Europeans have been able to avoid high home-country tax rates on downloads of songs and books by purchasing through Luxembourg. The UK wants to put a stop to that. The Guardian reports:
George Osborne’s latest budget could spell an end to 99p song downloads by closing a tax loophole that meant consumers were paying VAT at very low foreign rates on online purchases of books, music and apps.
The chancellor will bring in new laws making sure that internet downloads are taxed in the country where they are purchased, meaning web firms such as Amazon and Apple will have to charge the UK’s 20% rate of VAT. At the moment they are allowed to sell digital downloads through countries such as Luxembourg, where the tax rate is as low as 3%.
In a little-noticed announcement, Osborne said he would used this year’s finance bill to impose the new law from 1 January 2015.
The budget document said: “As announced at budget 2013, the government will legislate to change the rules for the taxation of intra-EU business to consumer supplies of telecommunications, broadcasting and e-services. From 1 January 2015 these services will be taxed in the member state in which the consumer is located, ensuring these are taxed fairly and helping to protect revenue.”
Official estimates suggest the move could raise an extra £300m for the Treasury. Online retailers could pass on those costs to consumers in the form of higher prices.
The policy is a good idea. Value-added taxes are a tax on consumption, not production, and as such purchases should be taxed according to the residence of the consumer, not the place where the sale actually transpired. (Note that in the US, retail sales taxes are meant to apply the same way – if I purchase a car in Montana, which has no sales tax, and bring it home to Indiana, I owe Indiana sales tax on that purchase). In practice this is sometimes difficult to apply. But with electronic purchases it should be possible (unlike applying it to someone who travels to another European country to purchase small, material goods). Applying the tax to consumers in their home countries will prevent race-to-the-bottom competition in low sales taxes for downloads, for which there is no compelling reason for differential tax treatment from material cd’s and books.
The key point here is that this is not Chancellor George Osborne’s decision. He is merely implementing an EU-wide VAT Directive. The Directive was agreed upon by all 28 EU Member States in 2013.