EU'S VAT RULES HELD VOLUNTARY, UNENFORCEABLE AGAINST U.S. E-TAILERS
While U.S. industry frets over rollout of European Union’s (EU’s) new value-added tax (VAT) on e-commerce, European Commission (EC) has acknowledged it really has no power to enforce compliance with directive. VAT on electronically supplied services (ESS), which went into effect July 1, applies to services -- including music, broadcasting and software delivered over Internet -- that are downloaded by consumers within EU. U.S. companies contend tax will discriminate against American businesses by, among other things, forcing them to try to verify customer’s location in order to collect proper amount of VAT and to submit to onerous audits in multiple countries.
Sign up for a free preview to unlock the rest of this article
If your job depends on informed compliance, you need International Trade Today. Delivered every business day and available any time online, only International Trade Today helps you stay current on the increasingly complex international trade regulatory environment.
VAT directive doesn’t set sanctions for noncompliance, leaving it up to each EU member state to enact its own implementing legislation. That has sparked even more wariness among U.S. companies faced with having to figure out how much tax to collect and to remit to each member state in which they do business.
As practical matter, though, European countries can’t force U.S. companies to comply with directive, said Jonathan Todd, EC spokesman on taxation. In practice, he said, “many companies trading on the Internet are keen to show a good example because they want to demonstrate that the rule of law (e.g., on copyright) applies also to cyberspace.” Moreover, Todd said, with at least 90% of trade being business-to-business, new law won’t change much: Importing companies already pay VAT on their purchases but are reimbursed when they file periodic VAT returns. It’s only in “relatively small percentage of the market represented by [business-to-consumer] sales that non-EU companies will have to begin applying VAT,” he said.
VAT on ESS is voluntary tax, said Greg Sinfield, tax partner at Lovells, international law firm. There’s no way U.K. can enforce it, he said, although country’s Customs department believes most high-volume Internet services traders will want to comply in interest of good corporate practice. Asked how many EU member states had implemented directive, Todd told us “the Commission does not yet have all the details.” However, he said, penalty provisions were “unlikely to be a significant factor in encouraging the compliance of non-EU companies.”
European tax authorities have been aware of enforceability issues since idea of VAT on Internet services was raised in late 1990s, said Roger Cochetti, consultant to technology industry who formerly was with IBM and VeriSign. In his opinion, they have assumed they could enforce payment of tax by non-EU sellers by: (1) Exercising influence and tax obligations on any vendor with any form of presence in EU -- whether as subsidiary, branch office or sales office -- by going after EU-located operation itself. (2) Threatening tax liability for any merchant without EU connection when that vendor later decided to do something that resulted in EU location. (3) Filing “even more extreme” civil or criminal cases, for instance, against CEO of vendor considered delinquent on VAT taxes who was present temporarily in that country.
Together, those 3 possibilities have been viewed by many European tax authorities as “sufficiently intimidating” to enforce sufficient compliance, Cochetti said. There’s also “remote” possibility that EU tax agency might attempt to use U.S. courts and some existing tax treaty to impose VAT obligation on nonpaying U.S.-based seller.
VAT system is “based on voluntary compliance and this tradition will continue,” EC said in FAQ. Reality, it said, is that legitimate businesses will “want to operate within the law and satisfy audit obligations to ensure that their commercial rights are respected.” EC said no one was suggesting seriously that “simply because legal enforcement and regulatory issues on the Internet present new challenges, nothing should be done about these issues. Tax laws are ultimately just as enforceable as any other laws or regulations affecting e-commerce.”