On the 1st January new EU regulations come into force designed to stop large online businesses like Amazon cherry picking favourable VAT rates, often giving them a price advantage over less flexible bricks and mortar operations.

That’s an understandable ambition, but the regulations have been badly thought through, and highlight a much bigger issue about government in a time of real globalisation.

The regulations are just a first step, covering purely digital products (software, music downloads, ebooks etc), though it’s expected that they’ll eventually try to cover all cross-border transactions within the EU. They insist that VAT must be charged at the rate set in the buyer’s country, rather than the seller’s. People selling across borders are required to levy and pay VAT at different rates depending on the buyer’s location. Here in the UK HMRC has set up a special unit to try to ease the burden of the red tape nightmare this could cause, but it won’t be enough.

In the UK we also have relatively generous VAT registration thresholds (currently you only have to register if your annual turnover exceeds £81,000). This recognises the fact that if you’re a small business starting up, the complexity of VAT imposes a disproportionate administrative burden. Other countries are less generous, sometimes because tax evasion is so rife that they’ve turned to VAT as the only easy means of maintaining revenues. But under the new regulations, if you’re in the UK and you want to sell a digital product to an EU country outside the UK, you will have to register for VAT, no matter how small your business.

The immediate effect is to make it impractical for small UK businesses to continue to sell digital products into the rest of the EU. Many have already looked at the problems of compliance and decided to stop selling digital products completely. Far from supporting the easy exchange of goods within the single European market, the regulations will make it harder for UK businesses to trade within the EU than it is to trade outside it, and in the process put a substantial spanner in the workings of small and start up European enterprises. This can hardly have been the intention, but the fact that it’s happened says something significant about governments, the internet and the evolving world.

It’s long been noted that one of the transforming powers of the internet lay in its effective abolition of geography. That’s a rosy way of seeing things; clearly geography remains fundamental to the ways many of our institutions still work.

It’s tempting to see this tension between new technology and older institutions as a matter of sclerotic old school administrators or legislators trying unsuccessfully to force things that they don’t really understand back into a form they do understand.

It’s tempting, but it can’t be that simple. Old borders may be theoretically irrelevant to a digital trading operation, but governments still have to work within borders and given jurisdictions to address other issues, like security and non-digital infrastructures. It’s certainly not a case of stupid/old v brilliant/new. All the same most attempts at forms of digital regulation, including these EU VAT changes, seem to make things worse, not better, often creating new problems without solving any of the issues they were supposed to address.

This isn’t just about information technology, but the way technology generally has shrunk the world into a global marketplace. The arguments raging over the proposed Transatlantic Trade and Investment Partnership (TTIP) highlight the threat to accountable government posed by the seemingly innocent desire to harmonise trading practices across borders. Even within the EU, where there has been a lot of effort to develop accountable institutions in parallel with trade harmonisation and liberalisation, there remain clear and fundamental tensions between the benefits of multinational co-ordination and the desire to keep power as close as possible to the people affected by state decisions.

Current attempts to bring these new possibilities into line with established institutions are much like putting some people in a room equipped only with pen and paper and asking them to fix a broken typewriter, or laptop. There’s some crossover in desired function but the tools, resources and reference points are all wrong. At the moment it’s as though everyone is wearing blinkers, narrowing their vision, so some are looking at the internet and thinking about its liberating effects, while others are looking at existing fiscal or government systems and wondering how they can accommodate new possibilities with minimal adjustment.

When we can’t cure a disease we understandably put effort into alleviating its symptoms, but everyone knows that a cure would be the better option if it was only possible. In this light, the new VAT regulations are a form of palliative attention (and a very poor one.) A “cure” might mean abolishing VAT completely, or any form of sales tax, because in itself it’s fundamentally a regressive and cumbersome form of tax, and trying to force it to work across different fiscal territories makes it even more cumbersome and unhelpful. Of course abolishing sales tax would raise some big issues for government revenue, but they are issues which could be solved with creative and fresh thinking. Such radical action might sound Utopian, but in the circumstances it’s seriously pragmatic.

We need more serious and comprehensive thinking about the possible impacts of the internet, the good things and the bad, and that needs to be done in a way that’s closely integrated with radical thinking about the roles of states, levels of government and so on.

This is what’s supposed to be going on within the G8, or at Davos, but there’s precious little sign of anything adequate coming out of these bodies. In this they are failing us. The truly exciting potential of the internet is the way it simultaneously empowers both global and very local effectiveness. Now we need to develop political institutions that reflect this double shift.


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