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Tuesday, 3 October, 2000, 20:35 GMT 21:35 UK
Online tax war looms
European Commissioner Frits Bolkestein
Commissioner Bolkestein foresaw opposition
Europe runs the risk of provoking a trade war with the US over value added tax (VAT) on online sales, unless European governments reach a compromise.

In June this year, the European Commission drafted plans to close a tax loophole for US companies, when it said that they had to charge VAT for software and music sold over the internet.

It said US companies could choose in which European Union country they wanted to pay VAT.

But now, European governments are questioning the Commission proposals, a move which is likely to anger US software companies and some commission officials say could lead to a trade war.

Until now, many US companies have avoided paying this tax because the current legislation did not take the internet into account.

French unease

The opposition from some European governments is because the level of VAT across Europe ranges from 15% to 25%, so most companies are likely to opt to register in Luxembourg, where VAT is only 15% (even lower tax rates apply to Portugal's Azores islands and Madeira).

Some European governments, notably France, say that this could deprive them of tax revenues.

Their argument is that US companies should have to register in all European countries.

"There is a small majority of member states which would go along with the French proposal. It is by no means unanimous," a European Commission official told BBC News Online.

He identifies two issues that the Council of Ministers' working group needs to resolve. First is the "clear wish by some member states to have some share of the cake," he added.

While the French proposal addresses this, it is seen as too obviously discriminating against non European Union companies, he said, adding that fear exists that this does not comply with world trade rules.

One alternative is a proposal put forward by the Belgian delegation. Its suggestion is that non-EU companies only register in one country but that the revenues are shared.

Trouble ahead

The European Commissioner for taxation, Frits Bolkestein, has admitted that he foresaw difficulty in member states agreeing his proposal.

He said: "The main objective of the commission's proposal is to create a level playing field for the taxation of digital e-commerce."

"Some of the facilitating measures which the commission proposes, notably the single place of registration and its implications, will certainly be difficult to agree," he said.

The Software Industry and Information Association welcomed the Commission's review of the VAT structure but expressed its caution over multiple registration.

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See also:

30 Aug 99 | Business
E-commerce threat to taxman
02 Dec 99 | Business
WTO tackles the internet
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