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New EU Law Bursts Dot-Com Tax Bubble
davaddavad




msg:653969
 2:41 pm on Jun 10, 2003 (gmt 0)

On July 1, a new EU directive goes into effect requiring all Internet firms to account for value added tax, or VAT, on "digital sales."

The law adds a 15 to 25 percent levy on select Internet transactions such as software and music downloads, monthly subscriptions to an Internet service provider and on any product purchased through an online auction anywhere in the 15-member bloc of nations.

rest of article

[bizreport.com...]

 

korkus2000




msg:653970
 2:43 pm on Jun 10, 2003 (gmt 0)

So are people going to move servers out of the EU territory, or will that not help?

Smiley




msg:653971
 2:51 pm on Jun 10, 2003 (gmt 0)

From what I understand it wont help, if the buyer is in the EU then they must pay VAT.

martinibuster




msg:653972
 2:53 pm on Jun 10, 2003 (gmt 0)

Good catch. I can see how in some cases, like for AOL UK, it's about time. I'm going to watch and see how this develops.

davaddavad




msg:653973
 6:15 pm on Jun 10, 2003 (gmt 0)

To me it looks like the beginings of international taxation. How are they going to enforce it?

Richie




msg:653974
 6:55 pm on Jun 10, 2003 (gmt 0)

I don't understand.

Does that mean all ISPs and websites in the UK which offer advertising space etc etc will have to be VAT registered and claim it from customers?

bcolflesh




msg:653975
 6:56 pm on Jun 10, 2003 (gmt 0)

The same way regular taxes are enforced everywhere - guys with guns come and take all your stuff if you don't pay...

Regards,
Brent

sullen




msg:653976
 7:25 pm on Jun 10, 2003 (gmt 0)

Richie -

As I understand it, it just means that foreign companies will have to pay VAT on digital sales in the EU (as they would if they had a shop here, so quite right too really). The vast majority of UK or EU ISPs are already paying VAT. You may have noticed that most quote VAT exclusive prices and then add the 17.5%.

If you are not VAT registered because your turnover is under the VAT threshold then you will be exempt. Don't know how it will affect small US companies selling ads to EU firms - I guess its the big firms they're out to get.

I could be wrong of course, but it's rare.

CromeYellow




msg:653977
 7:48 pm on Jun 10, 2003 (gmt 0)

Hmm... I thought this was already the case when selling to individuals. (If you are selling to another EU based VAT registered company you don't have to charge VAT).

Still, if you are based in the UK and selling goods outside the EU, you don't have to charge VAT, which is a nice way of offsetting the shipping to the US.

Cy

heini




msg:653978
 7:59 pm on Jun 10, 2003 (gmt 0)

OK here's why:
European dot-coms have been charging customers VAT since their inception. Their overseas rivals though have been exempt....

"It's a massive competitive disadvantage. It's good to see at last it being eroded," said David Melville, general counsel of UK Internet service provider Freeserve....

Freeserve ... saying its chief rival AOL UK ... saved 150 million pounds ($249.7 million) in tax payments over the years.

Here's what (it's not all online sales):
select Internet transactions such as software and music downloads, monthly subscriptions to an Internet service provider and on any product purchased through an online auction

engine




msg:653979
 8:04 pm on Jun 10, 2003 (gmt 0)

In simplistic terms: You don't have to be VAT registered in the EU for varying reasons of exemption (as mentioned, perhaps you are below the threshold).
If you are not VAT registered you still have to pay the tax, as you do when visting a foreign country on holiday - you pay the local tax.
If you are VAT registered you pay the tax on purchases and claim a proportion back based upon the offset of your purchases vs sales. Generally, as you sell more than you purchase, you'll end up sending the VAT man a cheque at the end of each VAT quarter.
That's a very basic overview.

seekanddestroy




msg:653980
 8:57 pm on Jun 10, 2003 (gmt 0)

It was a loophole, it's going, and I'm going to buy a load of stuff I had planned to before it comes into effect,.

Goodbye.

wackybrit




msg:653981
 1:14 am on Jun 11, 2003 (gmt 0)

But it wasn't really a 'loophole'. Taxes should always be collected locally, and have been, up till now.

If an American buys something from an EU company, they should pay the VAT. If a European buys something from a US company, they should pay the relevant US sales taxes. That's simple, and that's how it generally works.

I have a server with a large hosting company in the US and I pay Houston's city sales tax on it. No big deal. I don't want to end up paying that *AND* European tax on it.

But now the EU has decided it wants to force companies worldwide to collect tax on its behalf. This is about as stupid as the Australian Inland Revenue demanding that some mom and pop store in Russia charge all Australian clients sales tax, and then send it back to Sydney!

Just because the EU is a large entity should not give it the right to push through rulings which are in violation of common international tax policy. And, let's face it. The EU is only doing this because EU companies are anti-competition and over priced. Why else would I buy stuff from the US if I could get it in the EU?

Yet more EU nonsense, on a grander scale than the EU's 'you can't sell bananas which are too curved' fiasco of the 90's.

