I wonder if we should consider endorsing the EU position on taxing digital products since it's a problem some cities in California are now facing. Hmm... ===================================================================== EU Continues Efforts to Tax Digital Products By David Hardesty <http://ecommercetax.com/doc/102200.htm>, October 22, 2000 The European Union, which in June proposed new laws that would tax sales of digital products and services to European consumers, is still pushing to adopt those rules. Continuing efforts to put these rules in place are going ahead despite heavy criticism in the United States, whose legion of ecommerce entrepreneurs is the main target of the proposals. Now, other countries are beginning to look at ways of taxing digital imports to prevent erosion of their tax bases, and to protect local businesses from U.S. companies, which are far ahead of the world in online commerce. The legislation proposed in June by the European Union would require non-EU sellers to collect VAT on sales of digital products and services to nonbusiness consumers in Europe. Only those that are expected to have more than 100,000 Euro in sales from Europe are subject to these rules. For an explanation of the rules, see Europe Proposes New Taxes on Non-EU Sellers.[1] The types of sales that would be subject to the tax include downloaded products, like software and music, and online entertainment services, such as pay-for-use video broadcasting. This issue is very important to the Europeans, who receive 40 percent of their revenues from VAT. The fear is that failure to address taxation of ecommerce now could lead to a serious breakdown in the VAT system. The impetus for the rules comes from two sources. One is the fear that competition from abroad in digital products and services will harm local companies. The other is the fear of lost tax revenues. The concern about competition was expressed in a recent statement by Frits Bolkestein, European commissioner for taxation. Today European producers of digital products, such as computer games and software, are at a competitive disadvantage compared with non-European producers because they have to apply VAT to their products within Europe. US competitors, by contrast, can export to Europe free of VAT. Similarly European exporters to the US are now obliged to pay European VAT, whereas US producers are not faced with the same obligation. I propose to put European producers of digital products on an equal footing with US and Japanese competitors by applying VAT to digital imports into the EU and exempting digital exports from the EU. This would create a global level playing-field for European and non-European companies. An example of the kind of competition Bolkestein is trying to combat is demonstrated by Symantec, which makes the popular Norton Utilities and Norton Antivirus. In its Web site Symantec encourages European customers to download its software, saying "There is no VAT, shipping, or export charge. Save time and money -- download today!" [2] Some EU sellers of downloaded products and services are going to considerable lengths to avoid being subject to VAT. For instance, one strategy is to run sales operations from U.S. Web servers. This way they are able to sell to Europeans without collecting VAT. On the issue of lost tax revenues, Bolkestein said that, while VAT revenue losses are small today, they are bound to grow, and it is better to change now, rather than later. The proposed legislation will not take effect until enacted by all 15 EU member countries. Resistance to the proposals is coming from both inside and outside the European Union. Some claim the law is unenforceable because it is impossible to locate customers in cyberspace. This argument does not hold water when you consider two facts. First, consumers make most digital purchases using credit cards. To combat credit card fraud, vendors of electronically delivered products and services require detailed customer information. Credit card companies also require certain identifying information beyond a name and credit card number. The information received, which can be instantly verified, allows the vendor to know its customer, and its customer's location. Second, vendors typically use software to track the source of their Web site visitors. This information is useful in marketing and advertising efforts. Tracking software, which has become very sophisticated, can be used to determine a customer's country and potential liability for VAT. These measures are not 100 percent effective. Determined customers can take steps to mask their identities. However, most customers are unlikely to do so. Some claim that non-EU companies will flout the European laws if they are ever put into place. However, large companies have an incentive to cooperate with the Europeans. These companies need the goodwill of foreign governments to insure smooth operations in market countries. Europeans have mentioned protection of the intellectual property of non-EU sellers as one reason for cooperation. In addition, top executives of large companies, who travel regularly in Europe, may be at personal legal risk if they operate companies that refuse to comply with EU law. Only the small non-EU companies are likely to flout the laws, if enacted. And, many of these will be exempt from the tax. Some express serious concern about the tax compliance burdens presented by the proposals. Trying to be sensitive to the problem, the proposals exempt companies under the 100,000 Euro threshold. While this is a reasonable measure, aimed at easing the burden on small non-EU sellers, it does not help small European sellers, who remain liable for VAT on all sales. A reasonable measure might be to exempt small EU sellers as well. However, no one has seriously proposed this. As technology improves much of the compliance burden will be eased, or so goes the belief of European policy makers. Companies like IBM and Taxware International already have software solutions that allow non-EU companies to collect VAT on online sales. However, it is unlikely technology will be the easy panacea government officials hope. Grafting worldwide tax compliance capability onto legacy systems will be difficult and expensive. A complaint about the proposals that is coming from inside the EU relates to the ability of non-EU sellers to register for VAT in the country of their choice. Some EU countries have low VAT rates while others have rates that are high. In addition, non-EU sellers may register in countries that exempt their products and services from tax. High-VAT countries worry that this feature of the proposals may render them ineffective. Government officials in the Clinton administration, such as US Deputy Treasury Secretary Stuart Eizenstat, have spoken out against the proposed legislation, as have members of Congress. However, Bolkestein says the proposals are in line with the principles of taxation worked out at the Organization for Economic Cooperation and Development's (OECD) Ministerial Conference in Ottawa. The EU proposal is just one indication of a worldwide effort to adjust tax systems to the demands, and threats imposed by ecommerce. If the EU is successful in implementing its plan, other countries will adopt similar rules, requiring online companies to collect VAT in dozens of countries. It has recently been reported that the Malaysian Institute of Accountants and the Malaysian Institute of Taxation have recommended new taxes on Internet-based sales and services in an effort to protect that country's revenue base. According to Maylasian accountants, if the government is unable to tax companies because they are not doing business in Maylasia, the country should be able to capture tax on goods coming through the mail or services provided electronically. This attitude is likely to be found to one degree or another throughout the world as local merchants find themselves vulnerable to competitors doing business from the United States and other heavily wired countries. Policy makers in these countries will complain that the United States' attitude toward ecommerce, which is to remove most taxes and duties, especially from electronic products and online services, is self-serving, and does not take into account the fact that the rest of the world is five years behind the United States in online selling. The United States is set to reap most of the benefits from a tax-free Internet. In Maylasia some think the government should offer significant incentives to lure information technology companies to locate there. By getting knowledge workers to locate in these countries, there is some chance of capturing more tax revenues, as well as valuable industries. Ecommerce is particularly able to take advantage of tax incentives, because ecommerce operations are highly mobile. Conclusions Tax policy makers are struggling to adapt old tax systems to electronic commerce. Changes in tax rules must deal with often conflicting goals, such as encouraging the growth of ecommerce, while at the same time preventing the erosion of the tax base, and protecting local businesses from foreign competition. Outside of the United States the movement seems to be to expand government's ability to capture tax on electronic transactions. While there does not seem to be any immediate danger of the EU proposals being put into place, the support for these kinds of proposals is strong and has to be taken seriously by companies selling digital products and services. [1] Hardesty, "Europe Proposes New Taxes on Non-EU Sellers," EcommerceTax.com, 6/18/00. <http://ecommercetax.com/doc/061800.htm><http://ecommercetax.com/doc/061800. htm> . [2] See <http://eu.symantecstore.com> --- You are currently subscribed to members as: [email protected] To unsubscribe send a blank email to [EMAIL PROTECTED]
