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EU to impose new Internet tax 
EU to impose new Internet tax 

Reuters  

European Union ministers have endorsed a law obliging non-EU suppliers to
impose a higher tax on digital sales to European Union consumers to
remove a competitive handicap for EU companies, EU officials have said.

The law, applying to online sales of software and computer games as well
as some radio and television services, helps close a loophole that let
Europeans avoid paying value added tax (VAT) on products and services
bought from non-EU Internet sites.

But it is putting the EU at loggerheads with the United States, which has
accused the EU of unilaterally trying to impose its own standards.

The rules, which had already been agreed by officials in a preparatory
meeting, were simply rubber-stamped by the 15 finance ministers meeting
in Brussels on Tuesday, EU sources said.

So far, governments around the world have been slow to tax business over
the Internet in an effort to promote a potentially lucrative new market
arena for retailers and software developers. Politicians are seeking to
redress the imbalance.

The European Commission, which drafted the law, said new rules were
needed to eliminate competitive distortions and that they would affect
only a small share of total sales.

"The new rules will affect less than 10 percent of sales from non-EU
suppliers," European Commission spokesman Jonathan Todd told a press
briefing on Monday.

European business had mixed reactions to the directive. Software vendors
expressed concern that it could add layers of costs to digital
transactions, a rapidly growing business, particularly for firms that
sell computer security software and software upgrades to handheld
devices.

But British Internet service provider Freeserve, a unit of French-owned
Wanadoo, welcomed the directive, saying it would foster fair competition
in Europe.

"It will create a more level playing field" between EU Internet Service
Providers (ISPs) and non-EU ISPs, said David Melville, company secretary
and general counsel for Freeserve.

Freeserve has been lobbying the British government for six months to
impose VAT on its largest domestic competitor, AOL Time Warner. Melville
estimated that AOL saves £30m a year because of its VAT exemption.

The new law will not affect digital sales to business customers, which
account for around 90 percent of total sales, the EU's executive said.

The ministers' green light paves the way for the law to come into effect
once the European Parliament has been consulted.

Under the new law, non-EU suppliers of digitally delivered goods and
services will have to register with a VAT authority of an EU state of
their choice and levy VAT at the rate applicable in the state of
residence of the customer.

This could mean levying an additional charge of up to 15-25 percent for
products sold to EU customers.

The country of registration would then reallocate the VAT revenue to the
country of residence of the customer.

Kenneth Dam, United States Deputy Treasury Secretary, said last week that
the Bush administration had serious concerns about the EU's tax plans.

"Unilateral proposals such as the EU's may encourage others to take
unilateral measures, rather than waiting for the global consensus that
can be developed through a more deliberative and inclusive process," Dam
said in a statement.

He criticised Brussels for moving ahead with the proposal while work on
taxation of e-commerce was still under way in the Organisation for
Economic Cooperation and Development.

The Information Technology Association of America, representing 500 IT
firms, said the rules were putting a heavy administrative burden on US
companies and risked flattening US online sales to the EU.

"There is the risk that the EU may prescribe rules of compliance that, in
effect, will close the European market to US and other non-EU businesses
for certain transactions," ITAA said in statement late in January.

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