Friday, 28 September 2007

European Virtual Avatar Tax

In common with many European Second Lifers I received a bit of a shock last night when I received an email that purported to come from Linden Lab, claiming that henceforth any transactions* I have with them will be subject to VAT. For non-Europeans, this is not Virtual Avatar Tax, but Value Added Tax. The rate of this tax varies from country to country. In the UK it is 17.5%, while in Denmark I understand it is an eye-watering 25%. Naturally assuming some kind of scam I did my research, and found that, yes it really was from Linden.

I am not a premium account holder with my own land, so it may have only the most peripheral effect on me. But for those who run their own virtual businesses, or at least those not "VAT registered" (most people), it may seriously affect their competitiveness, since they will be paying Linden significantly more than their rivals for the raw materials of their trade - eg: land and accounts; costs they will need to pass on to their customers.

The sudden nature of the announcement, without prior warning and in an email posted when much of Europe would be asleep, was ill-considered and thoughtless. However, checking EU law it is clear that they should have been applying this tax since the beginning of Second Life, since it became a requirement in 2003. I trust there will be no effort to collect unpaid taxes.

If you try to weasel out of this by claiming to be from a non-EU country and are subsequently found out, then you will be barred (and possible tarred & feathered too). On the plus side, Linden $ exchanges between avatars are not subject to tax.

So I wonder what new wheezes will emerge to circumvent this? Using the Brazillian Kaizen Games registration site, perhaps? Or maybe an enterprising American soul will take a cut to act as a broker, registering accounts and buying land on behalf of tax-impoverished Europeans? I'm sure the free-spirited entrepreneurs of Second Life will dream up many innovative solutions to this curious conundrum.

* There was no mention of the LindeX - does anyone know what the score is with this??

UPDATE - 30/09/07:
Check out Prokofy's comment and my response. You might also be interested in seeing more of the directive - follow this link .

It contains the unambiguous: "
radio and television broadcasting services and electronically supplied services provided from third countries to persons established in the Community or from the Community to recipients established in third countries should be taxed at the place of the recipient of the services."


Unknown said...

Aleister, you keep raising this concept of back taxes which seems preposterous on the face of it. If that were how the law works, then every single business in American is "illegal" because it fails to indicate VAT in case a European buys something. That's ridiculous. I can't imagine that the EU authorities would go hounding an American business that only just set up in an EU country and provides employment to EU citizens and hammer on them for back taxes. The purchases were made of a product that is on servers in the U.S. where there is no VAT, and where the sales tax simply hasn't been applied -- because no law has been passed enabling such interstate ecommerce taxation -- it's been tried, and suspended or posted a number of times.

Here's a good piece on the subject -- google to find many more

I totally agree that the Lindens should have ramped this up and announced it better, and with some cushioning by lowering rates or postponing rate hikes for Europeans as others had to face them as a measure of good will and encouragement of the population -- but I fail to see this insane indea that suddenly, the Lindens are found in violation of EU law when they weren't based in the EU, had not registration in the EU, didn't do business in the EU, and were accessed over the Internet.

Now that they *do* have a European presence and office and staff and plan to move servers there, it makes sense they will start complying with these laws. If every business that came to Europe to set up shop was told that if they had so much as hired a consultant in the past or sold a widget to a European, they'd be liable for hundreds of thousands of dollars of VAT, there'd be no trans-Atlantic business whatsoever.


Aleister Kronos said...

The arrival of Linden on European shores is an irrelevance when it comes to charging VAT.

EU Law is seemingly unambiguous about the collection of VAT:

Following changes introduced on 1 July 2003, (under Directive 2002/38/EC), non-EU businesses providing digital electronic commerce and entertainment products and services to EU countries are also required to register with the tax authorities in the relevant EU member state, and to collect VAT on their sales at the appropriate rate, according to the location of the purchaser. Alternatively, under a special scheme, non-EU businesses may register and account for VAT on only one EU member state. This produces distortions as the rate of VAT is that of the member state of registration, not where the customer is located, and an alternative approach is therefore under negotiation, whereby VAT is charged at the rate of the member state where the purchaser is located.

In effect, Linden are doing the right thing - but should have been doing this since 2003. They make specific reference to this in their FAQ, where they state they have chosen not to attempt to collect back taxes.

The EU has made a special case about e-services - for right or wrong. If I am in NY and, go into a shop and buy, I dunno, an iPod then I pay the appropriate local sales tax. If I'd bought it at home, in "Socialism-loving Europe", I would have paid VAT instead. What the EU is saying is that if I had bought this from a US online store then I should be charged my local rate of VAT. As you say, there is no sales tax applied on e-sales in US. For that you should be thankful - I would wonder how long that situation will continue.

The "insane idea" you allude to is that, to do e-business with EU residents you have to abide by EU Law, regardless of your actual location. It has nothing to do with "being based in the EU" or providing a fistful of jobs in Brighton.

You are naive if you think setting up an office in EU is the key change that has led to the introduction of VAT. LL could easily have circumvented that, in any case, by setting up in non-EU countries like Switzerland or Norway.

Transatlantic Trade is usually between companies. European companies will be VAT registered, and able to claim back any VAT paid. So VAT has no real impact here, since neither the seller nor the buyer will feel it. It is passed thru, eventually, to the consumer (oiks like me) who have no option but to pay it.