European finance ministers agreed Tuesday on a regime for collecting value-added tax (VAT) on online sales of digital products such as computer software, and services such as internet pay-TV to end consumers.
Under the agreed system, companies based outside of the European Union will have to pay the VAT rate in the country where their customers are through one portal country of their choosing. That country would then pass on the VAT of the consumer's country.
The regime covers only business-to-consumer (B-to-C) transactions. Around 90 percent of e-commerce sales are business-to-business transactions and these are covered by separate rules. At present, most U.S. firms don't add VAT on B-to-C transactions with EU consumers.
The new laws "are not discriminating against non-EU companies," said Rodrigo Rato, Spain's finance minister and chairman of Tuesday's finance ministers meeting.
Firms within the EU that sell digital products or services over the internet will continue to pay VAT at the local rates in their country, although some countries, including the U.K., have not charged VAT in the absence of any EU ruling until now.
Under the new laws EU companies selling to end consumers outside of the EU will be able to do so VAT free. This will "remove a major competitive handicap" on European firms competing on the world market, said Frits Bolkestein, commissioner in charge of the internal market at the European Commission. His staff drafted the new laws.
Under the new regime, a U.S.-based software company will have to add 25 percent onto the sales price of its software if the consumer is in Sweden. A rival company based in Luxembourg will have to add only 15 percent to the price for the same customer in Sweden.
This is because the EU company would pay the local Luxembourg VAT rate, the lowest in the EU, while the U.S. competitor must pay the highest VAT rate in the EU charged by the Swedish government.
The U.S. government said the new laws, which will come into effect by July 2003, discriminate against small U.S. firms that do not have a presence in the EU. Deputy U.S. Treasury Secretary Kenneth Dam said the Bush administration will try to convince the EU during talks at the Organization for Economic Cooperation and Development that the rules are unworkable. The OECD is trying to find a global consensus on taxing e-commerce. If that fails, Washington may lodge a complaint at the World Trade Organization, Dam said last Friday.
The U.S. Diplomatic Mission to the EU said Tuesday that this position expressed by Dam has not changed. The U.S. made the same threats in 1997 when VAT was imposed on non-EU telecommunication providers competing on the European market, said one EU diplomat. "The U.S. government would be naïve to think it can launch a complaint at the WTO," she said.
The laws, one a directive and one a regulation, call for a review of the e-commerce VAT regime three years after the laws come into force. The U.K. government got backing for the idea of developing an online VAT payments system for the whole of Europe. Details of this idea remain sketchy. The ministers agreed that such a system could take over from the regime adopted Tuesday at the end of the three-year period.
"I am delighted that the Council of ministers has at last been able to agree the important directive on applying VAT to digital products," said Frits Bolkestein, commissioner in charge of the internal market at the European Commission. His staff drafted the laws. "This measure will remove the obligation for EU firms to apply VAT when exporting to world markets."
The law brings business-to-consumer rules in line with existing laws governing business-to-business e-commerce, which accounts for 90 per cent of all internet transactions, the European Commission said.