We are said to be in the middle of an Internet revolution, but I am frequently struck by the lack of understanding of the Internet and the VAT implications of Internet trading. Much of the confusion arises because people use terms like Internet trading, e-commerce, e-business and so on without defining specifically what they are referring to.
The Internet is used for two main types of trading. The first is electronic mail-order shopping. What distinguishes mail-order shopping on the Internet from traditional mail-order is that your customer is as likely to be situated in Bangkok or Berlin, as in Birmingham.
Mail-order shopping involves, in the main, the supply of goods. The fact that the goods have been ordered over the Internet does not impose any additional or novel VAT complications. Goods supplied within the EU are subject to the normal rules. For goods ordered by a business customer from a supplier in member state A for delivery in member state B, then the normal rules apply – the supplier must quote his customer’s overseas VAT registration number on the invoice and despatch the goods. This enables him to supply the goods free of VAT to his business customer in the other member state.
Where the goods are being supplied to private consumers or organisations not registered for VAT then the distance selling rules apply. This means if the value of sales in a particular member state exceeds a predetermined limit then the supplier must register for VAT in that member state, charge local VAT and file returns there. This is an anti-avoidance measure to prevent consumers rate shopping – purchasing their products in the member state with the lowest VAT rate. At present the spread of VAT rates within the EU is 15% to 25%.
Goods supplied from outside the EU are imports and will be subject to customs duty and VAT at importation. There is an important exception to this for low-value goods. If the value of an individual import – for example, a compact disc – is less than £18, then no import VAT or duty is payable.
The second, and potentially far more significant, use of the Internet involves the purchase of digitised products. These are products which can be downloaded by the purchaser using his modem and PC – for example, music, software and information. It is this second category of Internet trading which is likely to cause most VAT problems. Digitised products are categorised as services and not goods for VAT purposes. As a result there can be different VAT treatments for similar products. For example, books bought in hard copy format in the UK are zero-rated for VAT purposes.
However, the same content downloaded from the Internet is liable to VAT at the standard rate.
Digitised products also present the possibility of large-scale VAT avoidance.
This arises because there is no effective mechanism at present for taxing the supply of digitised services from a supplier outside the EU to a private consumer within the EU. There is therefore a clear fiscal incentive to supply services such as software and music from outside the EU.
The volume of business of this type currently transacted in the EU is very small. But developments in technology – for example, MP3 technology which allows CD-quality music to be downloaded – suggest that this could become a major problem for the VAT authorities in the near future.
The European Commission and the Organisation for Economic Co-operation and Development have been discussing for some time the effective taxation of digitised services and Internet trading generally. Their general approach is that no new Internet taxes should be introduced. VAT is their preferred form of taxation for Internet transactions and it should be levied in the place of consumption of the goods or services.
While most tax advisers welcome these general principles they point out that there is still no solution for the effective taxation of digitised services within the EU. Until a workable solution is found there will remain a major incentive for suppliers of these new services to locate outside the EU and to compete unfairly with businesses established within it.
Maurice Parry-Wingfield is tax director at Deloitte & Touche.
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