Dear Sir,
I am sorry to take up your valuable time, but I would like to make an inquiry related to Council Directive 2002/38/EC, concerning VAT on e-Business transactions.
The virtual world system, "Second Life", is a business platform for the sale of online services and media, hosted by the private company Linden Labs which is headquartered in the USA with a UK subsidiary. Second Life makes use of a micropayments currency called "Linden Dollars". Users purchase Linden Dollars with real money, then spend the Linden Dollars via the online service to purchase items. The seller then obtains real money by selling the Linden Dollars to the next round of purchasers. Linden Labs operate a brokerage service which matches buyers to sellers of Linden Dollars. Linden Labs also sell Linden Dollars themselves, which they do through the same brokerage.
Users wishing to place content on Second Life (for sale, or for personal enjoyment) have to purchase "land" (equivalent to internet hosting) in order to do so. This attracts a monthly fee, which is paid in US$ directly to Linden Labs. Linden Dollars cannot be used in this transaction.
Linden Labs recently announced their implementation of Council Directive 2002/38/EC: that as such, VAT would be charged on the monthly fees paid for "land". However, they argued that since Linden Dollars are not a real currency, VAT is not chargable on transactions using them; and that since Linden Dollars are bought and sold by private individuals, likewise these transactions are exempt, although they do charge VAT on their brokerage fees. (This assertion is in fact false, as some Linden Dollars are sold by Linden Labs themselves, and others, although posted for sale by private individuals, are posted by those individuals in their capacity as business representatives.)
This has had the effect of seriously damaging the ability of EU businesses to operate within Second Life, in the following regards:
- Non-EU businesses can accept their payments in Linden Dollars, which are then sold for US$ within the USA and transferred to the non-EU country, thus avoiding their responsibility under Council Directive 2002/38/EC to collect VAT from European customers. This enables them to use their immunity to VAT to undercut EU business for EU customers; exactly the situation that Council Directive 2002/38/EC was intended to prevent.
- Even if a business did wish to collect VAT from European customers, the technical design of Second Life would make it impossible. Although Linden Labs keeps a record of the country of residence of participants in the Second Life service, they do not allow a seller in any way to distinguish an EU from a non-EU buyer at any point during the trading process - neither at the point where media is sold to customers for Linden Dollars, nor at the point where Linden Dollars are sold to customers for real money via the brokerage. Although businesses are not forced to use Linden Labs' mechanisms for trading, Second Life's design makes it impossible for any other mechanism to offer an equivalent level of convenience.
- EU businesses within Second Life cannot register for VAT exemption, because (due to the difficulty above) are also unable to collect VAT from European customers. Thus, EU businesses are forced to pay the VAT on their fees and to pass this cost onto customers as part of the price, thus meaning that costs must be raised for all customers. This means that EU businesses cannot compete for US customers either.
Although I understand that this may seem insignificant, it is not. Second Life achieves significant business turnover: Linden Labs estimate that more than 1 million US dollars are spent there each day. It is also generally considered to be a prototype that will be followed by future virtual worlds, and thus if this interpretation of the VAT rules is also followed by future virtual worlds, EU businesses risk being permanently disadvantaged in a potentially significant developing market.
I would therefore like to query if Linden Labs' current interpretation of the VAT rules is in fact in compliance with Council Directive 2002/38/EC, and if it is, if the case of virtual micropayments economies was considered by the European parliament when this directive was passed; if this has any impact on the responsibilities of companies that produce the technical implementations of commerce platforms; and if any directive could be passed to either relieve the VAT burden suffered by Europeans in this situation, or to more rigorously enforce the protection of EU businesses in such virtual economies.
Yours faithfully..
