Saturday, 6 February 2010

VAT Raises Its Ugly Head Again

For those of you who have managed to read back to my very first blog post back in April 2008, you will know that the beginning of the end for me (commercially) in SL was when Linden Labs imposed VAT on its European customers, and although this was not the fault of Linden Labs, in the first instance, they did not handle the VAT issue, or their announcements, very well at all.

It all started back in 2002 when the EU issued Council Directive 2002/38/EC, whose summary states:

The objective of this Directive is to create a level playing field for European Union (EU) businesses with regard to the indirect taxation of electronic commerce.

This Directive was later amended by Council Directive 2006/138/EC of the 19th December 2006.

Basically a complaint had made by a European ISP that competing companies from the US, such as AOL, were not charging VAT to European customers for their electronically-supplied services, while European-based companies were having to charge VAT, and they wanted a level-playing field. The response from the EU was, via the above Directives, to require all companies based outside of the EU to gather VAT from their European-based customers, and remit the collected VAT back to Europe.

Linden Labs and the VAT Fiasco
The main problem with Linden Labs was not so much the Council Directive, which they had no control over, but rather their handling of it.

On the 27th Septemember 2007 Linden Labs informed their European customers by email that VAT would assessed from that date onwards, and would apply to:
  • Premium account registration
  • Purchases from the Land Store
  • Land use fees (tier)
  • Private Region fees
  • Land auctions
  • LindeX transaction fees 
However, in an amazing gaff, a Linden admitted in an interview that up to the point of the VAT announcement by Linden Labs, the Labs had been absorbing the VAT costs, and not passing them on to their European customers, in order to maintain a commercial level-playing field for residents of Second Life. More suspicions were raised when it was revealed that Anshe Chung had started charging in L$ and had cancelled all Paypal subscriptions 6 weeks earlier (did Anshe anticipate this VAT thing, or had she been tipped by the Labs earlier than anyone else that this was coming?).

So basically Linden Labs were aware of these EU regulations, had decided to absorb the VAT cost for their European customers to maintain a level-playing field for all residents engaged in commerce within SL, then one morning decided not to absorb them anymore. Of course, all the European residents who had been purchasing regions prior to this email announcement felt justly aggrieved, and many expressed sentiments in the SL forums that they would not have made these purchases had they known that Linden Labs had been absorbing VAT and might, at any time, rescind that policy and pass the costs onto their European customers.

Linden Labs should have informed their European customers as soon as Linden Labs was aware that VAT charges needed to be applied, and VAT payments from Linden Labs back to Europe needed to be paid, and should have made clear to residents THEN what their policy was going to be.

Aftermath and Sad Stories
Many Europeans pulled out of the Second Life land market. It was just too much to pay 19%  more than a competing US-based land baron and compete on rental prices to prospective tenants.

Others formed partnerships and agreements with US-based friends, and transferred their land holdings to them, as they did not need to levy the VAT. This was good news for Linden Labs, as they received $100 for all transfers of land ownership, and there was less VAT accounting to be done.

However, horror stories began to emerge, and a particular one caught my eye today in the SLU forum.

Basically, Ciprian_Newall claims that he lost US$20,000 by transferring regions to a chap called Darwin Tomsen, (for the purpose of mitigating the VAT exposure) only for Darwin to sell 'Ciprian's' regions and not pay over any of the money! (However, see the Comments for a counter-statement).

The thread makes for quite interesting reading.

So what now for Blue Mars and other US Virtual Worlds?
The question now is what will be the policy of Avatar Reality (Blue Mars) and other Virtual Worlds run by companies outside of the EU regarding VAT charges on their European customers? Should they absorb it as LL did initially, or charge it from the outset and risk losing European customers who just cannot compete commercially within their virtual economies?

Currently, the Blue Mars Terms of Service state, in Section 7.1, Fees:

You agree to pay all fees or charges incurred by your Account, including applicable taxes, in accordance with these Terms of Service and the billing terms that are in effect at the time that the fee or charge becomes payable.

'applicable taxes' = VAT?

I hope Avatar Reality handles this issue in a more open and pragmatic way than Linden Labs, and see if they are able to absorb the VAT charges, when setting the post-pioneer prices, and enable all Blue Mars residents to compete equally within the virtual economy.