E.U.’s online sales tax takes effect

A directive requiring companies outside of the E.U. to start paying value added tax (VAT) on sales of electronically delivered goods and services to European customers came into effect Tuesday.

Under the new rules, companies selling electronically-delivered goods such as computer software and music downloads as well as subscription-based or on-demand broadcasting will have to pay VAT in accordance with the country where the customer is located.

The new rule will likely mean higher prices for consumers living in Europe. In Denmark, for example, which has one of the highest VAT rates in Europe, prices for products and services delivered electronically from non-E.U. countries could increase by as much as 25 per cent. The new rule also means that companies based outside the E.U. may have to restructure the way they conduct their billing and sales tracking in the region.

The rules apply only to business-to-consumer sales and not business-to-business transactions.

The regulation was agreed upon last year as part of an effort to level the playing field between e-commerce sites in the E.U. and sites based abroad. Most E.U. suppliers have already been required to charge VAT on electronically supplied services. Under the new rules, they will no longer be obliged to charge the tax when selling in markets outside the E.U.

While E.U. finance ministers see the directive as a way to address what they saw as a competitive disadvantage for European companies, some have complained that the rules discriminate against small businesses with no operations in Europe.

However, in a memo released Tuesday the European Commission maintained the tax scheme will “eliminate a long-standing competitive distortion by ensuring that both non-E.U. suppliers and E.U. suppliers are subject to the same rules.”

Furthermore, it pointed out that more than 90 per cent of e-commerce supplies are business-to-business transactions, which do not fall under the new rules.

Still, many of the non-E.U. companies which are required to start charging European VAT Tuesday appeared unprepared or confused about the new rules, according to some tax experts.

Jon Abolins, vice president of Tax and Government Affairs for tax compliance system provider Taxware, said this week that although larger companies have tried to quickly educate themselves on the rules, many remain frustrated over a lack of information and still have questions for the E.U. member states.

Taxware, a division of govONE Solutions LP, launched a Web site called EUdigitalsales.com aimed at helping companies decipher and comply with the regulations.

One issue that needs to be clarified, according to Abolins, is whether companies need to verify where customers say they are located against a different piece of data, such as a billing address. The U.K. already requires such verification in a bid to ensure that customers don’t claim to be located in the Bahamas, for example, and skip out on paying taxes. However, many E.U. member states have yet to issue a similar rule.

“The larger companies are concerned because they don’t want to be labelled as tax cheats,” Abolins said. Avoiding this is particularly important to U.S. firms, which are now required to disclose any potential tax liabilities under the Sarbanes-Oxley Act of 2002, according to Abolins.

Firms such as online auction giant eBay Inc., for example, have been careful to stay abreast of the rules so as not to run afoul of them. An eBay representative said this week that for its E.U. sellers the company has increased its listing fees by the same amount as the VAT in each country.

But many smaller firms are assessing whether it is more costly to update their systems or pay a fine for non-compliance, according to Abolins. This too is a difficult call to make since many businesses are unsure how strictly the rules will be enforced. In its memo released Tuesday, the commission said it was up to the E.U. member states to audit companies participating in the tax program.

Companies should not view a lack of guidance on the rules as an excuse not to comply, however, Abolins warned.

“These rules (took) effect at midnight and can be enforced,” he said.

With files from Stacy Cowley and Paul Meller

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