EU VAT Collection for Online Businesses Starts July 1, 2003

Not all Canadians will be celebrating on our national holiday on July 1, 2003. The day also marks the onset of controversial new collection measures for European Value-added Tax (VAT) that will affect many Canadian e-businesses. Non-EU e-businesses providing online services to Europeans will be required to collect VAT as of July 1, 2003. While European e-businesses have already been collecting the VAT, a European Union Directive (European Council Directive 2002/38/EC) will require foreign businesses to collect VAT in an effort to level the playing field. Although the Directive does not affect sales of traditional physical goods, any company that electronically supplies services is potentially affected. Such services include:

• website supply, web hosting and distance maintenance of programs and equipment;
• supply and updating of software;
• supply of images, text and information, and provision of access to databases;
• supply of music, films and games (including gambling games), and supply of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events; and
• distance teaching.

A transaction is subject to VAT if the end-customer is located in an EU member state, regardless of the location of the service provider. Rates of tax vary by member state between 15 and 25 percent. The measures have met resistance from some U.S. critics. The critics charge that subjecting foreign businesses to 15 different tax rates (of individual end-customer member states) is unfair because their European-headquartered counterparts are only subject to one rate (that of the provider's state of residence). The text of the Directive is available at: http://europa.eu.int/eur-lex/en/dat/2002/l_128/l_12820020515en00410044.pdf News coverage of the measures: http://news.com.com/2100-1019_3-1014519.html http://www.washingtonpost.com/wp-dyn/articles/A36150-2003Jun9.html Summary by: Jennifer Jannuska