WHY THE OECD’S VAT PROPOSALS ARE CAUSING SOME KNITTED BROWS

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You’d think only the big, multinational conglomerates would get tangled in the complexities of international business taxation—but that’s knot the case.

A recent set of proposals from the Organization for Economic Cooperation and Development to refine recommendations for how to administer consumption taxes has one group of hobbyists—knitters—all wound up  (puns intended).

As with almost all business taxing controversy today, this is about how to impose artificial country borders onto global commerce, which has become increasingly vast and ethereal. This kind of effort normally affects the giants—Google’s advertising business, Netflix’s streaming services—but even small, self-owned businesses can, just by virtue of participating in the global economy, find themselves ensnared.

In December, the OECD issued a discussion draft with new recommendations on how to implement a consumption tax as part of its effort to combat base erosion and profit shifting. The goal of the draft was to clarify how a value-added tax or a goods and services tax—which many European countries use—should work in the digital age.

With physical goods, it’s easy enough to determine where the transaction is happening. It gets a bit harder in the online world—what if you’re streaming a movie on your laptop while taking a train through Europe? What if you’re buying an ad from a service that uses servers in multiple countries?

The draft states that in situations such as these—when the place of physical performance is difficult to determine—the usual residence of the customer should be used as a proxy, and the onus on registering and paying the tax should be on the supplier.

That’s reasonable enough for large online services such as Netflix or Google. For the self-employed owner of a small online business—such as, for instance, the many hobbyists who sell knitting and needlework designs online—it’s a much more considerable burden.

Several such sellers sent letters to the OECD during its usual comments period after new language is proposed. Usually, the respondents are large corporations and the big accounting firms. But for these dealers—many of whom run their own business, or use it as a part-time hobby to supplant their normal income—this is not a theoretical issue. The European Union has already created similar VAT requirements, which came into effect on Jan. 1 and have been confounding the knitting world.

“In the UK, for a nanobusiness, the impact has been horrific,” Claire Valentine, an online knitting design seller, wrote in a comment to the OECD.

Many other sellers said they’ve blocked sales to the EU rather than deal with the new rules.

“The fact that micro businesses are taking such actions is a strong indication that something is very wrong,” stated Karen Butler, a British knitting design seller. 

In particular, the sellers complained that researching the new taxing rules—including variations between EU member states—would require a tremendous effort, as they would need to identify the location of each and every customer and ensure that the correct amount of tax is being paid. For many, it would be not simply an inconvenience but a prohibitive requirement. Third-party sites offer to pay the tax for them, but normally charge fees of their own.

The knitting social media site Ravelry.com—considered one of the best hobby-based networking sites on the Web—is filled with posts and comments from knitters trying to wrap their heads around the new rules.

The OECD draft raises the possibility of a minimum threshold to exempt small dealers—but doesn’t quite endorse it.

“The introduction of thresholds needs to be considered carefully,” the discussion draft reads. “A balance will need to be struck between minimizing compliance costs for non-resident suppliers while ensuring that resident businesses are not placed at a competitive disadvantage.”

Even if the OECD changes the draft to recommend minimum thresholds, it’s likely that each country will elect its own standard, possibly based on different factors. Small businesses still would have to do research to determine whether each customer qualifies. And it raises some fairness issues as well—what about a mom-and-pop yard store that sells knitting designs by paper, and where such compliance costs aren’t really an issue? Should those be exempted as well?

The OECD held a public consultation in Paris on these issues on Feb. 25, and is expected to issue final language sometime in 2015.

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