Commission bids to slap VAT on foreign firms’ Internet sales

Date: 01/06/2000

By Peter Chapman

FOREIGN firms would face value added tax bills on Internet sales to EU consumers for the first time if Union governments accept radical new proposals drawn up by Single Market Commissioner Frits Bolkestein.

Under draft laws due to be adopted by the full European Commission next Wednesday (7 June), US companies selling video games or music for downloading over the Web to Europeans would have to charge VAT ranging from 25% in Sweden and Denmark to a mere 15% in Luxembourg or 12% on the Portuguese island of Madeira.

The regulations would apply to 'services' which can be delivered electronically, such as software, music and commercial broadcasting services including satellite television. Physical goods ordered electronically would not be affected by the changes.

The multi-billion-euro market for services is set to rocket as more business goes online, exemplified by the pop star Prince's decision to turn his back on record sales and release all future tracks on the Net.

The proposals to be unveiled next week are part of Bolkestein's plan to plug glaring loopholes in the Union's value added tax regime which, among other things, allows foreign firms to escape levies on Internet sales to EU customers. "We want to create a level playing field for European industry. The current tax rules are a disincentive for e-commerce. We want to make things as simple as possible for companies," said a Commission source.

The initiative is also designed to ensure that Union-based firms are not penalised when they sell to customers outside the EU. These companies - which currently often face being taxed twice, both in the Union and abroad - would escape any EU VAT charges on their sales. The only taxes payable would be those levied by the countries where the final consumer was based.

However, some industry experts warn that the disparity in Union VAT rates will open a political Pandora's Box.

They are already predicting that the proposal, which will directly target the US' dynamic e-economy, will be rejected by those member states which impose high rates of VAT and would therefore gain little from the scheme.

This is because firms would register with the tax authorities in only one member state and pay VAT on all their sales to private customers in the Union from there; although in the case of business-to-business sales, the tax would be paid by VAT-registered EU customers directly to their local tax authorities.

Tax attorney Guido De Wit of Brussels-based law firm De Bandt, Van Hecke, Lagae and Loesch - who advises the American Chamber of Commerce (Amcham) in Brussels - said the planned single place of 'establishment' would be far less complicated for firms than the likely alternative: forcing them to register for VAT separately in every country where their customers are located.

But he warned that it could lead to many foreign companies opting to establish themselves in Luxembourg, the EU member state with the lowest rates of VAT. This would mean non-Union companies would still have an advantage over EU firms based in other member states with higher VAT rates.

It would also result in the Grand Duchy gaining a huge cash windfall in VAT receipts from foreign companies selling over the Web. This would raise hackles in Denmark, Sweden and the Netherlands, which have fought to prevent Luxembourg bagging the lion's share of an estimated €100-billion windfall from a planned tax on cross-border savings.

Amcham believes that these problems would be better addressed globally through the Organisation for Economic Cooperation and Development, a view shared by Washington.

Foreign firms would face value added tax bills on Internet sales to EU consumers for the first time if Union governments accept radical new proposals drawn up by Single Market Commissioner Frits Bolkestein.