(July 6) That's the day when a new directive from the European Union (EU) will come in to effect requiring non-EU companies that sell e-commerce and Internet services to pay Value Added Tax (VAT), which is levied on most European goods and services sold throughout Europe, on "digital" products or services sold to residents of EU member countries. The directive is applicable only to digital goods and services, and not to products delivered via traditional methods, as items sent by postal mail are already subject to VAT regulations.
The directive, approved after a meeting of EU finance ministers in late 2001, is designed to protect EU businesses that have seemingly been put at a disadvantage by VAT compliance requirements. Until now, most non-EU companies serving EU residents have not been required to charge VAT, despite the fact that virtually all EU businesses charge some sort of VAT-based fee. Many businesses have complained that this has allowed non-EU competitors to set lower prices for the same goods and services, effectively undercutting the local competition. This has drawn the ire of many companies, and even caused UK-based ISP Freeserve to wonder aloud if it would move its business elsewhere if the British government did not require AOL, which was quickly moving in on Freeserve?s territory, to charge VAT (the new EU directive will require AOL to charge VAT).
Under the directive, companies will be required to charge the current VAT rate of the EU country the purchaser resides in. VAT rates differ greatly between countries, reaching as high as 25 percent in Sweden to only 15 percent in Luxembourg (the UK's VAT rate is 17.5 percent, while Germany's is 16). The directive covers only business to consumer transactions, as many business to business transactions are already subject to tax regulations.
As one might guess, the Bush administration in the United States is anything but a proponent of the directive. A statement by Deputy Treasury Secretary Kenneth Dam late last year stressed that the U.S. government has "serious concerns" about the directive and that the proposal "may potentially be inconsistent with international trade obligations in the World Trade Organization." Kenneth pointed out that companies based in EU member nations are able to charge VAT according to the rate of the country they are based in, whereas U.S. sellers would be forced to charge VAT according to where the buyer is located, creating an uneven playing field. "In addition, U.S. sellers may be subject to more onerous administrative and compliance requirements than are placed on their EU competitors," he said.