June 29, 2006
Some EU countries may charge VAT on AdSense & affiliate earnings
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.
Posted by Jenstar at June 29, 2006 05:01 PM
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Tracked on July 2, 2006 08:29 AM
The implications of this are a lot larger. If what you're suggesting is correct, then it basically means these countries would be shifting the VAT burden from the buyer to the seller in situations where the buyer is not liable to pay VAT (as with Adsense payments).
Two situations could occur. One.. Google could pay make all payments from EU jurisdiction and pay the VAT. They'd be able to claim it straight back and it'd keep publishers happy. Two.. Google ignores whatever happens, pays from the USA, and the publishers get stung.
If number two happens, there's a lot bigger problems than Adsene waiting. It'll kill a lot of trade between the USA and the European Union as Europeans will be forced to raise their prices by 15-20% to cover the new tax burden, and the EU will not be able to compete.
Posted by: Peter Cooper at June 29, 2006 06:01 PM
Well, I think that it is a shame. I don't think that advertisers have to pay the VAT right now. When a buyer (the advertiser) pays VAT and if it is a corporate or a professional, the tax office must reimburse the VAT he paid. While the seller (the publisher) cannot get a reimbursement. If the advertisers don't pay the VAT tax, the tax offices will earn money. If the advertiser pay the VAT tax, the tax offices will loose money because of the slice of money Google keeps in its pocket. In top of that, Google pays publishers in Dollar while advertisers in Europe pay in Euro, meaning publishers loose money along the way because of currencies cost. Well I bet you that would not be a lot of serious publishers to keep Adsense.
Posted by: Phil Blasco at June 29, 2006 11:25 PM
The VAT laws in different EU states is very different and it would be as well for each publisher to check their own applicable laws, and watch for any possible changes.
Unfortunately, blanket articles like this with scaremongering percentages like 83% really don't help.
Currently in Britain, for example, if one is registered as self-employed (sole trader) there is only the requirement to pay income tax at the various bands, and a particular class of National Insurance.
VAT is a whole different ball game but I don't see it currently applying to this. In the UK, VAT is something that applies to services and goods bought, which AdSense revenue does not fall into. I could partly understand it applying to AdWords advertisers, though this is a service bought from a non-EU country.
In any case, there are exemption rules and it's already quite complicated. Check out with your local tax office what the best course of action is for you to stay within the law.
Posted by: Andy Merrett at June 30, 2006 12:33 AM
To me this article doesn't make sense either. Those 83%, where do they come from? I guess it is the 20% VAT in Denmark and the 63% of the highest income tax. So please, what do these 83% have to do with VAT? Everyone has to pay taxes on their income, even in the US I guess. How much, that is an other thing, but to include that now to make the percentage seem to be extremly high is not really good journalism.
VAT can also only be applied when buying a good or a service (at least in Germany). That means not the publisher will pay for it, but the one who is paying for adverts! It ads to the costs of an adsense advert. I can't see how they want to charge VAT on the earnings from publishing Adsense on your website.
Maybe someone with a deeper insight of tax laws in Europe can help out. But too me that sounds like nonesense.
Posted by: holch at June 30, 2006 12:49 AM
> Unfortunately, blanket articles like this with scaremongering percentages like 83% really don't help.
Unfortunately that is realities in Denmark and the rules i Denmark are in fact not very different from the ones in Sweden and Norway and possible more countries (I am just not 100% sure how all EU countries work).
What makes this so stupid is, that the politicians here don't understand that this is really just a 20% "punishment" on local online businesses that are dependand on ad-revenues from major networks (that are often outside the EU). Why do politicians want to punish busnesses in their own country this bad? I don't get it.
It is also a problem for Google and any other US ad- og affiliate-network because it will make it very difficult for them to compete with similar networks inside EU. 20% is a lot.
> VAT is a whole different ball game but I don't see it currently applying to this.
We did not think so either. The basic priciples and logic of VAT is not really that different from UK to Denmark and not just me, but the majority of accountants I have talked to, did not think VAT would apply to this issue. However, (some of) the tax authorities seem to think it does.
One good thing about bringing this up here is, that maybe, just maybe, we can get the politicians to understand that they need to get this sortet out - one way or another.
Posted by: Mikkel deMib Svendsen at June 30, 2006 01:02 AM
By the way: the whole calculation of the 83% doesn't make sense!
If you would have to pay VAT on income (still don't know how this should work), but lets say you earn 1000 Euros and have to pay a special Adsense-Tax which is 20%, so you will have a income of 800 Euros. Now take that ridiculous high 63% of income tax - and you have 296 Euros left.
However, take 1000 Euros and a Tax of 83% (as described in this artikel): at the end you will have 170 Euros left on your account.
Please, what are the sources of this articel? I would really like to read for myself what this articel is based on!
Posted by: holch at June 30, 2006 01:09 AM
Jen, what are your sources? , this article does not make sense, you should know what VAT is first before writing about it.
