Row over VAT on Internet sales to sour EU-US relations

Date: 19/10/00

By Peter Chapman

EU-US trade relations look set to plummet again as Union governments prepare to reject a critical part of the Commission's proposal to make foreign firms pay value added tax on Internet sales.

Tax Commissioner Frits Bolkestein's plan, unveiled earlier this year, aims to clarify rules governing sales over the Internet of goods such as computer software, music, movies and photographs, which already are subject to VAT if they are delivered 'digitally' within the Union.

His proposal would also ensure that European firms are not penalised when they sell to customers outside the EU. These companies - which now face double taxation, both in the Union and abroad - would not have to pay VAT in the EU on their sales. The only taxes paid would be those levied by the country in which the customer was based. However, diplomats say the French presidency is pushing for changes to the plan which would be seen by Washington as "a red rag to a bull" and potentially ignite a new trade war between the two sides - already at odds over hormone-treated US beef, tax perks to US multinationals and the Union's banana import regime.

Under Bolkestein's original blueprint, non-EU companies delivering digital goods into the Union via the Internet would have to pay VAT for the first time. To keep the paperwork involved to a minimum, Bolkestein proposed allowing firms to register to pay VAT in just one member state.

Washington signalled its opposition to the plan as soon as it was unveiled, arguing that the Commission should have waited until the issue had been properly debated in the Organisation for Economic Co-operation and Development (OECD).

Diplomats say governments are now likely to add fuel to the fire by accepting France's argument that foreign firms should have to register in each member state to which they export more than 5,000 euro worth of goods.

The French proposal, which is still being discussed by diplomats, addresses member states' concerns that they would lose revenue under Bolkestein's plan. They fear his approach would prompt firms to register in countries such as Luxembourg, where VAT is just 15%, rather than in Sweden or Denmark, where it stands at 25%.

Some low-VAT member states, such as the UK, which stand to gain from the proposals are sceptical about the Bolkestein plan because they fear the glaring differences in rates from one country to the next would revive calls for tax harmonisation in the Union.

Bolkestein's aides say the French proposals would encourage smaller firms to ignore the rules - and could also fall foul of the EU's free-trade obligations.

But governments claim there are few alternatives. They argue that a Belgian plan to allow a single place of registration accompanied by a system for sharing VAT receipts between member states would be hard to implement and make the EU's already-confusing VAT provisions even more complicated.

Article forms part of a survey 'EU and the media'.