Normally, European countries only charge VAT on earnings where VAT is charged. However, some European countries are considering charging VAT to publishers on their AdSense earnings, meaning some publishers could be paying up to 83% tax on their AdSense earnings. The same would also apply to affiliate earnings as well. And from a business perspective, losing 83% of your AdSense income to tax would not make it worthwhile for many publishers to continue using the AdSense program. And especially those using PPC to promote their affiliate programs or AdSense earnings could discover that their break even point of aquiring traffic is suddenly much different than previously thought.
For those outside the EU, VAT (Value Added Tax) is similar to sales tax or goods and services tax, and is also known as MOMS.
Denmark may require publishers to pay VAT, which is 20% in Denmark, on all Google payments, even though the publishers are not collecting VAT, since business owners in Denmark do not collect VAT when invoicing any countries outside of the European Union (EU). So a Denmark publisher could end up paying an additional 20% tax on top of the 63% (as the top tax bracket) that top earning publishers already pay as income tax on those earnings.
Holland is also rumored to be requiring AdSense publishers & affiliates to pay VAT as well on earnings. And other European countries could be doing the same as well, please add a comment if you know others following suit.
There is definitely confusion around this, since publishers and affiliates do not charge VAT on their earnings, and hence, should not have to pay it. And it seems to be turning into a 20% surcharge for those making money through online programs.
Shortly after AdSense launched in 2003, those with a mailing address in Italy were not permitted to sign up for AdSense, due to VAT tax restrictions imposed by the government. However, those now seem to be resolved, as Italy is on the country drop down list for publishers when signing up for AdSense.
It will be interesting to watch and see how this develops, and what steps Google AdSense or major affiliate program networks take to help publishers facing this situation. And I am not an expert on EU tax issues and implications, so feel free to contribute and I will update on the issue as needed.