Governments oppose key plank of online VAT reform proposal

Date: 20/07/2000

By Peter Chapman

A KEY element of Internal Market Commissioner Frits Bolkestein's proposals to ensure that e-commerce sales do not slip through the Union's value added tax net is set to get a frosty reception from member states.

EU diplomats predict that most governments will voice serious misgivings about the plan when a special committee of national tax experts debates the fine print of the proposals for the first time next week.

Under the plan - which covers the 'digital delivery' of goods such as computer software or music over the Net and the supply of 'pay per view' television and radio services - foreign firms selling products in the Union would be allowed to register for VAT in just one member state. This would close a loophole which has allowed foreign companies to avoid charging VAT without breaking the law to the detriment of EU-based companies subject to the tax.

But diplomats say the move is likely to be blocked by most member states amid fears that they would lose any of the potential VAT windfall gains to neighbouring countries which charge lower rates, with firms opting to establish themselves in low-tax countries such as Luxembourg, where VAT is a mere 15%, rather than member states such as Sweden or Denmark, where it is currently 25%. "There has been no formal discussion on this ahead of next week's meeting, but on the margins people are saying that they do not like this 'single country of registration' and I do not expect that it will survive," said one source.

However, diplomats are predicting a smoother ride for other key aspects of Bolkestein's tax plan. These include the general aim of ensuring services supplied within the EU are subject to VAT, closing any loopholes and ensuring that the tax is not levied on services sold beyond the Union's borders.

An advisor to French Tax Minister Florence Parly said the proposal was "not a bad one", although he insisted that it was too early to predict whether Paris would try to shepherd through changes to the controversial plan to bring international e-commerce transactions into the VAT fold during its stint in charge of Union business.

Paris has declared that making progress on the proposals will be one of its priorities for its six-month presidency, although experts predict that it will take longer to reach final agreement on the plan.

One reason why there could be a protracted debate over the proposals is a desire to head off a dispute with the US over e-commerce taxation. Washington has voiced anger that the European Commission has 'jumped the gun' by coming forward with the proposals before the Paris-based Organisation for Economic Cooperation and Development (OECD) has completed discussions with member countries on the issue. The US, which fears a proliferation of conflicting rules governing value added tax for Internet sales, believes that the OECD is the proper forum for debating global tax issues.

A key element of Internal Market Commissioner Frits Bolkestein's proposals to ensure that e-commerce sales do not slip through the Union's value added tax net is set to get a frosty reception from Member States.