A new European Union directive will come into power on 1 July forcing all non-EU e-commerce companies to impose EU tax on all digital sales, making such products more expensive for people to buy.
The directive means that online companies such as AOL, Amazon and eBay must levy charges of between 15 and 25 per cent on all software and music downloads and transactions as part of online auctions.
European companies have always added tax to services and products sold online, but companies from outside the trading bloc had until now been exempt, giving them an advantage over EU firms.
But European dotcoms have successfully lobbied to have the advantage removed.
The relevant section of the HM Customs and Excise (HMCE) legislation reads: "Under the rules in force until 1 July 2003, most electronically supplied services, including digitised products and all radio and TV broadcasting services, were subject to VAT in the country where the supplier belongs [HMCE emphasis]."
But from July 1: "The place of supply of electronically supplied services and radio and TV broadcasting services is normally in the country where the customer belongs, subject in certain circumstances to where the services are effectively used and enjoyed."
According to HMCE, 'digital services' affected by the law include:
- Supply of websites or web-hosting services
- Downloaded software, including updates
- Downloaded images, text or information, including making databases available
- Digitised books or other electronic publications
- Downloaded music, films or games
- Electronic auctions
- Internet service packages
Although this does not affect physical goods such as books or CDs paid for online, the fallout has been enough to cause AOL to move its European offices to Luxembourg where the tax is cheaper.
Amazon has made a similar move. In an email sent to all marketplace sellers the company stated: "As a result of this legislation, Amazon.co.uk will generally charge VAT on all Marketplace, Auctions and zShops seller fees charged on or after 1 July 2003.
"Amazon Services Europe SARL [based in Luxembourg] will become the supplier of these services. Accordingly, the Luxembourg VAT rate of 15 per cent will apply to all such charges."
HMCE has launched a website specifically concerning VAT on e-services, available here.
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