July 01, 2003, 8:56 AM — 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 percent. 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 minsters 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 percent 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.