Fearful that overtaxed consumers might want to escape the value-added tax (VAT), the European Union has concocted a plan to impose the VAT on software, videos, computer games, and music downloaded on the Internet from non-EU companies. This means that U.S. companies selling goods to EU customers might be forced to collect taxes on behalf of European tax collectors. The plan is the EU's way to prevent tax competition, and it will lead to higher prices and higher taxes.
European consumers are shopping online in other nations because the EU has required all member nations to harmonize their value-added taxes at a rate of at least 15 percent. This high tax has increased the popularity of cross-border shopping. Under the new plan, the EU wants to shift the point of taxation to where the good is consumed, not where it is sold.
It's not hard to imagine why the EU wants this plan. Thanks to the Internet, highly taxed Europeans can purchase tax-free goods from non-EU nations. With the cost of shipping in constant decline, buying goods from non-EU online sellers is often a no-brainer for bargain-hunters. The number of EU customers buying from non-EU companies over the Internet has increased dramatically.
According to eMarketer, an online research firm, while the United States will have 168 million Internet users next year, among which 75 percent are online buyers, Europe will have 221 million people online, 86 percent of them shoppers. Also, in July 2003, Amazon.com reported that its international sales are growing faster than its North American sales, thanks mostly to Europe's "big three" Internet markets: Germany, France and the UK. Amazon.com also reports that those three countries accounted for 70 percent of e-commerce in Europe in 2002.
The EU hopes to steal the golden eggs without killing the goose. The size of the market is now big enough that the new tax probably won't kill it completely and the EU can expect a load of money to enter its coffers at the expense of non-EU companies.
For non-EU firms, it's a different story. Non-European businesses have three ways to deal with this new rule. First, they can register their business and set up their headquarters in one EU country. They would then have to pay that country's tax rate. That is the option chosen by America Online, which will move its European headquarters to EU's lowest VAT rate country, Luxembourg.
The second choice is for companies not to set up a physical presence in Europe but pay the tax rate for the country where the customer lives, which ranges from 15 percent in Luxembourg to 25 percent in Sweden. This option is complicated because it requires companies to collect information about each customer and to comply with many tax jurisdictions. European companies, by contrast, only charge the tax rate of the country where they are located.
The third option is for non-EU companies to ignore the new regulation. The cost of noncompliance could be steep because, according to the EU, it would force companies to pay back taxes and added fines of 100 to 200 percent of the back taxes, among other penalties.
If the EU succeeds in requiring VAT collection by U.S. firms, it might open a Pandora's box for taxing the Internet in the United States or to apply sales tax collection to all interstate vendors. This fear is accentuated because more than 30 U.S. state governments are now banding together to create a tax cartel that would allow them to start taxing income earned outside of their state borders, like the EU is trying to do at the international level.
And this is where the EU's scheme becomes clear. It's all about creating more sources of revenue for the EU by allowing governments to tax income earned outside of their national borders. If the EU's pro-tax forces manage to enforce this new scheme, the French government would be able to collect taxes from the Washington-based Amazon.com. The company being taxed, of course, has no voice in the tax-and-spending decisions made by the French government. Nor does it benefit from the public services France provides with those tax dollars.
Under this system taxpayers would be the big losers because no matter where they shop and how they choose to shop, they would face the same rate as if they were shopping in their own country. And because this would undermine fiscal competition among countries, such a proposal would give European politicians more leeway to increase taxes.
Countries, as sovereign entities, should have control over their tax policy. Companies with no physical presence in Europe should not be forced to collect taxes for the European Union. If this plan goes through, European taxpayers will lose, big time, and freedom and economic growth will be permanently damaged.