Industry calls to end VAT ‘distortion’ on e-commerce

Date: 31/05/01

By Peter Chapman

A coalition of leading European firms is calling on overnments to adopt new rules for value-added tax on e-commerce - and close a loophole that gives foreign firms an unfair advantage.

The European Business Tax Group, which includes engineering giant ABB, Siemens, France Telecom and the EU units of Microsoft and EDS, argues that the current laws allow foreign rivals to escape VAT when they sell goods such as software, music and videos that can be downloaded over the Internet rather than being dispatched to customers by post.

The EU-based firms pay VAT when they sell goods outside the Union, even if local taxes are applied in the country where they are bought.

The group's spokeswoman, Ine Lejeune, said keeping this regime could persuade firms to quit the EU - leading to lower investment, lost tax income and lost jobs. "Businesses will have to stop and think, 'Shall I do it from my European base or shall I relocate?'" added Lejeune, chief e-commerce tax partner for accounting firm PricewaterhouseCoopers.

She said the proposals on the table at the 5 June meeting of Union finance ministers could "end this distortion" by forcing foreign-based companies to register for VAT in an EU country of their choice and allowing EU firms selling abroad to escape the tax.

Tax Commissioner Frits Bolkestein stirred controversy when he proposed the new rules a year ago because his original plan would have allowed the country where foreign firms registered for VAT to take all the receipts from sales, regardless of where the customer is based.

High-tax member states feared they would lose out to countries such as Luxembourg and the UK which lured foreign firms with lower VAT rates.

Both the French and Swedish presidencies worked hard to find a compromise to keep the 'one-stop-shop' registration system, while ensuring that the consumer will pay at the rate applicable in his own country. That tax would be passed back to them by the country where the firm registered.

But doubts remain over whether governments will sign up to the rules.

Critics claim the compromise places huge administrative burdens on firms. They fear customers, whose email address might not identify where they live, will be encouraged to claim they are based in a low-tax country to pay less for their goods.

New media companies also complain that they will have to tax certain products such as books and newspapers when they are sold online. But these same goods might attract a reduced rate or be sold tax-free in shops.

The UK also signalled earlier this month that it wanted to wrap-up global negotiations on tax at the Paris-based Organisation for Economic Cooperation and Development before signing up to the Union VAT plan.

Changes to EU tax rules require the unanimous support of member states.

A coalition of leading European firms is calling on governments to adopt new rules for value-added tax on e-commerce, and close a loophole that gives foreign firms an unfair advantage.