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Taxing Business On-Line

(August 1998)

The Internet has brought with it many wonderful problems. One problem which is particularly pressing for governments, is the appalling difficulty of taxing Internet traffic.

The issues are many and complicated there have been suggestions ranging, for example, of micro-payments of taxation on the volumes of data transferred. There are also substantial issues with regard to the general taxation laws which effect what would be ordinary transactions, but which just happen to be dealt with on-line. For example, if you sit at a computer in Birmingham, ordering a CD from an American company, with a computer hosting the web site which is in a different state of America, and where the CD itself is delivered from a store in France, there are mind-boggling problems to be faced on just how the local taxes of the various states apply and to what.

The situation has, until now, been fairly laid back. It has been an agreed objective of the various national and international bodies, to encourage the growth of on-line transactions. The activity remains however such a source of potential revenue for governments, that some from of taxation on Internet traffic is inevitable, and also international agreements may resolve some of the outstanding difficulties.

A recent (June 1998) meeting of the World Trade Organisation has agreed that on-line goods and services which presently do not attract taxation, should be left in this condition at least until they next meet in l999. This does not necessarily signify a great deal, but it seems to us that the review in 1999 is itself unlikely to produce a different result. The agreement stands upon the shoulders of an agreement between the European Union and the U.S. under which electronic transactions, not including the physical transfer of goods, should continue to be, effectively, tax free.

Inevitably, the U.S. will have a large say in however internet traffic comes to be taxed, and those interested should read the 1997 document 'A Framework for Global Electronic Commerce' issued by the US government.

A more local difficulty is the application of VAT (value added tax) to on-line transactions. It is clear that there are difficulties in interpretation, and that many business conducting business on-line have no choice but to 'fly by the seat of their pants' as regards VAT. In this regard at least help may soon emerge from the European Commission who are hoping to publish a draft set of principles which will govern the way in VAT is to be charged and when it is to be charged in on-line business. It is understood that the principles will set out to provide a neutral environment so that neither on-line nor other transactions will enjoy any unnecessary tax disadvantage or advantage.

The purchaser from a web site must also recognise that the cost shown may not be the only charge. If you import an item from abroad, the cost of import taxes must always be allowed for. If the value of the item exceeds £18.00, and VAT has not already been charged, then VAT must be paid. In addition customs duties may be payable according to the nature of the item.

For those selling on-line, you must consider and possibly identify the country into which the product is being sold. It is possible that, as governments catch up, and get better at regulating such transactions, rules will be brought in to require, for example, the reporting of some internet transactions. You will do this already, by implication, on your VAT return.

Important: Please note that our law-bytes are retained for archival purposes only. The law changes, and these notes are often, now, out of date. You must take direct advice on your own personal situation and the law as it currently stands.
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