Changes in European Union Tax Systems, Changes in EU Tax System

By: EconomyWatch   Date: 30 June 2010

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First, if an EU customer buys and downloads software from an EU online retailer, then VAT is imposed. In contrast if the retailer is based outside EU, The transaction is tax-free.

Secondly - Services sold to a customer outside the EU area are subject to VAT.

To remove discriminatory factors on services delivered online, the Commission proposed a directive in June 2000 requiring non-EU e-commerce providers to register in at least one EU country when offering services to private consumers and charge the VAT according to the rules of that country on all online sales.

To ensure that the compliance burden is eliminated where it would reduce the incentive to carry on business activity and to permit tax administrations to focus resources where the return is likely to be high, the proposed directive introduces thresholds of online sales. In addition, the Swedish authorities, during their Presidency of the Council of the European Union in 2001, have proposed to require vendors to charge VAT at the rate applicable to the customer's country of residence.

This would reduce the competitiveness bias against high VAT countries and the non-neutralities between electronic and traditional commerce. However, despite broad support of most EU countries, there is currently no agreed approach to tackling VAT on e-commerce while any decision at the EU level requires unanimity.

In any case, in absence of an enhanced international co-operation among tax administrations, fair and effective taxation of e-commerce transactions would rely on voluntary compliance by companies based outside the EU area. Given the complexity of existing VAT rules and the lack of effective enforcement, it may be faster and cheaper for traders to opt for non-compliance. However, private purchasers often prefer to deal with entities that have established a degree of credibility and trust, including the compliance with tax rules.

Effect of Tax reform In EU

Shifting from wage to a consumption tax is considered as an advantage because it broadens the tax base insofar as consumption out of other income would also be taxed.
Simulations performed by the European Commission show that a cut in labour taxes by 1 per cent of GDP, coupled with an increase in VAT, would increase employment by almost 0.7 per cent in the long-run if transfer recipients were not compensated for their real income loss -- though this could induce some undesirable distributional effects. If the loss in purchasing power for transfer recipients were fully compensated.

Long-run effects of a tax reform in the EU area

GDPEmploymentInvestmentTax cut fully offset by a reduction in government  Consumption (1 per cent of GDP)  (a)Reduction of labour, corporate and VAT20.540.541.28(b)Reduction of labour and corporate taxes only20.650.571.88(c)Reduction of labour taxes only20.810.971.24Tax shift from labour to consumption   (1 per cent of GDP)   (d) Tax shift from labour to VAT without compensating transfer recipients30.660.820.73(e) Tax shift from labour to VAT with compensating transfer recipients40.370.480.32


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