Trade row looms over online tax

Date: 28/09/00

By Peter Chapman

EU GOVERNMENTS risk sparking a fresh trade war with the US by rejecting a key plank of European Commission proposals to make foreign firms pay value added tax on Internet sales to Union customers.

Diplomats say France is pushing fellow member states to agree changes to the plan which would be seen by Washington as "a red rag to a bull".

Under the proposals unveiled by Single Market Commissioner Frits Bolkestein earlier this year, non-EU companies selling goods 'delivered digitally' into the Union market over the Web would have to pay VAT for the first time. But in a bid to reduce the paperwork involved, Bolkestein has proposed allowing firms to register for VAT in just one member state.

However, diplomats say EU governments are likely to reverse this, accepting France's argument that foreign companies should have to register in each member state where they do business, provided they export goods worth a total of €5,000 or more to the country concerned.

The French proposal, which was discussed by diplomats this week, addresses member states' concerns that they would lose tax revenue under the Bolkestein 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 is currently 25%.

But a spokesman for Bolkestein said the French proposals would re-introduce the red tape which the Commissioner had sought to eliminate. He added that it had a catalogue of flaws which would at worst lead to a trade row with the US and other trading blocs and at best encourage foreign firms to ignore the rules.

"It is not at all certain that it is in line with World Trade Organisation rules. It will also act as a disincentive to compliance.

The big firms will probably comply, but the more complicated you make it the less chance that there is firms on the borderline will register," said the aide, insisting that it was "daft" for member states to talk about ways to avoid losing tax revenue given that the Commission was proposing to levy duties on this type of transaction for the first time.

"Moreover, if having a single country of registration is meant to be such a big incentive for firms to register in Luxembourg, then why haven't more EU firms exercised their right to do that?" he added.

Diplomats admitted this week that France's proposal could spark a row with the US because American firms would be the main victims of the extra bureaucracy. Deputy Treasury Secretary Stuart Eizenstat has already criticised the Commission proposals as an unnecessary barrier to e-commerce, and officials say the French approach will make Washington even more hostile to the plan. "As far as EU-US relations are concerned, this is likely to be a red rag to a bull," said one.

But diplomats claim there are few practical alternatives, arguing that a Belgian plan to allow a single place of registration accompanied by a system for sharing out VAT receipts between member states in line with trade volumes would be hard to implement.

EU governments risk sparking a fresh trade war with the US by rejecting a key plank of European Commission proposals to make foreign firms pay value added tax on Internet sales to Union customers.