10 - 16 February 2000

EU may put VAT on virtual goods

by Anthony Manduca

The European Commission is studying a proposal to impose value added tax on music, software and other virtual goods bought over the internet, the Financial Times has reported. The proposals, due to be announced soon, will bring the sale of music and software into line with the sale of tangible goods such as CDs and books, for which suppliers are required to register for VAT in the European Union.

The Financial Times said the EU's proposals will be aimed mostly at US suppliers that escape the VAT net when selling virtual goods. Companies that cross a threshold will have to register in the EU for VAT; smaller suppliers will continue to be exempt from payment of the tax. The American Chamber of Commerce recently urged the EU not to impose VAT requirements on virtual goods before it harmonised rates across the EU.

The EU's failure to harmonise rates was a significant factor in the loss of billions of euros of tax revenue through cross-border fraud, according to a toughly worded report from the Commission released this week. According to the report, fraud arises because VAT is charged in the country of destination on goods carried across borders, not the country of origin. That allows goods on which tax has not been paid to disappear into the black market. Goods are sometimes transported at speed across several borders making them difficult to track as they rode what the Commission calls "carousel fraud". Officials said favourite items were easily portable high value goods such as mobile phones.

They estimated that about five per cent of the EU's total VAT take was lost through fraud. With goods supplied cross-border totalling 930bn euros (US$911bn) last year, and members States' VAT rates ranging between 15 and 25 per cent, the loss could be 10bn euros or more. Money is also lost to the EU budget, partially funded by a contribution of one per cent of member States' VAT revenues. The report criticised EU States for using poorly thought-out and outdated control systems, failing to cooperate with one another and starving tax authorities of the resources to deal with 24 million registered VAT payers and 100 million declarations a year. The result was a "single market for fraud but not for law enforcement".