Academic journal article Journal of Legal, Ethical and Regulatory Issues

Consumption Taxes on Digital Products in the European Union

Academic journal article Journal of Legal, Ethical and Regulatory Issues

Consumption Taxes on Digital Products in the European Union

Article excerpt

INTRODUCTION

Any VAT is a consumption tax levied on goods and services as they are sold from one stage of production into the subsequent one (Bagby and McCarty, 2002). To the purchaser, a VAT is a tax on the price paid for the good or service. The seller pays VAT to the government on the amount of the value the seller has added. The seller keeps the remaining amount of VAT collected on the entire purchase price from the seller as an offset to the taxes it paid on the goods and services acquired in the process of producing the product or providing the service (Tait, 1988). In 2002, the European Union (EU) issued its first directive requiring sellers to collect VAT on digital goods (De Rato Y Figaredo, 2002). The original directive, which was set to expire in 2008, has been extended (Meller, 2006) and is currently in force. This directive attracted the attention of companies based outside of the EU that sell digital goods to consumers located in one or more EU countries. Non-EU companies that sell into the EU must now register with EU tax authorities and levy, collect and remit VAT if their sales include digital goods delivered into the EU. This paper outlines the provisions of the EU directive, compares them to current sales tax rules on interstate transactions within the United States, and examines the implications for future laws relating to consumption taxes on cross-border commerce in digital goods. The paper outlines three strategies that companies doing business in the EU can use to minimize the VAT. The discussion in this paper has important implications for all companies making online international sales, not just those companies who currently fall under the jurisdiction of this law, but also companies that might face similar rules enacted in the future by other countries and by organized international markets.

CONSUMPTION TAX ENFORCEMENT ISSUES

The enforcement and collection of consumption taxes, such as the sales tax levied by most U.S. states or the VATs levied by many other countries throughout the world, has always been relatively straightforward. Because the taxes occur at the point of transaction, tracking the occurrences of the economic events that trigger these taxes can be much easier than calculating and collecting income-based taxes (Yang and Poon, 2002).

Consumption Taxes on Transborder Sales of Physical Goods

A taxable transaction that involves a physical good typically results in a clear and visible event. Some form of product is moved from one location to another. In the case of services, an observable activity occurs. International transactions involving physical goods have always been particularly easy to track because the product being sold crosses an international border and most international borders are controlled to some degree.

By monitoring cross-border movements of physical products, countries can enforce the collection of duties and consumption taxes such as VATs. Services provided across borders can also be tracked by monitoring international movements of people traveling with a stated intent of conducting business. In most cases, a person or persons must travel across an international border to perform the service.

Consumption Taxes on Transborder Sales of Digital Goods

A major change occurred when virtual marketplaces opened online, allowing firms and individuals to place orders, confirm orders, and deliver digital goods and services without any movement of a physical product or the performance of a service by human beings in person (Schneider, 2010). The overall visibility of transborder transactions diminished significantly and a lack of clarity regarding where income is earned, products are sold, or value is added became prevalent (IBLS, 2007).

Existing laws and court decisions, which relied largely on the historical language of physical commerce to determine jurisdiction, became unclear and difficult to interpret in the online landscape (Jones and Basu, 2002). …

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