Tax jurisdiction

Tax jurisdiction determines which country gets tax income from a transaction. Under the current system of international tax treaties, the right to tax is divided between the country where the enterprise that receives the income is resident ('residence' country)

and that from which the enterprise derives that income ('source' country). Laws on taxation are rapidly evolving and vary dramatically between countries. A proposed EU directive intends to deal with these issues by defining the place of establishment of a merchant as where they pursue an economic activity from a fixed physical location. At the time of writing the general principle that is being applied is that tax rules are similar to those for a conventional mail-order sale; for the UK, the tax principles are as follows:

(a) if the supplier (residence) and the customer (source) are both in the UK, VAT will be chargeable;

(b) exports to private customers in the EU will attract either UK VAT or local VAT;

(c) exports outside the EU will be zero-rated (but tax may be levied on import);

(d) imports into the UK from the EU or beyond will attract local VAT, or UK import tax when received through customs;

(e) services attract VAT according to where the supplier is located. This is different from products and causes anomalies if online services are created. For example, a betting service located in Gibraltar enables UK customers to gamble at a lower tax rate than with the same company in the UK.

Case Study 3

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