EU to Eliminate Internet Tax Disadvantage

BRUSSELS (06/07/2000) - The European Commission's plans to update its indirect tax legislation to the requirements of electronic commerce will create a level-playing field for companies making digital deliveries within the European Union, a senior Commission official said today.

If approved by the 15 member states of the Union, the proposal put forward by the Commission today will amend existing legislation covering value-added taxation (VAT) to eliminate both the obligation on EU-based operators to impose VAT on digital deliveries made outside the EU and to require providers of such services located outside the EU to pay VAT on sales to consumers within the EU.

To facilitate compliance by non-EU based firms, the Commission has proposed that a supplier based outside the EU may register for VAT payments in a single location anywhere in the 15 member states provided the supplier has at least one sale in that Member State, added the official, who asked not to be identified.

The proposal would apply to the online delivery of products such as video games, music or software which the EU equates to services. The proposal does not apply to the online ordering of products such as computers, food or flowers that are subsequently physically delivered to the consumer. Physical deliveries within the EU are already subject to VAT and products exported outside the EU are zero-rated.

Currently, companies operating in the EU but selling these digital products outside the Union pay VAT which puts them at a competitive disadvantage from competitors in the U.S., Canada or Australia for example. At the same time, non-EU based companies selling to consumers inside the Union are not subject to VAT, meaning that their digital deliveries are cheaper than the same deliveries made by EU-based companies which have to impose the VAT.

Although the French government has identified this proposal as a top priority for the six months it will preside the EU -- from July 1 to Dec. 31, 2000 -- the proposal is not expected to win rapid approval within the Council of Ministers. All tax proposals require unanimous support among the 15 member states, and Denmark and Sweden are understood to have "some difficulties" with this proposal, a well informed source who asked not to be identified said.

The reticence arises because although all 15 EU nations have VAT systems, rates are not the same and vary between the low 15 percent in Luxembourg and a high 25 percent in Denmark and Sweden. Germany has a basic 16 percent VAT rate.

The Scandinavian countries fear that non-EU based companies will register in the low VAT countries thus reaping tax revenues on internet sales to consumers across the EU notably from their own coffers.

"We have always said that we will only get a truly single market when we have closer approximation of VAT rates," the official commented in defense of the Commission proposal.

Moreover, any move to require non-EU companies to register in all 15 member states and pay the differing rates of VAT would make it too complex for most small and medium-sized companies located outside the EU, the official warned.

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