EU Vat directive could weaken Irish business

1 Jul 2003

Tech industry lobby group ICT Ireland has warned that the new EU directive enforcing Vat on internet purchases which comes into force today could prove to weaken Ireland’s economic position. In addition, Irish consumers purchasing from US websites could see prices rise by as much as 21pc.

This morning the lobby group, which represents the concerns of multinational and indigenous technology firms in Ireland, stated that this country would not benefit from the predicted massive growth in worldwide purchases by consumers on the internet because of our punitive Vat rate.

According to ICT Ireland, there is significant growth in people buying goods and services directly from the internet. People are increasingly purchasing airline tickets and holidays, CDs, DVDs and concert tickets etc. While the European spend on business-to-consumer (B2C) e-commerce will grow to €200bn by 2006, Ireland will only make up a tiny proportion of this emerging market. Ireland’s current annual consumer spend on e-business through the internet is estimated at €400m. This means that for every €500 spent in Europe on online shopping, only €1 is spent in Ireland, the lobby group warned.

In a statement this morning, ICT Ireland pointed out that EU companies until today were at a major disadvantage when compared with their US counterparts. EU-based firms offering digital products such as software or music bought online have always charged Vat on such sales. However, US based firms did not to have to charge Vat on purchases to EU consumers.

The new EU Directive, which comes into effect today is intended to eliminate this distortion in the marketplace. Under the directive EU consumers who purchase digital goods and services from American websites will, for the first time, have to pay Vat. Irish consumers who purchase digital goods online from US suppliers will see the price increase as and from today by 21pc, ICT Ireland warned.

ICT Ireland director Brendan Butler pointed out that at 21pc, Ireland’s Vat was higher than that of the UK, the Netherlands, Spain, Portugal, Germany and France. He reckons this will have a major impact on the buying patterns online of Irish consumers.

Butler said: “For example, EU consumers, when offered the same digital product at the same pre-tax price from either an Irish or a UK operator, currently must pay almost 4pc more if they choose to opt for the Irish provider; a sufficient enough differential to influence their purchasing intentions. In a climate where borders are increasingly irrelevant and consumers are purchasing goods from their armchair – price is the deciding factor. This means that an Irish site charging 21pc Vat will find it very difficult to compete with any operator based in other European countries with lower Vat rates. The changeover to the euro has meant greater transparency of prices across the euro region and will make Ireland’s competitive disadvantage even more apparent.”

“The situation until today was even starker when we compare Ireland to the US,” Butler pointed out. “The US Government had a moratorium on internet-based sales tax in the US until this year. A nation, which has shown the greatest potential to reap the benefits of online trading, had no e-commerce sales tax, yet Ireland has a rate of 21pc. Clearly Europeans were more likely to buy goods online from the US than from European suppliers. The new EU Directive which comes into effect today means that people from EU members states who purchase goods from US suppliers will now have to pay Vat. In the case of Irish consumer goods purchased online from US suppliers will today increase by 21pc.

“While in theory this should act as an advantage to Ireland, there is strong evidence that many US based companies will now transfer part of their operations and set up a European hub for their e-commerce transactions. However, such investment is more likely to flow to low Vat countries such as Luxembourg, Germany, Spain and Portugal,” Butler warned.

By John Kennedy