Ankheg




msg:653982
 5:05 am on Jun 11, 2003 (gmt 0)

I get the impression from posts here that firms who do under a certain amount are exempt from collecting VAT, but can't find anything on the WWW about it. Could someone post a link to information on this? Please? :)

bcolflesh




msg:653983
 5:26 am on Jun 11, 2003 (gmt 0)

I remember reading about what happened the last time a European country tried forcibly collecting taxes from the "Colonies"...

Regards,
Brent

wackybrit




msg:653984
 5:41 am on Jun 11, 2003 (gmt 0)

Ankheg: In lieu of links, I'll quickly explain how it basically works.

In the UK you can be 'registered for VAT'. This means that you will charge VAT to your customers, and that you'll pass this VAT on to the tax man. In return for this hard work, the VAT man will allow you to 'claim back' the VAT *you* paid to buy stuff for the business.. parts, office equipment, fuel, and so on.

If you (or your company) makes over about $75,000 a year you HAVE to be VAT registered, there's no option. Below this, you can choose whether to be VAT registered or not.

Many self-employed people or small businesses choose not to register for VAT (if they make under $75k per year) because it causes a big headache with your accounts. If you're VAT registered you have to use a specially 'approved' accountant to sign off your books at the end of the year.. and this costs money.

If you're not VAT registered, then you don't need to charge your customers the extra 17.5% tax, and you also don't need to do anything special with regards to your accounts.

The big problem, however, is that if you're not VAT registered, you can't claim the VAT back on your expenses.

This results in a situation where the big guy wins, and the small guy loses. The small guy is effectively forced to use an expensive chartered accountant if he wants to be VAT registered and claim back the VAT on his expenses.. whereas the big guy probably uses a chartered accountant anyway.

In my own case, I'll be paying 17.5% more on my Adwords buys from July 1st, and I won't be able to claim it back.. whereas a VAT registered person (or company) will.

CritterNYC




msg:653985
 6:24 am on Jun 11, 2003 (gmt 0)

I'd guess that most overseas firms won't bother.

If I ran an ebook or downloadable music site in the US and had buyers in the EU, why would I bother collecting the VAT? Legally, there really isn't any way they can apply a tax to my business anyway. I have no physical or legal presence there, in any form. I'm outside of their jurisdiction, so they can't come after me here. They can't have the ISP on their end monitor all transactions, since they are SSL encrypted. I suppose they could legislate that ISPs there have to block sites that don't collect it, or some such nonsense. But I would guess that citizens wouldn't really like that one.

Or am I off the mark and does this only apply to EU-member nations?

wackybrit




msg:653986
 7:09 am on Jun 11, 2003 (gmt 0)

No, I think you've raised a good point.

Companies like Amazon and Google are following along with what the EU says, because they also have operations in the EU, which the EU could come down on. Companies that are entirely US based, however, can give the EU the finger, since there's not really anything the EU can do to force US businesses to tax different people in different ways.

The CEO of my ISP (who's in the US) has clearly stated that he will NOT be levying VAT on his European customers, whether the EU say or not. And good to him! :-)

Perplexed




msg:653987
 7:22 am on Jun 11, 2003 (gmt 0)

Ankheg

The last I heard a UK firm could have an annual turnover of about 40,000 UK pounds before it had to register for VAT. That was a few years ago so it will have gone up by now.

Rumbas




msg:653988
 7:31 am on Jun 11, 2003 (gmt 0)

Living in a heavily taxed country and being used to VAT/sales tax of 25%, this comes as no shock to most of us. However I see the point of having difficulty selling abroad, as the prices will increase.

Engine is right though, if you are VAT registered, you can claim the VAT back.

Taxes and death, can't get around none of 'em can you? ;)

gsx




msg:653989
 9:37 am on Jun 11, 2003 (gmt 0)

Currently 56000 pounds (turnover) for forced registration of VAT.

The small guy can lose out by being VAT registered - you pay 17.5% to the VAT man on sales and claim back 17.5% on purchases (in general). But, surely your sales should be higher than costs - so you owe the VAT man. You can either put your prices up by 17.% or lose 17.5% profit by being registered.

But if you want to sell to businesses, VAT registration is really the only way to go.

georgeek




msg:653990
 10:24 am on Jun 11, 2003 (gmt 0)

There is a parallel thread on this subject here [webmasterworld.com...]

Essential facts here [hmce.gov.uk...]

Outstanding question: How does the EU force compliance? (in the US for example)

wackybrit




msg:653991
 11:25 am on Jun 11, 2003 (gmt 0)

The small guy can lose out by being VAT registered - you pay 17.5% to the VAT man on sales and claim back 17.5% on purchases (in general). But, surely your sales should be higher than costs - so you owe the VAT man. You can either put your prices up by 17.% or lose 17.5% profit by being registered.

