Borderline cases.
| Author | Burnes, Gary |
| Position | VAT cost of on-line business |
How do you manage the VAT cost of on-line business? Gary Burnes examines the facts and the anomalies of current international and EU rules governing global internet transactions
When a business such as Amazon.com sells its products over the internet, but still delivers those products physically, nothing really changes for VAT purposes. The normal rules on cross-border goods movement apply. But one significant difference is that the facilities of the world wide web may open up new markets for sales to private individuals in EU member states. This may trigger a requirement to register and charge VAT at local rates, if distance selling thresholds are exceeded. The thresholds are either 35,000 ECU or 100,000 ECU in each EU state.
The position on products delivered electronically is more complex. Digital downloads are treated by all EU countries as supplies of services for VAT purposes. The OECD also agrees this treatment. Different rules apply to B2B and B2C transactions and these will change once draft proposals by the European Commission and OECD are implemented. The rules on B2C transactions have more impact for VAT purposes.
AN EU supplier solely involved in the digital download of music, games, etc to individuals in the EU, generally charges the VAT rate of its own state. This benefits suppliers located in Luxembourg (15 per cent VAT rate) who sell to a customer in Sweden (25 per cent VAT rate). It contrasts with the position on physical goods, where they often need to register in the other state and charge the local VAT rate.
In other cases, the supplier of physical goods may be at an advantage. For example, a book supplied physically is zero rated for UKVAT purposes. Supplied digitally, it is subject to 17.5 per cent UK VAT. Supplies of goods and services by EU businesses to non-EU individuals generally qualify for zero rating. Current legislation has not kept up with technology and many digital sales do not necessarily qualify for zero rating. For example, the UKVAT authorities argue that a technical journal qualifies for zero rating as "the provision of information", whereas fiction would not qualify, so VAT is charged if a digital novel is sold by a UK vendor to a non-EU purchaser. This treatment may raise VAT income, but will not make UK vendors competitive globally.
Most commentators agree that it is not possible under the terms of the EC sixth VAT directive, for EU states to tax digital services supplied by non-EU suppliers to EU...
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