Many European Residents have asked for clarification about VAT (Value Added Tax) in Second Life and how it impacts them. While each case may be different, I’ve tried to answer the questions in the Knowledge Base and to make it easier, I’ve also attached the VAT FAQ here.
The questions fall into a few categories, which I will try to address in this post. I’ll also be available in-world at a Town Hall meeting on Monday October 8 at 11:00AM PDT at The Pooley Stage to answer additional questions as well. Please come prepared with voice enabled so you can hear, as I’ll be answering by voice and chat questions by voice to be more efficient with the time.
First there’s been some debate as to whether or not we have to charge VAT and why.
The best place to get full details about European legislation is at Europa, “the portal site of the European Union”. It provides up-to-date coverage of European Union affairs and all legislation currently in force or under discussion.
The relevant section on that site is called “VAT: Special Arrangements Applicable to Services Supplied Electronically”. The Directives were implemented to create a level playing field for European Union (EU) businesses with regard to the indirect taxation of electronic commerce. Essentially, prior to this Directive non-EU-based companies providing electronic services to EU customers had an advantage in that they were not required to charge those customers VAT:
“The objective of this Directive is to introduce new harmonised rules and thus eliminate distortions in competition for radio and television broadcasting services and electronically supplied services within the EU. The absence of a clear and fair tax regime was a disincentive to investment and put EU business at a competitive disadvantage.”
Second Life classifies as an electronically supplied service in the definition below:
“Electronically supplied services include services such as cultural, artistic, sporting, scientific, educational, entertainment, information and similar services as well as software, video games and computer services generally.”
Under the Directive, Linden Lab is required to register with the tax authority and then to charge non-business customers VAT at the rate prevalent in their EU country:
“Non-EU businesses are able to register with a tax authority in a Member State of their choosing. They are required to charge VAT to non-business customers in the EU according to the standard tax rate in the Member State where the customer lives.”
I’ll leave it to your local tax advisor to help you interpret its implications for you personally, but basically this means that companies that sell to EU consumers must charge VAT regardless of where the companies are domiciled. We understand that it was implemented to require companies, such as AOL, to charge VAT, just like domestic EU providers of similar services, so all could compete equally.
Ironically, this Directive was put in place to create a “level playing field” but in Second Life it may cause EU based virtual businesses inside Second Life to be less competitive. This is because the Directive was designed with a view that end customers are the final consumers of a particular electronic service. The tax authorities could not have imagined a service like Second Life which enables Residents to develop and sell land, content or other forms of intellectual property within an ecosystem even though they are not official VAT-registered businesses. This means a side effect of the law is that VAT could put those Residents at a disadvantage compared to non-EU counterparts.
Related to this question, we have been asked quite a bit why we haven’t charged VAT before now. The simple answer is that Linden Lab was able to absorb the cost of VAT on behalf of its EU customers. Our business in Europe has quadrupled each year since 2004 and already it has more than quadrupled in 2007 through September. As a result, we can no longer afford to absorb these costs for European Residents.
The next set of questions has been about how we determine who resides in the EU.
To comply with the EU Directive, we are obligated to take reasonable care to ensure that we have identified the actual residency of our consumers. This includes, but may not be limited to, self-reported country of residence, address of billing information including the address of the bank which issued the payment mechanism, IP address predominately used by the consumer and other mechanisms. This is the same set of information that we use evaluate the fraud potential of a particular user, so if this set of information doesn’t match, then it’s probable that we would put the account on hold until we could reconcile the differences.
The third category of questions has to do with VAT numbers and invoices. Second Life Residents who operate businesses may be eligible for a VAT exemption. If you are, you can provide us with your VAT number here. We will also provide you with invoices downloadable within your account page (this feature is coming soon) so you have records of the VAT you have paid us for your own tax reporting purposes. Our VAT number for your records is: EU826011179.
One of the most interesting questions is about why we don’t charge VAT on L$ purchases on the LindeX.
The LindeX is a marketplace where Residents can buy and sell L$ from and to each other. Because Linden Lab merely facilitates the transaction, we do not assess VAT on the purchase. Consumers are not normally responsible for collecting and remitting VAT between each other, but your situation may vary and you should consult a tax professional.
And finally, some residents have noted that Mainland Maintenance fees are charged in arrears. To lessen the burden, and to provide Mainland residents with some additional notice, we will be not be passing on the VAT charge until October 27th for mainland maintenance fees.
If you have more questions, I encourage you to download the VAT FAQ, refer to our knowledgebase, send me a message in-world, or come to the discussion Monday (again, please come prepared with voice enabled so you can hear, as I’ll be answering chat questions by voice to be most efficient with the time.) Of course, I can’t give you tax advice and nothing here should be taken as such. In summary, We’re obliged by law to charge EU Residents VAT. Hitherto we’ve paid it ourselves. As Second Life grows, that becomes less sustainable. Taxes are rarely popular, and I’m sorry to be the messenger for this one. By their very nature, they also distort markets as some Residents have noted. We did manage to shield our European Residents for a number of years, which I hope is some small comfort.