EU Likely to Impose Taxes on Digital Deliveries

BRUSSELS (06/05/2000) - Foreign companies located outside the European Union selling goods and services to EU consumers over the Internet could soon face new tax bills. The new taxes could come into effect if the 15 EU nations accept a proposal that the European Commission (EC) is tentatively scheduled to put forward later this week.

The proposal would apply to the online delivery of products such as video games, music or software to a consumer in the EU by a company located outside of the European Union. Physical distribution of the products would not be affected by the proposal, because the goods are already subject to value-added tax (VAT) payment upon physical delivery in the EU.

Tentatively scheduled to be officially proposed by the Commission on Wednesday, the plan would require companies based outside the EU with annual sales in the EU of over 100,000 euros (US$94,624) to register for VAT with one EU member state. The state would then process and collect VAT payments on deliveries for all EU member states. Once registered, the foreign firm would have to impose the tax on digital sales to consumers.

Once the Commission issues such proposals, it often takes up to 18 to 24 months for EU countries to ratify them.

Motivation for the proposal comes from EU concerns that electronic commerce has put domestic firms at a disadvantage. An EU consumer who buys from an EU-based company over the Internet is subject to VAT, but if they download the same product or service from a company that is not physically present in the EU, they escape VAT payment. Since VAT varies from the lowest rate of 15 percent imposed by Luxembourg up to the high 25 percent rate levied in Sweden, avoiding VAT has clear benefits for the consumer.

Requiring foreign-based companies to register for VAT will eliminate this disadvantage, provided the foreign firms comply with legislation. However, many non-EU companies will continue to resist complying, according to a company source close to the issue who asked not to be identified.

One of the main questions concerning the proposal is how the EU will enforce it. Major multinational companies, whether based in the U.S., Asia, or Latin America, already have VAT levied on their products, so the focus of the proposal is on the small and medium-sized companies, which view sales to Europe as a bonus. These companies may not however be equipped to deal with the complexities of VAT registration, according to industry insiders.

Registering in the EU country with the lowest VAT rate is likely to be the norm for companies outside the EU, meaning that Luxembourg could become highly attractive to these firms, thus potentially irritating the high-rate VAT EU countries.

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