TAX is Never a Level Playing Field in a Global Economy

All businesses large and small cry for a level playing field, a fair taxation system under which apples can compete with apples and where all contribute the community in which they earn their living. Unfortunately Utopia doesn’t exist and as trading communities spread, global trade increases and an individual consumer can buy direct from anywhere in the world with any business anywhere in the world the issue of tax just gets more complex.

The new digital and technology traders from outside the EU discovered what could be best described as sink holes in corporation taxation and VAT across Europe. Not only were the rates all over the table but many governments were happy to induce companies to set up operations in their own countries with generous allowances and breaks. As new markets such as digital media grew many screamed foul, others tried to imitate and no one actually sorted much out.

Jean-Claude Juncker, the European commission president is now facing increasing pressure as allegations mount which indicate that even he used questionable tactics when he was prime minister of Luxembourg to promote the country as the destination for multinational corporations such as Amazon.

Bob Comfort, the former head of tax for Amazon, has claimed Juncker helped Amazon secured a confidential deal from the local tax office. A deal which is now the subject of a formal investigation by the European commission itself. Since 2003 Luxembourg has become the VAT haven for the likes of Amazon, Kobo, Nook and others all wanting to benefit from their 3% digital VAT rate. Companies could buy digital wares at a VAT inclusive price from higher rated counties such as the UK (20%), sell at 3% and effectively cream off 17%. This was possible due to the VAT being incurred at the point of distribution and registered office.

European commission investigators claim that they believe the Amazon 2003 deal with Luxembourg is so generous as to amount to illegal state aid. Amazon EU Sarl, the company with which customers across much of EU do business when they buy online from the retailer, took €13.6bn (£10.7bn) in sales last year, up from €11.9bn in 2012.

In January The EU is changing the rules such that VAT will be paid at the point of consumption of digital product. This means that the previous VAT benefit is levelled and this should benefit local retailers but many question whether this is the case and whether the EU has made it even harder for smaller traders to compete as they have to now deal with potentially not one but 28 different rates of tax. This also applies to those authors and publishers who sell direct and may be too small in terms of VAT sales to be registered. The VAT threshold below which many small businesses do not have to register for or pay/claim back VAT will be entirely removed for those dealing in digital goods selling into the EU. All companies will be responsible for paying VAT on every digital product they sell, even if they only sell one. Sell one ebook at 99p directly to someone in the EU, fail to report, and you risk of an unlimited fine. To avoid the need to register in up to 28 different EU member states, sellers can opt for the Mini One-Stop Shop (MOSS) alternative: registering in its home jurisdiction only, and submitting only one return and payment.

The question as to whether the VAT change will result is higher ebook prices for many within the higher rated EU countries remains a strong reality. However those selling into businesses and education will remain unaffected. Where the goods supplied consist of physical product which is ‘bundled’ with a product that is accessed digitally, then the place of supply rule changes will only apply to the digital element of the supply if this is seen as a supply or the dominant part of the bundle.

We still have no answer over the drop in France’s ebook VAT rate to 5%, which was deemed illegal by the EU but remains despite protest. France has now been joined by which has lowered the VAT on e-Books from the standard 22% to 4% so it matches the rate imposed on printed books. Malta has also cut its VAT on e-books from 18% to 5%, also so it is in line with print. The rates in France, Luxembourg, Italy and |Malta now are at significant variance to the likes of the UK , Denmark and others. VAT harmonisation across the EU even on one product seems very unlikely and so the muddle will continue.

Corporation, or business tax, which is based on profits made within a trading community also remains in a mess with various different rates being applied in different countries across the EU. This prompts Apple to seek refuge in Ireland and others to channel funds through other countries or create high royalty payments to subsidiaries to offset tax. The UK has declared a “diverted profits tax”, or Google tax, which is aimed at targeting companies who shift profits out of the UK in artificial ways, with a punitive 25% tax rate from April next year. The question of how effective this will be remains as does the question of whether the EU will follow suit. What is clear is that many are demanding tax is paid where sales are made not in safe tax havens.

But change is not just about the EU and the Japanese government is introducing a new Consumption tax on digital good sold to Japanese consumers. This will mean that any digital media sold by vendors whose headquarters are located outside Japan will be subject to the new tax. This will include companies such as Amazon.com and even Kobo Inc., who despite being owned by Japanese retailer Rakuten is registered in Canada.

An EU 'iTax' Is Not The Answer

The UK government have announced that they are to finally acknowledge the right of individuals to copy material for the own use. We have all done it. We have all copied a file from one format to another , or from one device to another in order that we can play it as we want to , on the device we want to, or store it logically with other files. Today that is illegal in the UK, but tomorrow it will be finally addressed.

