviest burden in sales tax code changes. You just hear about it less because they are, well, small and lack clout. The primary reason they suffer the most is because they tend to run software/hardware longer and do not have the finances/staff/knowledge to modify or upgrade. Many, many times it's more cost-effective to withdraw from the market rather than hit yet another tax compliance tripwire.


 7:42 pm on May 8, 2002 (gmt 0)

But correct me if I'm wrong... the bbc article gave the impression that EU companies already had to charge the VAT to their customers. If they're able to do it, why is it such a hardship to expect US companies to do so? While I'll happily take your word that implementing such changes are a hardship on businesses, I find it hard to understand why.

A very small US company is unlikely to do very much trade with EU customers in the first place, and since the smaller the business the fewer the orders, the easier it becomes to run the additional surcharge calculations by hand - simply because of lack of sales volume - until an upgraded version of their shopping cart software (or PayPal service) becomes available.

At the point at which running the surcharges by hand becomes a major burden, it seems the company should be doing a high enough volume of business to be able to afford having an extra tax zone added to their shopping cart (at that volume, I doubt they'd be using PayPal anymore...). (For us, it would probably cost about $100 to have the shopping cart company add a geographically-based surcharge routine to the checkout script, but it wouldn't be worth it with our EU order volume.)

Or am I totally missing something here? (I've never run my own business, so I happily admit that possibility.)


 7:55 pm on May 8, 2002 (gmt 0)

VAT is a fact of life over here, any business that has a turnover in excess of 54,000 [I think?] has to charge an additional 17.5% and pass that on to the good old VAT man. VAT registered businesses can however claim back the VAT element of any purchases. It is a major pain and even for the smallest business involves a high level of reporting and paperwork. How on earth a US based business will cope with this is beyond me, it will involve a major reworking of systems. I think RC hit the nail on the head, in many cases it will be cheaper to withdraw from the market.

Two tips passed on to me from past accountants;

1. "Don't mess with the VAT man, they make the mafia look like the girl guides."

2. As tempting as it is do not write on your cheque stubs "robbing *******" in place of "VAT payment". As much as it ammuses you at the time it is nothing compared to the ammusement of the VAT man as he rips your company apart.


 8:11 pm on May 8, 2002 (gmt 0)

Just to mention, for people in countries not familiar with it, that VAT liabilities can be set against VAT expenses - and also that companies registered for VAT can get a UID number, which theoretically enables them to buy goods from other jurisdictions without the VAT being levied (apart from the fact that certain large internet retailers seem never to have heard of it).


 8:15 pm on May 8, 2002 (gmt 0)

So, NFFC and Stever,

Let me see if I have this right. In B2B situations, VAT would be levied, but the business who paid the VAT would be able to get a "claim back."

Does this hold true if the purchasing business actually uses the good/service rather than resell them? For example, a company buys some computers for internal use. Would they get a VAT credit? :)




 8:37 pm on May 8, 2002 (gmt 0)

>Would they get a VAT credit?

Of course :)

If you are VAT registered you can claim the VAT back on purchases, assuming of course you have a valid VAT invoice.


 8:39 pm on May 8, 2002 (gmt 0)

With a UID (this is German "Umsatzsteuer Identifikationsnummer" - might be different in other countries) the seller is entitled not to charge VAT if the foreign buyer produces a UID. They then mark the sale with the UID in their books.

In answer to the question about "credits" (and I'm not an accountant!) the VAT I have charged on work during a certain period is set against the VAT I have paid during that period on business-related goods and services and the credit or debit comes from the plus or minus in that sum. If I have bought a micro-widget polishing machine and paid 100 in VAT for that in one month and sold 20 fluffy widgets and collected 200 in VAT on them in the same month, I owe 100 in VAT (Mwst over here) to the taxman.


 8:43 pm on May 8, 2002 (gmt 0)

What I don't really get here is how are small non EU companies supposed to transfer the money to the EU taxman?
From what I read it could be transferred to an EU country of choice... Does that mean every non EU business has to set up an individual account with a local tax office?


 8:48 pm on May 8, 2002 (gmt 0)

> every non EU business has to set up an individual account with a local tax office?

That's the way it appears.

EMusic.com would have to determine electronically that the purchaser is located in Belgium. Using that information, EMusic's computers would add the appropriate Belgian sales tax to the purchase.


 8:57 pm on May 8, 2002 (gmt 0)

What I got from the bbc article is that the non-EU retailer would choose a single EU country to register with, and would then remit their VAT taxes to that country at that country's rates. I think they mentioned Luxembourg as having the lowest rate...

Under the measures, non-EU internet retailers wishing to sell within the bloc will be obliged to register for tax purposes in one of the 15 EU nations.

The online retailer - or 'e-tailer' - will levy VAT on all sales to EU customers at the rate applied by the country it is registered with.

That country will in turn divide the revenues between the other EU nations according to where the sales are made.

brotherhood of LAN

 9:28 pm on May 8, 2002 (gmt 0)

NFFC, I think its 50000, im not 100% on that, but looking at a business directory its interesting to see so many companies that turn over less than 50K ;)

VAT, a good excuse for government interest and coffers to swell. Used to be 5% too :(


 9:37 pm on May 8, 2002 (gmt 0)

>Used to be 5% too

The fact that VATs are structured to be rolled into the price rather than shown as a tax line-item is one of the biggest taxpayer fears here (I'm not sure how the VAT is shown in practice). That provides a way for governments to distance themselves between the cause and the effect.


Looks like they will be the digital download taxation capital of Europe under that plan.


