A New Tax Headache for E-Commerce
Analysts and VAT experts say the new measure will have an impact on all U.S.-based businesses that provide digitally downloaded products and services to consumers in the EU.
And that includes companies that offer things like Web-hosting, ASP services, sales of downloadable software and upgrades, the sale of electronic books, streaming music, digital movies, computer games and even distance-learning services.
"The European Union passed this new legislation to address the disadvantage that European suppliers of electronic goods and services have," said Richard Mitchell, general manager of the London office of Minneapolis-based e-commerce outsourcing company Digital River.
"An EU-based ASP has always been required under EU law to collect taxes on all supplies of electronic goods and services, which can put them at a disadvantage to U.S. ASPs," he said.
Suppliers outside the EU will have to charge the VAT rate (a levy that is something akin to a sales tax) in the EU country where the consumer resides, according to John Fay, VAT partner at PricewaterhouseCoopers in Ireland.
PricewaterhouseCoopers has set up an informational Web site to help American and other non-EU e-commerce and ASP operators gain more little understanding about the issues involved.
But a lot remains murky, and PricewaterhouseCoopers says on the site that individual EU member states have, in most cases, not yet provided information about registration procedures or related guidelines on how they will manage the new system.
"These new rules will cause major challenges for businesses that have to adapt their systems to meet the requirements," Fay said. "We hope that the Web site will help in enabling them to understand the issues they need to be addressing now in planning for compliance with the new arrangements."
The new law, which was agreed upon almost a year ago, means that companies based in the United States will in effect be forced to raise prices for European buyers - and more than just a little.
The VAT rates vary widely in the European Union. They can dip as low as 15 percent in Luxembourg and run as high as 25 percent in Denmark and Sweden - rates that are nothing like the 5 percent to 8 percent sales tax rates that American consumers pay.
"For example, if a U.S. based supplier sells digitized products over the Internet (i.e. digital downloads) to a consumer based say, in Germany, the U.S. company will be required to charge/account for German VAT at 16 percent on the sale price," Fay told internetnews.com. "If the U.S. company also sells to an Irish consumer, 21 percent VAT will have to be charged, a UK consumer 17= percent, etc."
Currently only EU businesses in the 15 member countries (with a further 10 to join the EU by May 1, 2004) have to charge VAT, according to Fay. But from July 1, all businesses will have to comply with this new ruling. Suppliers outside the EU will have to charge the VAT rate in the EU country where the consumer resides.
"These rules only apply to downloaded digital content supplied by non-EU suppliers to consumers based in the EU," Fay said. "It does not apply to hard goods ordered from non-EU suppliers which are delivered by traditional means."
"Anyone dealing in tangible goods would already be subjecting those sales to VAT," Mitchell explained.
Many larger American IT and e-commerce companies are already planning for the change.
"We manage VAT-related issues for clients operating on our merchant account," said Mitchell at Digital River.
"For clients who wish to run their own merchant accounts, we can customize their account set-ups around their VAT structure," he said. "We then automatically collect any VAT due based on their custom settings and the new requirements. Through our online reporting tools, they can run reports to analyze the VAT due."
Still, some companies may be taken by surprise and some critics have said that the administrative burden the directive will place on e-tailers is similar to the one that looms from the impending imposition of sales taxes on e-commerce in the United States.
The U.S. Department of the Treasury has voiced "serious concerns" over the issue and said that it "may potentially be inconsistent with international trade obligations in the World Trade Organization, in particular the commitment to accord national treatment to foreign goods and services."
Proponents of the new rules, however, say that they will make it easier for EU-based Internet retailers -- already required to charge VAT on sales to customers in Europe -- to compete with their non-EU rivals. The changes, they say, are supposed to create a level playing field on both sides of the Atlantic, as it were.
"This legislation was approved over a year ago and has had quite a high profile in the United States," Mitchell said. "I would imagine that most companies have been aware of this for quite some time. Most online companies have software in place that can handle U.S. taxation rules. Based on that software, they will either need to upgrade it or purchase a product that can handle the new rules."
"In addition ... they will need to have their finance department register them in an EU country, where they will have to submit their VAT returns and potentially make their accounts or records available for audit," he said.
A quick search on Google turned up a variety of companies making VAT software, including Taxware.com, although it did appear as if much of what came up was oriented toward managing the VAT requirements for tangible goods.
One thing that will make it somewhat easier for U.S. companies is that apparently they will not have to pay each individual European nation.
"In terms of a mechanism for collecting the tax, the EU Directive envisions a single point of registration in the EU for non-EU suppliers," Fay said. "In other words a U.S. supplier will register in one jurisdiction and remit on a periodic basis, by way of a VAT return, the total amount of VAT charged to consumers in all EU jurisdictions. That tax authority will then remit the appropriate amounts to the appropriate EU jurisdictions."
What about digital B2B sales, from an American company to one based in the European Union?
Fay said that business to business sales over the Net are excluded "as these are taxed for VAT on what is called a reverse charge basis. In other words the EU-based business customer self assesses the VAT liability in its VAT returns. The U.S. based supplier will not therefore have to register or charge VAT in respect of business to business sales."