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New EU Law Bursts Dot-Com Tax Bubble

     

davaddavad

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

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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

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

WebmasterWorld Senior Member korkus2000 is a WebmasterWorld Top Contributor of All Time 10+ Year Member



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

Smiley

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

10+ Year Member



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

martinibuster

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

WebmasterWorld Administrator martinibuster is a WebmasterWorld Top Contributor of All Time 10+ Year Member Top Contributors Of The Month



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

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

10+ Year Member



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

Richie

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

10+ Year Member



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

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

WebmasterWorld Senior Member 10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

WebmasterWorld Senior Member heini is a WebmasterWorld Top Contributor of All Time 10+ Year Member



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

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

WebmasterWorld Administrator engine is a WebmasterWorld Top Contributor of All Time 10+ Year Member Top Contributors Of The Month



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

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

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

10+ Year Member



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

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

10+ Year Member



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

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

WebmasterWorld Senior Member 10+ Year Member



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

Regards,
Brent

wackybrit

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

WebmasterWorld Administrator 10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

10+ Year Member



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

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

WebmasterWorld Senior Member 10+ Year Member



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
 

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