Can/Should the EU "force" US companies to pay taxes to the EU?

See here for the whole story but let’s focus in on one bit

“Force”? How? What legal powers does the EU have over US based companies doing business on US soil? And really, why in the world should a company based in and doing business in one country pay tax to another country?

By way of analogy, if I own a music store and a European customer walks in and buys the latest ABBA reissue, I collect US taxes, not EU taxes.

A) Can the EU “force” a US business to collect tax?

B) Why aren’t they taxing their citizens instead?

This strikes me as stupid AND unenforcable.

Fenris

It’s a VAT (Value Added Tax, a tax on the incremental value added in the supply chain up to what is considered final sale), VAT is collected by the seller. That’s how it works Fenris.

As to the scope, well, the US taxes income regardless of where earned so the basic concept is hardly novel, although I leave it to tax specialists to say more.

The issue is ‘where’ they are doing business. If the American firm is doing business in Belgium then, well, it’s gotta live with the rules. What defines that is a bit tricky with internet of course, but if the EU thinks it has a means of enforcement and it stands up to EU law…

BTW your Swedish customer buying the product in your real store in US territory is not strictly comparable. Of course there may in fact be taxes upon return for said customer, but that’s another matter.

Yep, I agree with Coll on the point that you’re doing business in a country (albeit via the Internet) so you have to play by that country’s (tax) rules.

If it helps, my understanding is that there is in place a tax regime that is supposed to deal with this – ‘Import Duty’ – but that, as it’s up to the individual to notify the tax authorities of purchases made overseas (just like walking though the Red Channel in the Customs Hall and coughing up the Duty on goods purchased while abroad), as is the want of people, they don’t declare the DVD (or whatever) they’ve bought online – it’s pennies anyway to the individual so why bother. Problem is, it all mounts up.

Ok, the debate seems to be where the country is doing business.

If I have my inventory/warehouse space/employees in the US, then I am a US country. My understanding (may be wrong) is that if I sell something to someone in the EU say, via mail-order, I don’t think I’m the one who has to mess around with VAT. It’s the customer’s responsibility.

So shouldn’t this be the same thing?

Fenris

Aargh. I’m not insane, despite the evidence in that first sentence (which, by the way, should read something like "Ok. The debate seems to be ‘In which country is an internet business located?’ ".) How it came out like it did, I dunno. Personally, I blame gnomes.

Fenris

I don’t know about that, not sure what EU rules are on mail-order but it appears from the snippet that this might be a loop-hole that they’ve ignored on the retail issue. Have’d to ask someone in taxation as to our transfer pricing, but as I recall for xfer sales onto Europe we do have to take care of VAT as a seller. However, I am not sure about that, I try to stay away from tax law as it causes the brain to melt. Nonetheless, VAT is a seller collected tax in which the price is quoted with tax.

Whether this can be effectively applied, I dunno.

I don’t understand how this can be enforced. The article says "…U.S. companies will be forced to charge customers the prevailing rate [of VAT] in force where their customers live…

By whom??

A similar bit of idiocy - the Hong Kong government is currently trying to get a law passed that will make it a criminal offense for anyone in any country in the world to accept on-line bets from someone in Hong Kong. The government agrees that it can’t enforce the law unless the individuals running on-line betting sites turn up in Hong Kong in person.

Concentrate on where the buyer is located – he/she has to pay VAT (sales tax, if you will) on their purchases.

How’s that usually done – it’s collected by the seller on behalf of the Government (the seller becomes, de facto, a tax collector).

What if the seller is overseas (for example, the Internet) – opps, no sales tax is collected. At the moment, the buyer is responsible for declaring their overseas purchases and, through the Import Duty tax regime, redress is achieved.

However, that’s unreliable because people don’t declare to the tax authorities what they’ve bought online (it was okay until the Internet came along because luggage was searched at the Customs Hall). So, Plan B: Make the overseas sellers act like domestic companies and have them collect the tax for you – that seems to be the essence of this idea.

How can European Governments make companies in the US (or other) countries do this – the WTO says the US enjoys an illegal trade subsidy:

http://story.news.yahoo.com/news?tmpl=story&u=/dowjones/20020507/bs_dowjones/tax_facts__lawmakers_look_to_fix_us_eu_tax_dispute - and if that link works, I’ll eat my tax free CD’s.

Fenris is correct. This is so not happening in its present form. The EU are going to make complete fools of themselves by attempting to do this unilaterally.

First, from a practical standpoint, any country can declare a tax on anything. Albania can declare a tax on land transfers in New Jersey if it likes. However, if the country has got no leverage to collect it, the tax is meaningless. "I can call spirits from the vasty deep! " “Why so can I, or so can any man; But will they come when you do call for them?”

Second, no other country is going to act as the EU’s tax collector. For one thing, there is way too much precedent – even in the EU – for ignoring another country’s law which you happen to dislike. Many countries, for example, have laws specifically prohibiting the enforcement of U.S. anti-trust judgements.

Third, as for the U.S., there is no conceivable possibility that any state of the federal government would – or could – pass a law imposing a European tax on digital Internet sales to Europe. Under current U.S. constitutional law, a state is constitutionally prohibited from forcing an out-of-state company to collect sales taxes on sales into the state. The U.S. federal government is just not going to impose a national “out-of-country” sales tax for the benefit of foreign governments.

Fourth, and somewhat more philosophically, the EU is trying to impose its “consumer-centered” model of Internet transaction. The EU pushes the theory that the locus of the transaction is where the customer resides, rather than where the company is located. Therefore, the consumer’s national law, taxes, etc. apply to the transaction.

Obviously, there is some debate about this. The U.S. has, so far, mostly followed a “seller-centered” model.

This tax will only impact companies that the EU can reach. If you are really big and have offices in Europe, you will probably have to comply with EU law. If you are shipping tangible products, you’ll probably also have to comply or, more likely, the EU will simply impose a customs duty. However, if you are an Internet company based somewhere other than the EU delivering digital content, you’re home free.

BTW, the Foreign Sales Corporation problem that LC mentioned is a completely different problem. The WTO found FSC’s discriminatory because they effectively made income earned from foreign sales tax free (more or less). Foreign digital sales, however, are taxed exactly the same as out-of-state U.S. domestic sales.

Yep, as TruthSeeker says, a did get my wires crossed on the final point. Sorry for that.

I think there is probably considerable indirect leverage the EU can bring to bear: The issue is Internet centred, search engines (as currently configured) and Directories favour companies with a suffix of the country from which the search is made (companies like Amazon, therefore, have .co.uk as well as .com, etc, etc). Search engines themselves have country specific suffixes.

Also, if memory serves, you need a registered office in Japan in order to use a .jpn suffix – may not be the case throughout Europe yet… …but you get the drift.

Plus, I don’t believe Yahoo appealed against the decision that went against them vs. the French Government re Nazi memorabilia.

  • Seems angles might well be available if they want to press ahead.

Whether the motivation for this is wholly genuine or, at least in part, pay back for what’s widely perceived to be protectionism by Bush with regards US steel, I just don’t know.