This article is in English to smoothen setting up gentleman's agreements with people on other continents.
The VAT system is intended as a Value Added Tax system. If I purchase something for 10 Euro and sell it for 15 Euro, then I add 5 Euro of value, and I must charge VAT over that. My provider charges VAT over his 10 Euro as well, so I end up charging VAT over 15 Euro to my customer, who thus pays VAT over the total value. Ticks like clockwork:
Who? Value VAT My provider: 10.00 1.90 Me: 5.00 0.95 Customer pays: 15.00 2.85
Now add some complexion -- I live in the Netherlands, where VAT percentages are 19%, and let's say that my provider resides in Canada, where VAT charges to the Dutch are 0%. In spite of the fact that I do not pay VAT over the Canadian charge, I must still charge my customer with 19% VAT over the total sum:
That is awkward, as this system makes me charge VAT over my total income, rather than over the value that I added. What did VAT stand for again?
Who? Value VAT My Canadian provider: 10.00 0.00 Me: 5.00 0.95 Customer pays: 15.00 2.85
Now the opposite -- an Australian person buys my 15 Euro value, and because he resides outside the EU, he will be charged 0% of VAT. That is another strange thing, as I did add value, and yet I do not charge taxes over it. But it also means that the high Dutch VAT percentage (19%, mind you) does not apply to him, so that I appear more friendly to him than to people in the EU:
Who? Value VAT My Canadian provider: 10.00 0.00 Me: 5.00 0.95 Australian customer pays: 15.00 0.00
To be allowed to charge only 0% VAT, I have the obligation to prove that my customer comes from Australia. Any idea how hard that can be on the Internet? I do -- I am quite up-to-speed with even the lowest levels of networking, and believe me, there is hardly any certainty to be derived from Internet traffic.
And just to demonstrate how well EU bureaucracy functions, there is an exception for sales to/from other EU countries. These are considered in-country sales (charge the Dutch 19% VAT to customers) except when selling to companies (in which case you charge 0% VAT). Anyone still following all this? I am... but barely!
Of course, to prove that my customer is a company from inside the EU (but not my own country), I must collect their VAT number, and manually verify their number, just to avoid a fine if it turns out false. If I would charge them VAT, they would really be in trouble.
Say you sell something spiffy, which is not hard to decide on. An example in my case is domain names -- but the general idea is something that feels like a breeze to buy, mainly due to low cost.
Now, to satisfy all tax constraints, I would have to setup the following procedure:
if customer lives in my country then charge my country's VAT percentage else if customer lives outside the EU then obtain proof of their country of residence charge 0% VAT else if customer has a VAT number then verify that number manually charge 0% VAT else charge my country's VAT percentageWorst case, three questions must be asked to my customer, and proof must be provided to support the answers. Now, would it be reasonable to include such a questionnaire as part of a simple purchase? Not really, it would surely scare away most customers...
What I end up doing to avoid the hassle, is charge a fixed fee, hope to get mainly non-EU customers (I happen to have a sufficient proof of their country of residence as part of their domain registration) and subtract the VAT percentage afterward. In this scheme, I turn in a part of my profit for some customers, to pay my VAT. Pretty complicated, if you ask me, especially because it discards my customer's interest in providing proofs and VAT numbers.
As explained above, the VAT system is not suited for realistic sales on a medium as dynamic as the Internet. The cause is clear: the VAT system has started as a simple system that was effective when we used a bicycle to go to our business partners, but since that time it has had to keep up with developments. While keeping up, patches have been added --for EU countries even in two layers-- and a monster has arisen. To compare it to a parallel universe: in software we call this spaghetti programming, and it leads to almost-certain bugs, especially in unforeseen circumstances.
The heart of the problem lies in the pile of discontinuities of the current system -- each of which is represented by an if statement in the algorithm above.
There has been no attempt to smoothen the path, and to create either one VAT system throughout the Internet, or to design merchant/customer interactions for automation.
From all this, it seems clear that the Internet, where automatic customer handling is an important goal, requires different treatment. In the process of this evaluation, I have actually designed a new VAT system that would answer to the ideals of the Internet as well as allow tax officers to charge VAT properly.
In order to demonstrate what discontinuities in rules can do, the explanation below demonstrates how simple it is to circumvent paying VAT altogether in the current system. Although this example is specifically described from the Netherlands, it should apply in a similar way to other countries. Ask your local tax officer for the details, and verify everything that I claim and assume below. I am merely informing you of a possible hole in the VAT system; you are still completely responsible for your own doing!
To be able to calculate the right VAT percentage for a customer, he must tell the merchant what his country is. If he has nothing to loose, he can be trusted to provide accurate information. Lies will only occur when there is a 19% charge for telling you are located in certain countries.
Being Dutch, I may offer a 0% taxed sale to anyone from outside the EU. And, anyone from outside the EU can offer a 0% taxed sale to anyone inside the EU. Similarly for other regions, where EU may have to be replaced with "my country" or perhaps "my continent" -- your local tax office will gladly provide you with the details.
Now, the only thing I must do is set up a gentleman's agreement with someone outside the EU who sells the same products as I do, for the same price. I will send my EU customers to him by saying "pay 19% here, or 0% over there" and he does the opposite to his more-than-0% customers. Given the choice between 19% and 0% VAT, it is quite clear what a customer will do. As a result, both my friend and I can use greatly simplified VAT systems, simpler pricing schemes to present to our customers, and still earn the optimal income.
In an extreme situation, my outside-EU friend would simply purchase my product (paying 0% VAT because he lives outside the EU) and sell them for the same price to my customers (who pay him 0% VAT because he is a non-EU seller). This is a crazy scheme for offline trading, but it is quite simple to establish for Internet commerce. Which is not so much a demonstration of how easy it is to cheat on the Internet, but rather how badly the VAT system is adapted to these situations.
You should know that there is a big difference between paying 0% VAT and paying no VAT. In the former case, the customer has paid VAT and need not repeat that in their own country; in the latter case, the obligation to pay VAT in their own country usually exists. So, for a private person, this is the most ideal it can get!
In order to achieve the above system, it has not only been assumed that a browser is easily redirected between web sites (which is common practice), but also that international payments are not different from national payments. Notably, a big fee on international payments can make the above scheme intractable in most circumstances.
Fortunately, there are payment systems that work seamlessly across borders.
The best ones that I have seen are gold accounts which have an interface optimised for e-commerce.
I call them the best ones I have seen because they excel at efficiency and clarity.
Depending on your point of view, gold is either local currency to all, or it is a foreign currency to all.
But at least it's a good standard for value -- defined outside the payment system (unlike a currency such as PigTailCurls or Swobbles or so).
Please note the importance of the value definition outside the payment system -- it means that the payment system is unable to inflate their own currency, which would be a good way to earn money over the backs of all their customers. This earn-from-inflations scheme is exactly what is done with "real" money managed and valued by governments. Nothing bad about governments, but I don't appreciate it if they inflate my possessions. And in that sense, gold is not a bad thing to invest in, pay in, and be paid in.
Taxes are designed to be fair to everybody. Unfortunately, they are usually fair in the amounts owed, but the procedures to derive those amounts are not always fair to everybody -- especially not to an automation-driven Internet crowd.
The fact that a VAT circumvention scheme like the above is legally possible, and even quite simple, is a clear sign that the VAT system has not been properly scaled up to an international system.
Fortunately, I have a better VAT system in draft design, and if you are a tax officer, then I would gladly talk you through it. So that I don't just tell you what's wrong, but also help to resolve these issues. The Internet community needs (and deserves) a better VAT system!
Rick van Rein