Posted by: gimpsy at June 30, 2006 01:19 AM
I'm a VAT consultant by trade. Advertising services (such as are supplied by Adsense publishers to Google) are deemed to take place where the customer belongs. As Google is in the US, for VAT purposes the services take place outside of the EU and cannot be subject to EU VAT.
The VAT laws in each individual EU Country have to reflect the rules set out by EU Law (The 6th EC Directive). Therefore it would not be possible for individual countries to change their law in such a way. It would require all 25 EU Nations to agree to a fundamental change to the way VAT works. This is highly unlikely.
As the other commenters have posted, the highest rate of VAT in the EU is 20%. Further, if this was to happen, Google has branches and VAT registrations in most EU member states. Adsense advertisers would be able to add the VAT on top of the income and Google would claim it straight back on its VAT return. Neither the publishers nor Google would be any worse off - the basic premise of VAT is that it is neutral to VAT registered businesses.
Posted by: theaardvark at June 30, 2006 01:36 AM
> As the other commenters have posted, the highest rate of VAT in the EU is 20%.
In Denmark VAT (called MOMS here) is 25% that is added to all (normal) sales. However, thats when you calculate it as what you have to put on top. If the calculation is the other way, assuming that the "100" you get from Google is including VAT, VAT will be the "20" out of the "100" so its 20% of the total. It's just a calculation issue :)
I completely agree with you, theaardvark, on the logic, however, it is a fact that Danish (and possible more) national tax officies are getting away with the extra VAT stupidity as we speak.
I am not sure if any of you can read Danish, but below is a link to a recent case (March 24, 2006) in an affiliate case that are technically almost identical to AdSense revenues, where the final ruling in our tax legal system was that they DO HAVE to pay the VAT even though it was never collected. Stupid? Yes, absolutely! But as you know when the ruling is done its very hard (not to say) impossible for an individual or firm not to pay what they require. It dosn't help me to say that it's against EU law - I still hav to pay. Tax-officies are a strong force :)
The link to the ruling in the afiliate case:
Posted by: Mikkel deMib Svendsen at June 30, 2006 02:04 AM
This article seems whacko. VAT is Value *Added* Tax. It is not a sales tax. It works out as x% (0%, 5% or 17.5% for most things in England IIRC) of Value *Added* not x% of sale price.
It's an unfair tax (hits the poor more than the rich) but it's nowhere near as bad as this article suggests.
Posted by: MJR/slef at June 30, 2006 02:11 AM
>As the other commenters have posted, the highest rate of VAT in the EU is 20%
It's actually 22% in Poland. Before we joined the EU the situation did look like Jen described. We had to pay 22% VAT on our Adsense earnings, as if we had in fact been paid the VAT. We weren't, so the VAT was a tax burden. Now it's like theaardvark describes.
I sure hope the EU directive holds up. If I'm correct it was put in place to make EU online businesses (such as online stores) competitive with US ones. Revoking this directive would be a hassle for affiliates, but stores as well. They would have to charge US customers VAT.
Posted by: mykel79 at June 30, 2006 02:14 AM
> This article seems whacko
No, this article just relates to fact that some national tax officies ARE in fact trying to force local companies to pay VAT as if it was collected. I think we all agree that it is wrong to do so and it may not even comply with EU law but what are one company or individual to do here (or any other place where this is happening) about it if our legal systems rule that we have to pay? That is really the question to me.
Myebe we can fight the national tax systems with EU law and EU cases but that is just unrealistic for most AdSense or affiliate publishers to do. It takes year and years and cost a fortune.
So to me, it sounds like a much better and faster solution if Google (and other US based networks) would change the location of the legal agreement with publishers to Ireland (or any other EU country) because in that case we would not have the VAT probelems we are fighting now. Changing the location could, theoretical, be done in days - Google allready have an established company in ireland (and most other European countries for that matter).
In any case, I hope Google (and other networks) takes this serious because it IS in fact serious. Seriuously bad. And I hope they want to work with us to solve this for the best of everyone. :)
Posted by: Mikkel deMib Svendsen at June 30, 2006 02:33 AM
If it really comes like that (which I think would be against the tax laws on an European, but also the German level) it is because the authorities think they are loosing money, because the Adsense-Publishers are paid from abroad.
In Germany you have to charge Mehrwertsteuer (VAT - which is actually going up from 16% to 19% beginning next year), as long as you are not below a certain sales and revenue level.
However, other businesses have to charge 16% from their clients. If the client is from abroad it is getting more complicated, that is the case with Google.
However, in this case the authorities would assume point that in ever 100 Euros earned with adsense is VAT included. That means out of the 100 Euros 86,2 Euros are earnings, and the rest 13,8 Euros is VAT. If VAT is charged you have to send it to the authorities.
This would force Google to get local with Adsense, because most publishers could not afford paying around 13,8 % (it actually would not be 16%!!!) of their earnings to the state. If Google would be local and the VAT would be included in the earnings Publisher would still have to pay the VAT to the authorities, but at the end could equalize it with the VAT they had to pay for services and products. Depending on the constalation that could mean that you are acutally getting more money out of the authorities than you pay (if you have a reduced VAT like e.g. photographers have).