That's not really true. If you charge $20 per hour for your time, let's say, and suddenly you register for VAT.. you still charge $20 per hour and also add $3.50 for VAT. If the client is another company, they claim back that $3.50, so you still cost $20 whether you're VAT registered or not. You don't lose 17.5% profit, because that was never your profit in the first place, it's just money passing through you from the buyer to the VAT man.

That said, many larger companies use VAT for cashflow purposes, since it inflates their revenue by 17.5% in a real world sense, even if the accountant doesn't see it that way.

gsx




msg:653992
 11:57 am on Jun 11, 2003 (gmt 0)

You do lose profit for B2C sales. You sell something at 200 (same as a competitor for example):

NOT VAT REGISTERED:
Cost: 100+VAT = 117.50
Sell: 200 = 200.00
PROFIT = 82.50

VAT REGISTERED
Cost: 100+VAT = 100.00 (when VAT claimed back)
Sell: 170.21+VAT = 170.21 (200 when VAT is paid)
PROFIT = 70.21

So you either put your prices up and become more expensive, or you pay the VAT yourself when becoming registered.

devniall




msg:653993
 4:55 pm on Jun 11, 2003 (gmt 0)

If an American buys something from an EU company, they should pay the VAT. If a European buys something from a US company, they should pay the relevant US sales taxes. That's simple, and that's how it generally works.

The problem is that while we call this "Sales Tax" governments consider it "Sales & Use tax".

For example, "Sales tax" in Massachusetts is 5%. New Hampshire has no "Sales tax". However, as a Massachusetts resident I am supposed to pay the 5% sales and use tax to the state of Massachusetts on any goods I purchase in or from New Hampshire.

So is VAT a "sales and use" tax or just a "sales tax"? If it's the former this new policy is understandable. If it's the latter I'm totally confused.

georgeek




msg:653994
 5:58 pm on Jun 11, 2003 (gmt 0)

If an American buys something from an EU company, they should pay the VAT. If a European buys something from a US company, they should pay the relevant US sales taxes. That's simple, and that's how it generally works.

You are going to remain confused as long as you think this is the case.

In fact sales from the EC to outside the EC are in the vast majority of cases not liable to VAT. Not only that if a US citizen is on holiday in the UK and buys a suitcase for example they can keep the receipt and claim the VAT back. See here [hmce.gov.uk].

And of course in the US inter-state and international mail order shipments are exempt from tax and foreign visitors do not have to pay either on production of a passport and ticket. But in practise this entitlement is difficult to get sometime, except in places like NY where there are tax free shops for the tourists.

nell




msg:653995
 6:05 pm on Jun 11, 2003 (gmt 0)

Good news!

We'll surely be offering shipping to Europe as soon as this goes into effect. We'll even remove the item price tags, send them as *gifts in generic wrapping and mail the shipping advice under separate cover. Our new EU customers will enjoy the savings of customs duty as well.

*gifts
Reciprocal in nature.
They give us money.
We give them merchandise.

xy123




msg:653996
 9:19 pm on Jun 11, 2003 (gmt 0)

wackybrit: I dont think being VAT registered is anything to do with having to use a Chartered accountant. Being VAT registered does mean you must keep certain records, true. Chartered accountants only come into it when a company must submit audited accounts (to Companies House). Accounts can only be audited by a chartered accountant.

In practice, a large proportion of VAT registered businesses are companies. Which, by law, must submit annual accounts. Most companies will use a chartered accountant to prepare these, even if they are not formally audited (with turnover below a certain level, accounts do not have to be audited).

The cost of using a chartered accountant is generally more than reimbursed by the 'insurance' if I can put it like that that it gives the business in dealing with the likes of the Inland Revenue and VAT people; people who choose not to use recognized accountants attract much more attention from the IR and VAT people, with the consequent cost & hassle.

xy123




msg:653997
 9:29 pm on Jun 11, 2003 (gmt 0)

Compliance: those posting here to suggest that US businesses can safely ignore this new EU directive because the EU cant touch them unless they have a physical presence in the EU would be well advised to consider their position very, very carefully.

I am not a lawyer and dont take any of this as legal advice - get your own! But as I understand it:

If a US business sells to an EU resident, that business will most likely, from a legal point of view, be deemed as having 'availed itself of the (local) jurisdiction', and as such it could probably be sued by the relevant tax authorities in the relevant country. Irrespective of whether it has a physical presence in that country. And if it lost the case, which it most likely would, it could be injuncted preventing all sales and related activity in that country. Oh and dont forget that through treaty obligations any judgement could be enforced in the US against the US business.

Of course, if the US business has a presence within the EU any judgement will be easier to enforce, but I dont think having no presence means you can stick 2 fingers to it.

dmorison




msg:653998
 9:43 pm on Jun 11, 2003 (gmt 0)

it could be injuncted preventing all sales and related activity in that country.

But how can they enforce the injunction if they cannot enforce the VAT?

If the EU cannot enforce a non-EU merchant to collect VAT then they cannot enforce an injuction either...

This 61 message thread spans 3 pages: 61 ( [1] 2 3 > >
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