Why European "eVAT" tax is unfair to U.S. firms

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: Declan McCullagh <declan () well com>

Previous Politech messages:

"E.U. will tax offshore digital sales"
http://www.politechbot.com/p-03499.html

"EU to impose VAT on digital goods and software, from WSJ"
http://www.politechbot.com/p-00965.html

---

Subject: EU eVAT tax
To: declan () well com
From: "Marc Peterson" <mpeterson () imerys com>
Date: Thu, 10 Oct 2002 19:10:06 -0400

Declan:

I read your comments regarding the eVAT tax on the internet, and though I'm
a little late to the party, thought I would share some information that
doesn't seem to be getting any attention. (I am researching this issue in
order to publish in a tax journal.)

In most if not all relevant articles available on the internet, the EU VAT
is equated with the US sales tax in the various states. This is not the
case.

The US concept is that of an "end-user" tax. When a product is sold, tax is
due. A product's taxability may be deferred by a stream of exemption or
resale certificates as it moves through the stream of commerce to the end
user. Thus, Coca-Cola pays no sales tax on corn syrup, but we pay tax on
the Coke purchased at retail. The end user, or consumer, must pay tax
unless they have an exemption for end users: charity, government, etc.

The VAT, or value added tax, is quite distinct. The scheme is designed to
place the burden of the tax on the cost of adding value to a product or
service. Tax is due on all products when sold--there are few if any
exemptions. However, when the European firm completes a VAT return for
remitting the tax, it is permitted to deduct all VAT taxes paid on its
purchases. Thus, the resulting remittance constitutes a tax on the value a
firm added to the goods and services it purchased.

When we place EU and US firms head-to-head in the European market, the math
works to the disadvantage of the US firm. Here is an example:

<file://C:\Documents%20and%20Settings\Declan%20McCullagh\My%20Documents\Eudo
raData\Eudora-Attch\pic00041.pcx>2e539bf.jpg<file://C:\Documents%20and%20Set
tings\Declan%20McCullagh\My%20Documents\EudoraData\Eudora-Attch\pic00041.pcx
>
pic00041.pcx
[Graphic says for same price of product, an EU firm would owe $100K to
government, while US firm would owe $220K. --DBM]

US firms operating in the US are consumers. They must pay sales tax on the
taxable goods and services they consume. There is no revolving door for US
firms. Yet, after bearing the burden of the US consumer taxes, the EU now
wants US firms to collect the VAT without any VAT deduction available to
European firms or any benefit received from European civil or social
infrastructure and services. The EU company has a double advantage: no US
consumer taxes, and a whopping deduction on its VAT return that is not
available to a US-based company.

And the Europeans call this a "level" playing field!

You are correct about this issue having been settled a while back. Maybe
it's time to refresh their memory.

Best Regards,

Marc Peterson


------ End of Forwarded Message

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