Posted by: holch at June 30, 2006 02:56 AM
I think we can all agree:
1) It is just not right for the local tax-authorities to demand that we, as AdSense publisher or affiliates in US based networks, have to pay VAT on our earnings, as we do not, and can not, collect VAt from those networks.
2) It is probably not in line with the EU law, or at least the intention of the law, if we have to pay VAT on those earnings
The question is what do we do about it?
"We" - the publishers AND the networks. We are in this together - the problem could hit both side and it is in both sides interest to get this stupid issue resolved.
If any of the US based networks, or AdSense reps, reading this want to talk with me about this issue just ask Jen about my contact info.
Posted by: Mikkel deMib Svendsen at June 30, 2006 03:19 AM
I am not going to debate the %%% percentages in the post. I think there are some take aways here that are real and may impact people.
Taxation, the VAT, the GMT, (examples) are all considerations for companies when you are a large - worldwide corporation such as Google, Yahoo, MSN, Proctor & Gamble, etc.
Every country is different with different laws & different political contexts. It will be interesting to see how Google, and other Internet companies navigate this as we all become more entwined in the global economy.
I am not an expert in international taxation issues, with that said, I don't think that it would be in any of the engine's best interest [G,Y,MSN] to let their contextual program folks take a big hit because it would have a pretty strong impact on their bottom lines, one way or the other.
I am just glad its not my area of specialty because I would have huge headaches every day.
Posted by: Mary Kay Lofurno at June 30, 2006 03:53 AM
In Portugal it's very simple, if I dont get an invoice I dont have to declare anything, it's like my uncle works at Google and sends me money every month, tax free. If I do get an invoice without VAT applied I dont pay VAT but it will count for IRS.
Does anyone know the percentage of income that Google receives from the EU? This could hurt their (Google) income and ours too. Even the advertisers would be hurt, I couldn't afford to use Adwords anymore if they get me 21% of VAT on my advertising
Posted by: Eduardo Maio at June 30, 2006 06:45 AM
This matter of VAT on e-commerce activities is the subject of a European directive dated May 7, 2002.
How can a judge consider that ads automatically served on a web site do not belong to e-commerce ?
Posted by: Jean-Luc at June 30, 2006 12:11 PM
If this were the case (VAT on adsense), all you have to do is to register for VAT with your local tax auhtority. You will then be able to claim back VAT. So, what the fuss about this?
Posted by: StÃ©phane Lee at July 1, 2006 04:45 AM
This article is totally confusing.
I live in the UK, I use Adwords to advertise. My account is therefore with Google Ireland. I pay Irish VAT on my invoice which is more than UK VAT.
Any money I earn from people clicking on Adsense on any of my sites is earnings. Earnings are subject to Income Tax.
So a country wishes to change it's rules and make earnings subject to VAT?
Posted by: J Morgan at July 1, 2006 02:40 PM
> all you have to do is to register for VAT with your local tax auhtority. You will then be able to claim back VAT. So, what the fuss about this?
No, that is if you PAY a bill with VAT. In the case with AdSense YOU get paid for a service you supply. As it is supplied to a US firm you, as a VAT registered company, would normally not add VAT - in fact, there is no way you CAN do it, within the agreement with Google AdSense. The problem is, that some local tax-men want us to pay VAT even though it was not collected. So, even though we are VAT registered there is no place to add or deduct it.
That is the problem - and that is very real
Posted by: Mikkel deMib Svendsen at July 2, 2006 12:33 AM
I concur with gimpsy. This would require a new or modified EU directive, and implementation in national laws. Don't fear the rumors, this won't happen overnight.
Besides, this is not how VAT works at all. It's probably a misunderstanding. You're only required to pay VAT when you were required to charge it in the first place. If that happens with EU->US advertising, Google would have to pay the VAT you charge and would get it reimbursed by the EU tax agencies. It's a zero sum game.
The only real VAT issue with this whole thing is consumers or VAT exempt organizations who buy ads through Adwords. _They_ have to pay VAT. But that's already covered by Adwords I think. I remember having to provide my businesses VAT id to Google to not be charged VAT on Adwords ads.
Posted by: Rene at July 2, 2006 10:58 AM
A very scary thought. I'm sure the Canadian government will find a way to grab more tax revenue also. This would be of great concern to Google, and I'm sure they would try and "get around" punishing us publishers for our hard work.
Imagine all the hardworking publishers around the world not able to profit from Adsense. There would be some frowns in the Google Plex that day.
Posted by: Terry at July 2, 2006 09:10 PM
Ads on ur website is not clickable ;)
Posted by: rishi at July 2, 2006 10:20 PM
Great post. I just started with Adsense, this blog is a great help. thanks
Posted by: Internet Marketing Successful Recipe at July 5, 2006 06:53 PM
"This matter of VAT on e-commerce activities is the subject of a European directive dated May 7, 2002."
That is to say, if web space for ads is a service (?), and Google is a non-EU customer (?):
"when these services are provided by an EU operator to a non-EU customer, the place of taxation is where the customer is located and they are not subject to EU VAT"
Posted by: Juan G at July 6, 2006 01:09 AM