Major issues unresolved in postal VAT proposals

National post offices and the European Commission appear to be in disarray over the issue of imposing value added tax on their services for the first time.

The Commission is supposed to come forward with a proposal by the end of this year to level the playing- field between national monopolies and private delivery firms.

But officials now concede that the end of year deadline is unlikely to be met, with major questions - such as whether VAT will be imposed on all services or just on those where public and private firms clash head on - still to be settled.

The move comes as the Commission is putting the finishing touches to proposals for fast-track measures to prevent European phone companies losing out to foreign competition because of a loophole in VAT rules. All member states, apart from Italy, are supporting this initiative.

The issue of imposing VAT on postal services is, however, proving far more contentious. In most European countries, all national post office services are exempt from VAT. But private courier firms, airlines and other transport companies which provide delivery services must pay the tax, even if they are in direct competition with the state providers.

New entrants Finland and Sweden have helped push the VAT issue high up the Commission agenda. Both apply the tax to both public and private postal services, although the precise regimes operating in each country differ, as Finland exempts all cross-border deliveries from VAT while Sweden does not.

European national post offices are divided over whether to fight the imposition of VAT, according to Bernard Mirailles, head of a committee of European post offices looking into the problem.

He says opposition from some member states to passing on such a highly-visible new charge to consumers could still result in the Commission proposal being buried before it sees the light of day - or soon afterwards.

Mirailles, who is also the head of French monopoly La Poste's fiscal department, says France has lined up with Finland and Sweden in favour of all postal companies being subject to VAT. 'We do not think there is a lot to fear. We can still be competitive,' he said, adding that the imposition of VAT across the board on all services would be easier to manage than if it was focused on specific areas.

But Mirailles claims Germany and the Netherlands are ambivalent on the whole subject of VAT, whilst the UK and Ireland are opposed to any change.

The Directorate-General for customs and indirect taxation (DGXXI) is also preparing a plan for all EU countries to adopt a derogation from an article in the sixth VAT directive which has resulted in different tax regimes for domestic and non-European telecoms companies competing in the same markets.

Currently, the rate of VAT charged is that levied in the country where the telecom company is based and not where the service is offered. This means that American companies such as AT&T can offer VAT-free 'call-back' services in the EU, since phone calls are zero-rated in the US.

But European operators, such as the Belgium national phone company Belgacom, must levy the local rate (21% in the case of Belgium).

The immediate action proposed by the Commission would change the rules by requiring the local rate of VAT in the country where the services are provided to be applied - thus plugging the loophole.

The clamour for action has grown as a few Union countries (such as Germany and the Netherlands) which previously did not charge VAT on phone services are falling into line and imposing the tax in time for the January 1998 deadline for telecoms liberalisation.

US companies, taking advantage of already substantially lower international phone tariffs and the lack of VAT, are often able to offer savings of between 50&percent; and 70% on EU rates for transatlantic calls.

Officials in the Directorate-General for telecoms (DGXIII) estimate that call-back services may have captured up to 5% of the EU market for international calls.