However, in addressing it we face many further interpretations and fine detail. It will not allow encrypted files to be unlocked so in fact could be said to be further promoting some to remain in the restrictive world of DRM. Defining what librarians, teachers and academic researchers, can and can’t copy is today also open to much debate. It will get clarified as the law is amended, but how much compromise has to be accommodated and how open it will be in reality, is widely open to debate and much lobbying by strong vested interested groups.

It is right that the law reflects the consumer perspective and decimalises what is accepted social practice, but it also must protect the licensed owner’s and originator’s too. In doing so it must strive to obviate creating new loopholes that can be exploited by some at the detriment of others. Interestingly it should also recognise that what is acceptable today will need to be revisited and reviewed regularly as the digital environment evolves and cloud based services develop. We still are to revisit the long overdue review of the first sale doctrine on digital and some would argue that this alone is the biggest timebomb and is primed to explode

The latest taxation challenge and EU battle looks to be over what has been dubbed the ‘iTax’. This battle is clearly going to pit the UK against other member states and also some other states against each other.

Today in France if you buy a 64gig iPad you will pay a 15 Euro iTax on the transaction. If you buy it over the border in a neighbouring country you may pay zero iTax. France raises a levy on digital device sales to offset the lost revenues from digital copying but could be said by some to be just driving sales elsewhere with little deterrent and even less real revenue. In Holland cassettes carry a 2 Euro levy and a 2 gig memory stick a 0.50 Euro one. In Poland even blank sheets of paper are taxed  as they can be used to facilitate copying. It begs questions as to how the tax is distributed, the logic of the charges and whether they make any difference today, let alone tomorrow, or whether they are just like some ‘green taxes’- a means of raising tax revenues?

The UK have rightly said no to the iTax and now appear to be on a collision course with the EU who wish to introduce a standard cross community iTax with some £15 tax in iPads  and other gadgets and also iTax on blank media, all to cover the cost of illegal copying. Some would suggest this is just tax for tax sake.

Copying and piracy is promoted by scarcity of content and the inability to access, play or store at one’s convenience. Loopholes and inconsistency of pricing, taxes and approach to copyright, in a cross border commercial environment such as the EU, is the bigger cause of abuse. Taxing devices and blank material is not the answer and just drives more people underground. Inconsistent VAT rates, between digital and physical media, and also between free trading nations are at best indefensible and at worst an open invitation for global companies to exploit for their own pockets at the expense of all. Introducing more tax, for tax sake, is not the answer.

The EU is once again demonstrating its ineptitude to deal with the digital issues head on and instead play to their political audience. The digital strategy that we wrote about earlier this week, clearly shows vision but also is so predictable and fails to address today’s issues.

The fact is that global business is pulling the fabric on which individual and local societies can grow. The commercial environment today is imbalanced in favour of the accountants, lobbyist and loophole managers and Taxing the illogical to reward the state is not the answer.

The EU Declares 7 Digital Priorities and Forgets the Big One

The European Commission has adopted a seven point plan to accelerate the growth of the European digital economy. The European Commission Vice President Neelie Kroes claims, "2013 will be the busiest year yet for the Digital Agenda. My top priorities are to increase broadband investment and to maximise the digital sector's contribution to Europe's recovery."

They have focused on an agenda that is aimed at increasing technology investment, improving and growing eSkills, enabling public sector innovation, and ‘reforming the framework conditions’ for the internet economy. It is claimed that by addressing the infrastructure by pan-European action could create 1.2 million jobs.

However is it merely pushing a future agenda over the reality of the mess of the EU today. Some  would suggest that today’s clear abuse of taxation loopholes within the community are in fact potentially spoiling the overall growth? Other argue that because there is nothing illegal being done by the these international corporations all is well and free markets will always prevail.

The EU’s seven priorities are:

1. Create a new and stable broadband regulatory environment aimed at reducing the cost of roll-out.

2. New public digital service infrastructures of digital services such as eIDs and eSignatures, business mobility, eJustice, electronic health records and cultural platforms such as Europeana. All aimed at reducing the cost of doing business

3. Launch Grand Coalition on Digital Skills and Jobs and make Europe more "start-up friendly".

4. Propose EU cyber-security strategy and Directive

5. Update EU's Copyright Framework

6. Accelerate cloud computing through public sector buying power with an aim to dismantling current national walls and creating the ‘world's largest cloud-enabled ICT market.’

7. Launch new electronics industrial strategy for micro- and nano-electronics.

So we have some very grand plans which claim to show the way forward for a digital Europe. But these plans do not address how the revenues generated today let alone tomorrow can build a stronger society. The new start up and technology corporations are continuing to pay their fair share and invest in the local economies and instead are squirreling away their gains, sharing it with their shareholders and playing financial games in order to avoid tax. The current EU non standardised VAT and taxation rules have created this opportunity or problem. The EU is great at proclaiming the way forward but often very poor at resolving the challenges they create.

Click to  read the EU press release