uropean Union member countries impose a value-added tax (VAT) on sales of goods and services originating within the EU (regardless of where the goods and services are consumed), while those suppliers outside the union are not subject to VAT—even when they deliver products to consumers within the EU. Many EU businesses have been concerned that the current rules as they apply to electronically delivered services distort competition and work to their disadvantage. (The laws were drawn up before the growth of e-commerce.) EU businesses must collect the VAT on all online sales, no matter where the consumer lives; non-EU suppliers are not required to collect this tax, even when providing electronic services to EU customers.
The EU is in the process of adopting new rules that would require non-EU vendors (including many U.S. companies) to collect and remit VAT on digital goods and services supplied to EU consumers. ( Note: These new rules do not apply to non-EU suppliers selling to business customers in the union; existing self-assessment arrangements already cover VAT collection in these situations.)
Requirements. Non-EU suppliers will have to register in an EU member state of their choice, and levy VAT at the rate applicable in the member state where the customer resides.
Goods and services included. These new rules will apply to the online sale of digital products such as software, music, games, databases and broadcasts of events.
This will lead to discrepancies in taxation between digital goods and services and their tangible equivalents. Books, magazines and newspapers physically available in the EU member states are taxed at reduced rates (or not at all). E-books or electronic subscriptions to newspapers or magazines provided by non-EU vendors will be subject to VAT under these new rules.
Thresholds. There is no provision in these new rules for any sort of a de minimis amount; theoretically, a vendor with one dollar of digitized-goods sales in the EU would need to register and collect the VAT.
In addition, each of the EU states can enact its own threshold amount. Currently, this can range from zero to approximately 85,000 euros (about $75,000).
Documentation. Under these new rules, a non-EU company must charge VAT based on the customer’s location. The vendor would be required to verify the information concerning the purchasers and their locations; the vendor would be responsible if the individual consumer provided inaccurate or fraudulent information, even if it was accepted in good faith; a purchaser’s declaration would not be sufficient. In addition, the vendor would presumably be responsible if there were discrepancies between the customer’s ordering location and shipping address (for example, a customer purchased goods via the Internet while on vacation but had them delivered to his or her home address).
Collection. Under these new rules, a U.S. company will have to register in one of the EU countries; however, the U.S. company will have to charge and collect VAT at the rate that applies in the country of consumption. Currently, there are 15 different rates, ranging from 15% (in Luxembourg) to 25% (in Sweden). Thus, a non-EU vendor will have to register in one country in the EU but collect VAT at the correct rate in 15 different countries.
Such a requirement contrasts sharply with those imposed on EU vendors. In general, an EU vendor will only have to charge VAT at the rate that applies in the country where it (the seller) is established.
For a discussion of this and other current developments, see the Tax Clinic, edited by David Madden, in the June 2002 issue of The Tax Adviser.
—Nicholas Fiore, editor
The Tax Adviser