A directive requiring companies outside the European Union to start paying value-added tax (VAT) on sales of electronically delivered goods and services to European customers came into effect today (1 July).
Under the 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 rule is likely to 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-EU countries could increase by as much as 25%. The rule also means that companies based outside the EU 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 EU and sites based abroad.
Most EU suppliers have already been required to charge VAT on electronically supplied services. Under the rules, they will no longer be obliged to charge the tax when selling in markets outside the EU.
While EU 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, the European Commission maintained the tax scheme will "eliminate a long-standing competitive distortion by ensuring that both non-EU and EU suppliers are subject to the same rules".
Furthermore, it pointed out that more than 90% of e-commerce supplies are business-to-business transactions, which do not fall under the latest rules.
Still, many of the non-EU companies which are required to start charging European VAT appeared unprepared or confused about the rules, according to some tax experts.
Jon Abolins, vice-president of Tax and Government Affairs for tax compliance system provider Taxware in the US, 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 EU member states.
Taxware, a division of govONE Solutions, launched a website 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 UK already requires such verification to ensure that customers do not claim to be located in the Bahamas, for example, and skip paying taxes. However, many EU 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 US firms, which are now required to disclose any potential tax liabilities under the Sarbanes-Oxley Act of 2002.
Firms such as online auction eBay said that for its EU 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.
The commission said it was up to the EU member states to audit companies participating in the tax programme.
However, companies should not view a lack of guidance on the rules as an excuse not to comply, Abolins warned.
Scarlett Pruitt writes for IDG News Service