Bid to close phone tax loophole

Date: 11/07/1996

By Fiona McHugh

FOREIGN phone companies would be forced to charge customers Value Added Tax on services provided in the EU under a new proposal being drafted by the European Commission.

Even though the Union market has not yet been fully opened to competition, US firms such as AT&T are already providing 'call back' services in some member states.

Often considerably cheaper than those offered by European monopoly operators, these have become hugely popular among businesses in the EU.

But local phone firms complain that foreign rivals have been given an unfair competitive advantage over them.

At the moment, VAT is charged in the country in which the telecoms operator is based, and not that in which the service is sold. But VAT rates vary sharply from country to country.

In the US, for example, no VAT is charged, whereas in Belgium customers must pay an extra 20&percent; in taxes. Not surprisingly, American firms tend to bill their European customers in the US, avoiding the additional VAT costs.

British, Belgian and French companies, on the other hand, must charge their clients VAT and, as a result, their bills are higher and their hold on the market weaker.

That already poor competitive situation is set to worsen once the market is opened to full competition in 1998.

“Companies which do not have their principle place of business or a permanent establishment in the EU are able to provide services to users in the Union without VAT being imposed on those services,” says the Commission in a status report on telecoms policy.

To level the playing-field, it is due to come forward with a proposal before the end of the year that VAT be charged in the country in which services are provided - a move which will be warmly welcomed by EU phone companies.

“This makes a lot of sense to us,” says Mike Corkery of British Telecom. “At the moment, US firms can bill offshore without paying tax and that naturally creates a competition problem for us.”

But while he and other EU operators welcome the proposed new law, they question the Commission's ability to force non-EU governments to comply with it. “It will be interesting to see how they enforce it,” says Corkery.

European governments, who lose considerable sums of money as a result of the current system, are also likely to welcome the draft law. But US firms, on the other hand, will almost certainly try to resist it.

Germany, the Netherlands and Austria are also expected to lose their exemptions from VAT payment and collection by the end of the year. However, instead of passing price rises on to customers at a time when it is preparing for full competition, Deutsche Telekom will probably decide simply to absorb the additional VAT costs.

The harmonisation of VAT systems in Europe remains one of the trickiest of single market aims to achieve.

Taxation Commissioner Mario Monti is about to propose moves towards a single European fiscal system, but is likely to encounter resistance from sovereignty-conscious countries.

Under the definitive tax regime, VAT would be charged in the country in which goods originate and not that in which they are sold - precisely the opposite to the proposed system for telecoms services.

Commission officials insist, however, that the two systems are not incompatible and point out that taxation of other services, such as accountancy, already work on this principle.