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Tuesday, 7 May, 2002, 16:58 GMT 17:58 UK
EU imposes e-commerce tax
Woman surfing the net
Internet sales to EU customers will attract VAT
The European Union has agreed new rules forcing internet retailers based outside the EU to levy value-added-tax (VAT) on sales to customers within the 15-nation bloc.

The measures, which look set to hit the European sales of major US e-commerce operators such as AOL Time Warner, could exacerbate an ongoing EU-US trade dispute over steel.

The European Commission said the new rules would make it easier for EU-based internet retailers, who are already obliged to charge VAT on sales to customers within the European bloc, to compete with their non-EU rivals.

"They will remove the serious competitive handicap which EU firms currently face in comparison with non-EU suppliers," the Commission said.

At present, EU consumers can avoid paying VAT on many products by ordering them online from US-based e-commerce companies.

Discrimination fears

Under the measures, non-EU internet retailers wishing to sell within the bloc will be obliged to register for tax purposes in one of the 15 EU nations.

The online retailer - or 'e-tailer' - will levy VAT on all sales to EU customers at the rate applied by the country it is registered with.

That country will in turn divide the revenues between the other EU nations according to where the sales are made.

National VAT rates vary widely within the EU, ranging from 15% in Luxembourg to 25% in Sweden.

The new VAT regime, which is due to come into force in July 2003, will apply to sales of products downloaded from the internet, including software and online film or radio subscription.

The US, which has already threatened to refer the issue to the World Trade Organisation (WTO), fears that the rules could be used to shut non-EU firms out of the market.

Tensions mount

A spokesperson for the US Treasury said the US was concerned about "the potential for discrimination against non-EU companies in terms of the tax rates to be charged".

Critics also object to the extra administrative burden that the VAT rules will impose on non-EU firms.

A referral to the WTO would mark a further deterioration in transatlantic trade relations, already strained by the US decision earlier this year to tax steel imports in order to protect domestic producers from foreign competition.

The EU is planning to retaliate with a range of import tariffs targeted at selected US industries.

The steel dispute erupted months after the two sides had settled a ten-year old trade row over EU subsidies to Caribbean banana growers, which the US claimed had harmed US fruit exporters.

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