The European Union introduced legislation in November 2014 that implemented a new Value Added Tax (VAT) to virtual purchases. The legislation took effect on January 1, 2015. It is designed to reduce the ability of companies to avoid taxes, especially large companies such as Amazon.com.
Instead of taxing an item based on the country where it was manufactured, or to the location of corporate headquarters, the item is taxed based on the country where the buyer is located, such as in the United States.
Rumors on Reddit suggest that anonymity is under attack, and that even Bitcoin itself may be under attack. The new tax is not directed at Bitcoin or virtual currencies. Instead it merely prevents companies from avoiding taxes.
Value Added Taxes have been used in the past to directly attack Bitcoin and exchanges that accept the currency. Australia began applying a VAT to Bitcoin transactions in December 2014. This legislation was applied only to Bitcoin, particularly to Bitcoin exchanges.
The European legislation is different. It is much broader. Instead of focusing on a particular industry, the way Australia did, it seems to be designed to address large, multinational companies that use a liberal tax code to reduce their tax burden.
Companies have begun using a practice called “inversion” to avoid paying taxes in their home countries. Taxes are usually based on the tax rate of the nation in which a company holds its official headquarters. The United States has one of the highest corporate tax rates in the Western world at 39%. Consequently, many companies move their headquarters to locations in Europe, where some countries have tax rates as low as 20%.
The European Union does not apply taxes as a single unit. Instead taxes are assessed by each individual nation, and there is a broad range. Corporate taxes on income in Denmark, for instance, are holding steady at 24.5%, while corporate income is taxed at a rate of 33.3% in France. A French company could move their offices to Denmark and save nearly 10% on their tax rate.
The new European rule might harm smaller firms operating in European countries. Companies that sell digital goods such as eBooks, music and training videos might be required to arrange VAT in every EU member state, which could prove burdensome.
The new legislation is not intended to attack anonymity. Anonymity is an illusion that many people who purchase on the internet still buy into. When you make a purchase online, you cannot avoid revealing your identity, except maybe your to family. If you use a credit or debit card, banks and governments can easily access those records. Even if you use virtual currencies, delivery still kills any chance of real anonymity.
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