 10:05 pm on May 8, 2002 (gmt 0)

>I'm not sure how the VAT is shown in practice

In general B2C sites show the price including VAT, B2B sites show excluding. This may also apply in the real world, although I have increasingly less interaction with that and cannot be sure. :)

brotherhood of LAN

 10:17 pm on May 8, 2002 (gmt 0)

NFFC, I think youre right

Also, I think it is mandatory to show a price including VAT if you choose to show the one exc VAT, though dont hold me to that


 10:43 pm on May 8, 2002 (gmt 0)

being a UK VAT registered business, i'm in competition with US (and other) suppliers that don't have to charge VAT - that generally makes my products and services more expensive to everyone except other VAT registered businesses. VAT puts me and other UK businesses at a big disadvantage.

the proposed implementation of worldwide VAT should (in theory) create a level playing field and should help UK and EU businesses to compete with other businesses worldwide.

IMO, it won't work. it will either be a bureaucratic nightmare, or people will ignore the rules through ignorance or defiance.

in the UK, vast numbers of small business owners run websites in breach of the law - they don't provide legally required company information, they don't register with their tax offices, they don't declare the taxes they should be paying right now. i'd guess it's much the same in the US - people find they can set up a website and sell stuff and they just do it without realising they still have to register as a business and pay taxes in the same way as a bricks and mortar business does. so how can we expect small businesses outside the UK to implement VAT?

IMO, the best thing the EU can do is abolish VAT and increase income taxes - EU citizens will pay the same amount in taxes, the governments will have the same income, everyone everywhere will save on bureaucracy costs, and EU businesses will be able to compete fair and square with the rest of the world.


 10:53 pm on May 8, 2002 (gmt 0)

>>In general B2C sites show the price including VAT, B2B sites show excluding

yep, although when i checked this with trading standards, they told me that if i provide a B2B service and it is possible that i could make a B2C sale (for example, direct sales via the internet) then i should treat the business as B2C and display pricing including VAT. as there is no physical way to prevent B2C sales from a B2B site, it's probably best to display both inclusive and exclusive pricing.


 11:15 pm on May 8, 2002 (gmt 0)

Crazy_Fool - that's about the best summary of the situation I've read so far.

It's definately not acceptable for EU biznesses to be severely disatvantaged in their own countries compared to colleagues from outside the EU. (Yep, this is not a EU vs US thing, asian, african, russian companies - they are all facing this situation)

The practibality of this solution however is highly questionable.


 11:30 pm on May 8, 2002 (gmt 0)

>highly questionable

I don't think that the one-man script shop in Kansas City is going to lose any sleep over this. This is one of those skim-the-cream laws.


 11:31 pm on May 8, 2002 (gmt 0)

not acceptable for EU biznesses to be severely disatvantaged in their own countries compared to colleagues from outside the EU

Someone in the US could just as easily argue that a California retailer is in unfair competition with neighboring Oregonian businesses, because Oregon has no state sales tax while California does. But there hasn't been any move to force Oregon retailers to charge sales tax to California customers, because the Oregon businesses are not legally subject to California's tax laws.

To play devils advocate:
Why should non-EU business entities be subject to the laws and tax structures of the EU gov't, which they had no hand in implementing and no input in designing? Sounds a bit like the whole "taxation without representation" issue that started that tea-dumping fiasco in Boston harbor. ;)

(Oh, I've probably gone and started a mess now...)


 11:38 pm on May 8, 2002 (gmt 0)

>Why should non-EU business entities be subject to the laws and tax structures of the EU gov't

They are not, but their Achille's heel is that the credit card companies they use as merchants (directly or indirectly) are.


 11:40 pm on May 8, 2002 (gmt 0)

So what if I only sold products to EU customers via electronic check or money order, etc? End run around the credit card processors...


 12:54 am on May 9, 2002 (gmt 0)

>>Why should non-EU business entities be subject to the
>>laws and tax structures of the EU gov't, which they had
>>no hand in implementing and no input in designing?

<thought> will the US retaliate by insisting that european businesses selling to the US must charge US sales taxes at the rate in force in the purchasers state? </thought>

something not mentioned here so far is that people outside the EU (especially people in the US) need to understand what the EU is and what the EU do.

the EU is an organisation that sets the rules by which all europeans must play. the EU is effectively run by the member states, each of which has to pay vast sums of money for membership. the EU uses some of this money to fund itself, then dishes the rest out in EU subsidies to the member states and businesses or organisations within these member states.

if the EU creates a set of rules, they give all member states a time limit in which to implement these rules in their own laws. some EU laws are totally compulsory, others can be implemented partially or in different ways. in theory, this creates a level playing field for all member states - a United States of Europe as some like to think.

as examples of what the EU does:

they pay farmers not to farm their fields - i think this is supposedly to prevent overproduction and storage costs - meanwhile, the EU imports field crops and food stuffs from abroad and millions of people in the third world starve.

the EU decides on product specifications - a banana must be curved by a certain amount - if it's too straight, it's not a banana. yorkshire puddings must be made in yorkshire - if they are made elsewhere, they are not yorkshire puddings. i presume black pudding must be black - very dark brown isn't good enough.

the EU insists that all member states charge VAT on domestic fuel consumption (gas and electricity) - VAT is a tax on luxuries (things we can survive without) such as chocolate or a computer or a newspaper - things we need (ie food and clothes) are supposedly VAT free - however, it now appears that keeping warm in the winter is a luxury.

i'm not anti-EU, i just think it's a waste of time and money and restricts free trade.

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